The mandatory schemes
Insurers, brokers and other intermediaries that provide financial services to retail clients must join one of three approved dispute resolution or ombudsman schemes (there is a fourth but it services only banks). These schemes provide an avenue for consumers and small businesses to have their claims and complaints rendered or determined for free in an informal setting.
Increased limits
Originally, the schemes applied only to relatively low value claims. The risk they presented to insurers and brokers was therefore limited.
Last year, however, the two main schemes that serve the insurance industry, Insurance and Financial Services Ombudsman (IFSO) and Financial Services Complaints Limited (FSCL), dramatically increased their maximum claim limits. They can now issue determinations that are binding on insurers and intermediaries (but not on complainants) to a maximum value of $500,000 (or, in the case of regular payments, $2,730 + GST per week). Remarkably, the $500,000 jurisdictional limit is more than the $350,000 maximum jurisdiction of the District Court.
This has been a rapid and recent development. When IFSO (then named the Insurance and Savings Ombudsman Scheme) was established in 1995, it had a financial cap of $150,000, which increased to $200,000 in 2009. As recently as 2023, IFSO’s jurisdictional limit was still only $200,000, increasing to $350,000 that year. FSCL had raised its limit to $350,000 later that year. The recent increase to $500,000 is a significant development.
For consumers and small businesses, access to a free, binding dispute resolution scheme is very useful as their claims would otherwise often be uneconomic to bring in a court. Schemes of this nature are appropriate for relatively straightforward, low value complaints.
However, they are not appropriate for disputes that involve complex disputed facts or those that require medical, engineering or other technical evidence, or concern serious matters such as fraudulent claims or other dishonesty. Financial services firms are exposed to considerable risk when claims and disputes of this nature are determined by a body that does not have the discipline of the rule of law, the rules of court, the rules of evidence, the ethical obligations of advocates and a right of appeal.
Insurers pointed out these concerns when Ministry of Business, Innovation & Employment (MBIE) engaged in consultation with respect to the proposed changes. They pointed out that the schemes were not suitable for resolving complex insurance disputes. The Insurance Council of New Zealand made submissions that:
In relation to the ‘fairness’ criterion, we believe that there should also be reference to the quality of decisions. If the process is not fair to insurers, then it will impact on the insurance pools they manage and on the costs to customers more broadly. We also note that the focus of the review seems to be solely on the consumer, yet fairness and good faith in particular, are concepts involving both parties.
Those concerns were not heeded
We initially thought that the increase from $200,000 to $350,000 in 2023 was positive. That increase brought the schemes into line with the District Court. For consumers, the schemes provided an alternative to court proceedings, which almost invariably result in entrenched positions, delay and cost. The schemes addressed complaints without the need for them to be escalated, generally satisfying consumers and participants. However, the additional increase coming only two to three years later moves the schemes into a different frame.
How the schemes operate
The schemes are funded by levies on their members, with no Government funding. IFSO and FSCL have as their stated purpose the accessible resolution of complaints. However, the schemes have become increasingly active in determining disputes. FSCL’s terms of reference refer to “resolving” disputes by making “final decisions”.
In addition to the greatly increased jurisdictional limits, we have recently seen an increased willingness by the schemes to move quickly to a determination, sometimes in draft or on a preliminary basis, as a means by which to encourage settlement. Schemes are also now more frequently considering complaints that are more serious in nature, including those relating to technical issues requiring competing expert reports. While their terms of reference permit this approach, it is not consistent with their originally intended purpose of being a relatively informal resolution service. These factors make them risky for insurers and intermediaries, particularly when coupled with a jurisdictional limit that exceeds the District Court, in a decision-making environment where the fact finder is not bound by the rules of law and fair process.
None of this would be particularly concerning if scheme outcomes were non-binding. But complainants may accept and enforce a determination if it suits them, which will be binding on the participant and enforceable by a threat of a reference to the Financial Markets Authority (FMA) or Reserve Bank of New Zealand (RBNZ). Participants’ appeal rights are extremely limited. In contrast, if a consumer is dissatisfied with a decision, they are not obliged to accept it and may issue court proceedings. The schemes are therefore essentially unbalanced.
The proposed merger
It was recently proposed that IFSO and FSCL merge as at 1 July 2025. As they resolve 90% of financial services complaints (excluding banking) between them, they would have in effect become a monopoly. Not only would insurers and intermediaries have been bound to membership of a scheme, they would have little choice as to what they scheme is. There is only one other scheme that provides services to insurers and intermediaries, Financial Dispute Resolution Service.
Government supported the proposed merger, claiming that it will help streamline services, create operational efficiencies and remove duplication. That could be said of any monopoly. The reality is that an absence of choice does not usually result in better outcomes for consumers or participants.
What now for insurers and intermediaries?
So where does this leave insurers and intermediaries? And what can they do to maximise the prospects of positive outcomes with their retail customers?
Insurers and intermediaries must now focus on how best to manage these schemes and achieve acceptable outcomes.
- It goes without saying, but participants need to ensure that their internal complaints systems are robust and comprehensive. We see many complaints that stem from a failure to keep customers up to date with claims processes and decisions. Further into the complaints process, communication problems and a lack of due process often see customers losing patience, resulting in deadlock. Honouring commitments and adopting consumer friendly, as opposed to overly formal, approaches can often make customers feel heard, minimising the prospect of referral to a scheme.
- Make reasonable and early settlement offers where appropriate, considering the legal and reputational risks involved. FSCL, but not IFSO, can refuse to consider a complaint where it is satisfied that a reasonable settlement offer has been made. It seems logical that IFSO would encourage complainants to its scheme to accept a reasonable settlement offer by a participant, but that is not a specified reason for it not to consider a complaint.
- Consider whether the issue raised by the complaint should become a test case in the courts. IFSO’s terms of reference prevent complaints from being considered further if the participant undertakes to prosecute a test case diligently and pay the complainant’s costs of participating in the case. FSCL does not appear to have this relief valve.
- Use the scheme’s terms of reference to best advantage. Carefully comply with the notification and timeframe requirements for deadlock letters to engage the three-month limitation period for complaints.
- Insurers providing liability cover for financial advisers may wish to consider the extent and cost of cover they provide in light of this risk.
Insurers and intermediaries should plan to manage more high value claims and disputes before the resolution schemes. They should ensure that they avoid allowing claims to proceed to a determination where possible and that they are equipped with the skills and resources to obtain the best possible outcome when they do.
