External Dispute Resolution Schemes and Systemic Issues
An Examination of the Telecommunications Industry Ombudsman’sSystemic Issues Functionagainst Best Practice
28 December 2010
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Calluna Consulting Pty Ltd
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Table of Contents
- Scope and Purpose ……………………………………………………….3
- Background…………………………………………………………………4
2.1External Dispute Resolution Schemes and Systemic Issues ……4
2.2The TIO and Systemic Issues ……………………………………..5
- Comparison with Other Sectors…………………………………………6
3.1Elements of an EDR Systemic Issues Function ………………..6
3.2Definition and Investigation of Systemic Issues ………………..6
3.2.1The TIO Definition ..……………………………………….6
3.2.2Definitions Used in Other Sectors ……………………… 7
3.2.3Distinguishing Features ………………………………….9
3.3Investigation of Systemic Issues ………………………………….11
3.3.1TIO’s Procedures …………………………………………11
3.3.2Investigations in Other Sectors …………………………12
3.4Resolution of Systemic Issues …………………………………..13
3.4.1TIO’s Approach to Resolving Systemic Issues ………13
3.5Reporting to Regulators ………………………………………….14
3.5.1TIO’s Approach to Reporting Systemic Issues
to Regulators …………………………………………….14
3.5.2Reporting in Other Sectors …………………………….15
3.6Public Reporting of Systemic Issues …………………………..18
3.6.1TIO’s Public Reporting Practices ……………………..19
3.6.2Public Reporting in Other Sectors ……………………20
4.Leading Practice Principles……………………………………...... 21
- Recommendations………………………………………………………23
Section 1
Scope and Purpose
This paper presents the results and recommendations of the research carried out by Calluna Consulting on behalf of the Australian Communications and Media Authority (“ACMA”) in relation to its Reconnecting the Customer inquiry. It examines the systemic issues function operating at the Telecommunications Industry Ombudsman (“TIO”), compares it to other industry external dispute resolution (“EDR”) schemes and makes recommendations for improvements in a number of areas.
The research findings are intended to assist in the development of a systemic issuescapability within the TIO that reflects best practice models and contributes to driving systemic change in the telecommunications industry.
This report is divided into four sections:
Section 1:Scope and Purpose (this section);
Section 2:Background – provides an overview of the development of systemic issues responsibilities in Australian EDR schemes, including the TIO;
Section 3:Comparison with Other Sectors – compares the TIO’s systemic issue function with that of schemes operating in other sectors, both in Australia and overseas;
Section 4:Leading Practice Principles – provides a summary of leading practice principles evident from other sectors; and
Section 5: Recommendations –a series of recommendations to align the TIO’s processes with best practice models.
Section 2
Background
2.1External Dispute Resolution Schemes and Systemic Issues
Industry based external dispute resolution has been part of the Australian consumer protection framework for approximately 30 years. EDR schemes in the key areas of financial services,energy and telecommunications have operated since the 1990sand have paved the way for similar schemes in other sectors.
The key objective of these schemes in their early days was the inexpensive and efficient resolution of individual consumer complaints. Whilst raising industry standards was a desired outcome, the frameworks that existed at the time did little to facilitate any meaningful contribution towards this aim.
The early to mid 2000s, however, saw an important policy shift in external dispute resolution in Australia, with a range of strategies employed by the schemes to drive improvement in key consumer products and services. In particular, the gradual introduction of powers to identify and/or consider systemic problems extended the scope of EDR schemes beyond the realm of individual complaint resolution to a broader systemic focus.
Different models were adopted by the schemes, as stakeholders grappled with the challenging issue of the appropriate roles for dispute resolution schemes and regulators. Whilst some schemes were limited to identifying potential systemic problems and bringing them to the regulators’ attention, others investigated problems, secured consumer redress and reported outcomes to regulators. Regardless of the models adopted at the time, however, systemic issue mechanisms are now firmly entrenched in the operations of Australian EDR schemes.
The importance attributed to the ability to consider systemic problems was summarised well in the jointfinancial services EDR schemes’ submission to the Victorian Law Reform Committee’s Inquiry into Alternative Dispute Resolution in 2007:
“The schemes’ powers to resolve systemic issues provide a highly cost effective and powerful tool for addressing disputes that may affect more than one consumer, including the ability to facilitate substantial redress to large numbers of consumers where it is
warranted … The ability of industry based EDR schemes to resolve systemic issues also provides a low cost way of “trouble shooting” for industry making it easier to improve its practices.
… In our view, these powers to deal effectively with systemic issues are vital to the ability of the schemes to create benefit for consumers beyond the benefit to individual disputants who come to the schemes.”[1]
The strong messages of success from EDR schemesand the resulting rise in the profile of systemic issues have created a clear expectation amongst consumers that EDR schemes will act decisively and effectively in relation to systemic industry problems.
2.2The TIO and Systemic Issues
In 2003, the TIO took on the important role of investigating systemic industry problems identified from complaints. Whilst the Constitution did not specifically provide for this, procedures were put in place for the identification and resolution of systemic problems. At the time, the following statement was made in the TIO’s Annual Report:
“The procedure formalised in the past year for the investigation of systemic complaints is one of the most important pro-active initiatives adopted by the TIO since its inception….. The benefits to customers, TIO members and the TIO itself are obvious and immediate…”[2]
Three years later, in July 2006, this role was formalised with the introduction of provisions into the TIO’s Constitution that enabled the scheme to identify, investigate, resolve and refer systemic problems to regulators[3]. This was undoubtedly a significant step towards driving improvement in the telecommunications industry, and much has been achieved as a result.
However, time has passed. The telecommunications environment has changed. There are increasingly complex products forconsumers, and the unprecedented rise in complaints to the TIO is cause for significant concern. It is timely, given the current climate in which the TIO is operating, to consider whether its approach to systemic issues reflects principles of leading practice, as they have evolvedover recent years, and to examine whether the scheme is set up to make a significant contribution towards driving systemic change in the telecommunications industry.
The TIO itself has recently acknowledged a need to improve its approach to dealing with systemic issues. The Ombudsman’s Overview in the TIO’s Annual Report for 2010, states:
“Included in my report is information about a number of new initiatives that we hope to realise in 2011 … a revamped systemic issues strategy to increase our impact in identifying and addressing matters that impact on consumers.”[4]
The Systemic Issues section of the Annual Report then goes on to state:
“In the past year the TIO has increased its capacity to investigate and resolve systemic issues. After a review of our systemic investigations area, the TIO adopted a more targeted and strategic approach to dealing with systemic issues and investigations. By increasing our focus in this area we hope to more quickly identify systemic issues and work with service providers to resolve complaints and the causes of these complaints.”[5]
Section 3
Comparison with Other Sectors
This section compares the elements of the TIO’s systemic issues process with those of other EDR schemes, both in Australia and overseas. The comparison highlights a number of areas in which the TIO’s approach differs significantly from other schemes, and best practice standards are not currently being met.
3.1Elements of an EDR Systemic Issues Function
The TIO’s systemic issues process may be examined by reference to the following key elements:
- Definition and Identification;
- Investigation;
- Resolution; and
- Reporting.
These elements are common across many schemes and serve, therefore, as useful headings for discussion.
3.2Definitionand Identification of Systemic Issues
The definition of a “systemic issue”, as set out in a scheme’s Terms of Reference or Constitution, has a significant effect on the degree of organisational focus on systemic industry problems. The nature of the definition can directly impact on the number of potential systemic problems that are identified by scheme staff and escalated for further review.
A broad, flexible definition generally encourages a proactive approach, where issues that are potentially systemic in nature are frequently detected, often at an early stage in the dispute resolution process. A narrow definition, particularly one which has a number of threshold criteria, may, however engender a more conservative approach, where matters are not appropriately identified and classified as systemic problems or brought to the attention of the relevant provider.
3.2.1The TIO Definition
The expansion of the TIO’s jurisdiction in 2006 saw a new Clause 5A introduced into the Constitution covering “Systemic Problem Investigations”. Clause 5.A.1 defines a “systemic problem” as follows:
“Systemic Problem means a problem with or the failure of a system, process or practice of a member that causes detriment (that is not trivial) to a significant number or a class of end-users of a carriage service and which arises from a complaint that is within the jurisdiction of the TIO by virtue of another provision of the TIO Constitution.”
To satisfy this definition, five criteria must be met:
- The problem must arise from a complaint lodged with the TIO;
- The complaint must fall within the TIO’s jurisdiction;
- The problem must relate to a problem with, or the failure of a member’s system, process or practice;
- That failure or problem must cause detriment to a significant number or a class of end-users of a carriage service; and
- The detriment must not be trivial in nature.
The TIO’s Systemic Problem Investigation Procedures state that these threshold criteria are mandatory:
“When the TIO Officer is not satisfied that each of these Threshold Criteria is established, he or she will not commence a potential Systemic Problem investigation. Standard procedures will then apply for the resolution of that Complaint issue.”[6]
3.2.2Definitions Used in Other Sectors
The following examination of other sectors illustrates that the TIO’s definition is complex and narrow. It contains a number of unique criteria that may discourage TIO staff from actively identifying potential systemic problems and bringing these to the attention of members.
Financial Services Sector - Australia
External dispute resolution schemes in the Australian financial services sector (the Financial Ombudsman Service and the Credit Ombudsman Service Limited) have, for some time, been formally incorporated into the regulatory framework. In 2001, the Corporations Act was amended to require financial services licensees to be members of an external dispute resolution scheme approved by ASIC. ASIC’s Regulatory Guide 139 – Approval and oversight of external dispute resolutionschemes (“RG 139”) sets out the requirements for obtaining initial approval from ASIC and the ongoing requirements to maintain approval.
RG 139 gives substantial regulatory guidance about the roles and obligations of EDR schemes in relation to systemic issues. RG 139.111 provides the following broad working definition of systemic issue:
“At a broad level, systemic issues relate to issues that have implications beyond the immediate actions and rights of the parties to the complaint or dispute.”
The Regulatory Guide then provides a number of guidelines which clearly steer the schemes towards a flexible approach to identifying and classifying systemic issues. The guidelines state:
- Whilst several complaints of the same type may indicate a systemic problem, it is not sufficient to classify a systemic issue by reference only to the number of complaints received[7];
- Systemic issues may also be identified out of a single complaint, where the effect of the issue will extend beyond the parties to the dispute[8];
- The causes of systemic issues can be numerous, including poor disclosure or communication, administrative or technical errors, and improper interpretation or application of terms[9]; and
- Systemic issues may arise in relation to the conduct of an individual scheme member or multiple scheme members.[10]
The Financial Ombudsman Service (“FOS”) and the Credit Ombudsman Service Limited (“COSL”) have both adopted this broad based approach that classifies a systemic issue primarily by its ability to affect parties beyond the dispute.
The FOS Terms of Reference define a systemic issue as:
“… an issue that will have an effect on other persons … beyond the parties to the Dispute.”[11]
The COSL Rules define systemic issues in the following way:
”… systemic issues being either an issue arising out of a single Complaint but having implications which extend beyond the parties to the particular Complaint (e.g. how interest is calculated or a fee applied), or an issue arising from multiple Complaints which are similar in nature (e.g. inadequate disclosure, improper interpretation or application of standard terms, or where a particular intermediary has mis-sold financial products to a number of consumers).”[12]
Ombudsman for Banking Services and Investments - Canada
The Terms of Reference for the Ombudsman for Banking Services and Investments, Canada (“OBSI”) were amended in recent years to introduce, amongst other things, a formal systemic issues power. The changes came into effect in April 2009. A systemic issue is defined as:
“… a matter, such as undisclosed fees or charges, misleading communications, administrative errors or product flaws discovered in the course of considering a complaint against a participating firm which may have caused loss, damage or harm to one or more other customers of the participating firm in a similar fashion to that experienced by the original complaint.”[13]
Energy and Water Ombudsman Victoria
The Energy and Water Ombudsman Victoria (“EWOV”) defines a systemic issue in the following way:
“An issue, problem or change in company policy or practice that affects, or has the potential to affect, a number of customers.”[14]
“The issue may be caused by, but is not limited to, one or more of the following: a system change, an alteration in performance levels (ie: quality of supply, access to call centre), a policy or procedure change, a lack of policy/procedure, a lack of clear regulatory guidelines, regulatory non-compliance, the conduct of an energy or water provider’s employee, agent, servant, officer or contractor or the action of a stakeholder (eg: legislative or regulatory change leading to misunderstanding or misapplication of the change).”[15]
3.2.3Distinguishing Features
There are a number of differences between the TIO definition and the definitions used in other sectors:
i)Requirement for detriment to be “not trivial”
The TIO Constitution states that the detriment resulting from the problem must not be “trivial”. This requirement does not exist in other sectors where the systemic problem is characterised by its ability to become widespread, rather than its level of severity if considered in isolation. The following case study from the FOS Annual Report 2007 illustrates how a small calculation error which resulted in an average financial loss of only $5.24 to individuals was systemic in nature because the error became widespread, affecting 70,972 customers:
Incorrect Calculation of Withholding Tax[16]
As a result of a dispute, it became apparent that a financial services provider had been incorrectly calculating and remitting non-resident withholding tax on savings accounts to the Australian Taxation Office. The rounding methodology did not comply with the Taxation Administration Regulations.
The member identified that the number of customers affected by the rounding error was 70,972, with an average over deduction of $5.24. The total remediation amounted to $486,158.48
ii)Issue must betied to a member’s system, process or practice
The TIO definition states that the issue must relate to a problem with, or the failure of a member’s “system, process or practice”. Whilst this requirement may currently be consistent with the types of issues arising in the telecommunications industry, there is a risk that the definition may become outmoded and in need of revision as new issues arise that do not relate specifically to a member’s system, process or practice.
In most other sectors, the areas in which systemic problems may arise are mentioned, but only by way of example, rather than as a fundamental aspect of the definition itself.
iii) Number of consumers affected must be significant
Clause 5.A.1 states that the problem must cause detriment “to a significant number or a class of end-users of a carriage service.” The wording of this provision enables the TIO to classify a matter as systemic where detriment has been caused to either:
- A significant number of end-users; or
- A class of end-user (regardless of the numbers involved).
However, the interpretation of this provision in the Systemic Issue Investigation Procedures restricts the definition to those problems where detriment is caused to significant numbers. One of the criteria stated in the Procedures is:
“… the number or class of consumers affected or potentially affected must be significant.”[17]
A systemic problem, by its very nature, usually involves a large number of consumers. However, this is not always the case, and none of the schemes referred to in this section require a “significant” number of consumers to be affected. Instead they refer to:
- “persons beyond the parties to the dispute”[18];
- “one or more other customers”[19]; and
- “a number of customers”[20].
There are certainly situations where EDR schemes have become involved in resolving problems that affect relatively small groups of consumers, as illustrated in the following case studies from the Energy and Water Ombudsman (Victoria) 2008 Annual Report:
Gas Bottle Fee Wrongly Charged[21]
Approximately 30 liquefied petroleum gas (LPG) customers were incorrectly charged a gas bottle fee after the LPG retailer scaled its operations down from two distributors in an area to one. Customers who had been with the redundant distributor continued to be billed a bottle fee by that distributor. EWOV identified this issue as systemic from one single complaint.
The LPG retailer identified all affected accounts (30) and arranged refunds where necessary. In addition, it updated its intranet to ensure its staff had current information about distributors when attending to customer enquiries.
New Connection Requests not Processed[22]