Masu Financial Management P/L v FICS and Julie Wong

CATCHWORDS : Whether the Financial Industry Complaints Service (FICS) scheme intrudes in an impermissible way upon the exercise of judicial power - Whether such powers of adjudication can only be exercised by a court constituted in conformity with Chapter III of the Australian Constitution LEGISLATION CITED : Commonwealth of Australia Constitution Act, Chapter III Attorney General (Cth) v Breckler (1999) 197 CLR 83 CASES CITED : Attorney General (Cth) v The Queen (1957) 95 CLR 529 (Privy Council) Australian Communications Authority v Viper Communications Pty Ltd (2001) 110 FCR 380; (2001) 183 ALR 735 Brandy v Human Rights and Equal Opportunity Commission (1995) 183 CLR 245 Masu Financial Management Pty Ltd (Plaintiff) PARTIES : Financial Industry Complaints Service Ltd (First Defendant) Julie Wong (Second Defendant) FILE NUMBER(S) : SC 30107 of 2002 N Perram (Plaintiff) COUNSEL : J Sexton SC (First Defendant) H Burmester QC (Intervenor Cth A-G) J Higgisson (Intervenor Cth A-G) McLachlan Chilton (Plaintiff) SOLICITORS : R Giles (First Defendant) T Griffith (Second Defendant) A Buckland (Intervenor Cth A-G)

• 7 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION ADMINISTRATIVE LIST

30107 of 2002 Masu Financial Management Pty Ltd (Plaintiff)

Financial Industry Complaints Service Ltd (First Defendant)

JUDGMENT (No 1) 1 Shaw J: Financial Industry Complaints Service Ltd (FICS) is a private body, registered as a corporation, but which is empowered to make decisions of a public nature. The question as to whether its decisions are susceptible to judicial review will be separately considered by this court. FICS administers a private complaints resolution scheme in relation to financial advice provided to citizens, including dealing with complaints against the plaintiff, a financial adviser which has provided advice in the relevant category to an individual, Ms Wong (the second defendant). The result of that advice was that Ms Wong purchased a property in Melbourne. She was dissatisfied with the transaction and made a complaint to FICS. The scheme operates under the corporations regulations which empower the Australian Securities and Investment Commission (ASIC) to do so. A provision of ASIC policy states that (cl 139.50): A scheme's effectiveness relies on its ability to ensure that members abide by its decisions and by its rules. Typically, scheme members will contract to be bound by the scheme's Terms of Reference as a condition of their membership. 2 The objects of FICS include the role of acting as a complaints resolution body of the financial services industry in Australia and dealing with complaints arising from transactions involving members of the public and participants in the industry or investments, directly or indirectly, of monies belonging to members of the public by participants in the industry. In the course of the performance of its duties, FICS is required to have due regard to relevant law, codes of practice, fairness in the circumstances and good industry practice. The rules governing FICS which have been put in evidence contain a number of principles to which FICS must have appropriate regard. These include (and I refer to rule 5) the need to determine the complaint on its merits and to "do what, in its opinion, is fair in all the circumstances, having regard to" ….a number of specified indicia which include, for the purposes relevant to the determination of this constitutional question, "any applicable legal rule or judicial authority (including one concerning the legal effect of an express or implied term of the contract or other document)' and "general principles of good industry practice and any applicable code of practice." 3 Thus, FICS is a body designed to adjudicate in relation to consumer complaints, but is not established under any direct legislation of the Australian Parliament. Rather it is, as I have pointed out, constituted under regulations and a policy statement issued by a body which, at least in one sense, is an emanation of the federal executive government. 4 Whilst it is required to have regard to existing legal rights and obligations (questions which ordinarily fall within the province of the judicial power of the Commonwealth) it is not bound or required to apply any particular legal principle but rather is bound to have regard to (that is, to give consideration to) such principles and is required to have regard also to a consideration which would not ordinarily fall within the jurisdiction of federal courts ordinarily constituted, namely the general principles of good industry practice. The Board of Directors of FICS consists of an independent chair, four directors from industry members and four directors appointed by the federal minister responsible for consumer affairs. Its origins lie in a body established in 1995 to deal with complaints in the life insurance industry, but over the years that role has expanded to enable FICS to deal with complaints more generally in the financial services industry. It is plainly not a court but rather, if constitutionally valid, an administrative complaints mechanism which is empowered to exercise functions of conciliation and arbitration arising from consumer complaints. The adjudication of individual consumer complaints is undertaken by a "panel" which is enjoined to follow informal procedures with a minimum of legal formality and technicality, although the panel is required to apply the rules of procedural fairness (rule 27 of the FICS rules). It is the panel (constituted from time to time by different individuals) which determines the complaint, not FICS or its Board of Directors. 5 Thus we have a relatively informally constituted body designed to do no doubt what is regarded as in the public interest, namely to resolve consumer complaints in relation to financial activities within its jurisdiction. 6 The question arising in the present case is whether the scheme intrudes in an impermissible way upon the exercise of judicial power and whether, as the plaintiff contends, such powers of adjudication can only be exercised by a court constituted in conformity with Chapter III of the Australian Constitution. 7 Certainly, FICS has heard and determined a controversy between Ms Wong and the plaintiff and has made coercive orders to the effect that the plaintiff should repay the amount of a commission which is said not to have been disclosed by the plaintiff to Ms Wong, together with any difference between the price Ms Wong paid for the property and the price for which she sold it, provided it was sold prior to 31 December 2002. The determination by FICS published on 29 July 2002 upheld Ms Wong's complaint and directed the plaintiff to pay to the complainant forthwith: (a) $10,363.00; and (b) interest at the rate of 5% per annum on $9,863.00 from 1 September 1999 to the date of payment; and (c) interest at the rate of 5% per annum on $500.00 from 20 September 2000 to the date of payment. If the complainant sells the apartment before 31 December 2002 and satisfies the panel that: (i) the sale was on the open market and at arms length; (ii) she has made a loss after taking into account interest payments and income from and expenditure on or in connection with the apartment, the panel will give a further direction to the member to compensate to that loss. Otherwise it will not direct the member to pay her any more compensation than is provided for in this decision. 8 Analogous schemes designed to deal with consumer complaints have been upheld by the courts as not involving an infringement or usurpation of judicial power. As the Commonwealth has submitted, the scheme is broadly comparable with the telecommunications ombudsman scheme, the validity of which was upheld by Sackville J in the Federal Court of Australia in Australian Communications Authority v Viper Communications Pty Ltd (2001) 110 FCR 380; (2001) 183 ALR 735. Another comparable scheme resulted in a challenge to the validity of legislation conferring powers on the Superannuation Complaints Tribunal, where the High Court of Australia upheld the scheme as valid in Attorney General (Cth) v Breckler (1999) 197 CLR 83. 9 Faced with these apparently relevant and arguably binding decisions which tend to support the validity of the scheme comparable to the present proceedings, counsel for the plaintiff in his able argument has seized upon a rule of FICS (namely rule 39) concerned with the enforcement decisions of the panel in adjudicating a complaint made by a consumer. This rule provides: The Service may take any necessary action (including legal action) to enforce a Panel's decision. This may include seeking specific performance of the agreement to abide by these rules. A member who does not comply with a decision of a Panel may have its membership terminated. The Service must consult ASIC prior to the termination process taking place. 10 In reliance upon this rule, the plaintiff submits that FICS can enforce its own decisions. If this is correct, the plaintiff says that it places the position of FICS much more in the category of Brandy v Human Rights and Equal Opportunity Commission (1995) 183 CLR 245. In that case, decisions of HEREOC were enforceable merely by the registration of the HEREOC decision with the Federal Court and without subsequent or supervening judicial procedures. This scheme was struck down by the High Court as unconstitutional. Thus, the question comes down to whether the third sentence of rule 39 of FICS rules creates a right in FICS to enforce its own decisions without curial intervention. If this were the case then, so the argument runs, Viper and Breckler can be distinguished.

11 The rule contemplates the prospect of legal action to enforce the decision of the panel. It identifies "specific performance" as a judicial remedy which might be sought as a result of the agreement of a particular member to abide by the rules. But then it goes on to say that in the event of non-compliance with the decision of a panel the member "may have its membership terminated." That is the high point of the plaintiff's argument, namely that, at least indirectly, the panel's decision can be enforced by the sanction of deprivation of membership which has the practical consequence, apparently, that if a member were to fail to comply with the decision of a panel and was therefore to have its membership terminated the member would lose the licence issued by ASIC. However, it seems to me that the submission of the first defendant is correct that any such loss or deprivation would be as a result only indirectly of the termination of membership by FICS and it would be a result more directly of ASIC making an administrative decision which could itself be a subject of some legal challenge. In other words, if there were a termination of membership pursuant to rule 39 of the FICS rules, administrative law remedies may well arise both in relation to the role of FICS and ASIC. Such a decision would not constitute an authoritative or final enforcement of the decision of FICS. 12 In my view, the deprivation of membership does not amount to the enforcement in the sense of judicial enforcement of coercive orders of the decision of the panel. Rather, the rule envisages that such enforcement will be dealt with by legal action in a court. This needs to be seen in the general context of the way that FICS operates. It has regard to legal rules and judicial authority but also to "policy considerations" including, as I have emphasised, questions of good industry practice. 13 In my opinion, the determinations of a panel of FICS create new rights and obligations designed to achieve fairness, in a broad sense, between the parties rather than amounting to the performance of the traditional task of a court, namely the ascertainment and enforcement of existing legal rights. If the panel directs a payment, then it creates a new obligation which can only be enforced by judicial proceedings. There is an analogy with an industrial award prescribing wages and employment conditions in futuro. An arbitral tribunal makes the quasi-legislative prescription, but only a court, in the constitutional sense, can impose penalties or order compensatory payments for breach of the resultant award. 14 If an order is defied, FICS cannot find the non-compliant party in contempt or issue any authoritative order to confiscate property based upon the contractual arrangements between FICS and its members. No doubt relevant judicial proceedings would be available under State or federal laws. I acknowledge that there is a power to terminate membership but I would regard this as being in the category of a disciplinary or administrative decision rather than enforcement in any legal sense which requires the exercise of the judicial power of the Commonwealth. Companies and voluntary associations can discipline or expel members without exercising judicial power, albeit that they may be required to act judicially in the sense of according procedural fairness to those members or affiliates who are being disciplined. 15 The basic principles are not in dispute:

a) a federal non-judicial body cannot exercise the judicial power of the Commonwealth (that is, s 71 of the Australian Constitution);

b) binding authority insists on such a separation of powers: Attorney General (Cth) v The Queen (1957) 95 CLR 529 (Privy Council). The Privy Council held that the Australian Constitution closely modelled, in its structure, the American Constitution (p 537), however; their Lordships posed a "formidable" question as to "why for a quarter of a century no litigant has attacked the validity of this obviously illegitimate union" (p 547); (see also P H Lane "The Decline of the Boilermakers Separation of Powers Doctrine" (1981) 55 ALJ 6). 16 In all of these circumstances, it is my view that there is no infringement of the separation of judicial and administrative powers in the way FICS has been constituted and operates and that, fundamentally, the protective jurisdiction of FICS should be characterised as administrative or arbitral rather than judicial. I am influenced also by the concept that the character of the power (that is, judicial or administrative) is, at least in part, indicated by the nature of the body in which that power is vested. 17 Accordingly, I reject the constitutional challenge mounted by the plaintiff in this case and uphold the submissions of the Commonwealth and the first defendant.

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