ASIC has initiated public consultation on the creation of new standards for financial firms handling consumer and small business complaints.
The regulator is proposing standards that will include mandatory data reporting and make firms' complaints handling performance transparent.
Financial firms will be required by ASIC to meet the new standards when they deal with consumer complaints through their internal dispute resolution arrangements.
Internal dispute resolution is the first step in the complaints handling process, and ASIC said financial firms should view it as an opportunity to redress the issue before it is escalated to the Australian Financial Complaints Authority (AFCA).
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AFCA has welcomed ASIC's announcement that it will strengthen complaints handling within financial firms.
AFCA chief ombudsman and chief executive David Locke said: "Increased transparency is good news."
It will help firms to continuously improve, and that will be good for the firms and their customers alike, he added.
"We also welcome the idea of requiring firms to provide a standard set of data - this will help companies know how they compare to their competitors and help to inform consumers about the companies they're dealing with," Locke said.
"In this digital age, the move by ASIC to require firms to include complaints made on social media platforms, is entirely appropriate."
All financial firms are required under legislation to have an internal dispute resolution system that meets strict ASIC standards.
ASIC deputy chair Karen Chester said: "It is widely acknowledged there is room for much improvement when it comes to handling consumer complaints in our financial system.
"The Ramsay Panel Review, recent ASIC research, case studies before the Financial Services Royal Commission and our own supervisory work have all identified shortcomings in consumer complaints handling."
She went on to point out that consumers expect effective complaints handling and the absence of such redress and the failure of firms to identify systemic complaints were key findings of both the Royal Commission and the Prudential Inquiry into the Commonwealth Bank.
"With the benefit of broad consultation, ASIC's new standards will lift complaints handling performance of firms and ultimately consumer outcomes and fairness of the financial system. And transparently so. These standards will also apply in their entirety to all APRA regulated superannuation funds," Chester said.
ASIC conducted research into how consumers experience complaints and found that while 17% of Australians surveyed considered making a complaint to a financial services firm in the last year but only 8% actually lodged a complaint.
About 18% of those complainants then went on to withdraw their complaint before it was concluded.
Almost a quarter of complainants did not have the internal dispute resolution process explained to them and 27% were unsure how long they would have to wait for a decision.
ASIC wants feedback specifically on how to reduce timeframes for internal dispute resolution responses and also wants to set clear standards on what should be included in written reasons for decisions.
The regulator is seeking public input on the consultation by August 9 and said it will release the new internal dispute resolution standards by the end of the year.