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Issue 27 - October 2016

Systemic issues update


This article summarises some notable systemic issues that were newly identified during the July to September quarter of 2016. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC) in accordance with our processes.

Also provided is an update on a selection of current systemic issue investigations, a summary of the possible systemic issue investigations for the September 2016 quarter, as well as some positive outcomes from matters that we investigated but ultimately considered were not systemic.

Our process for identifying and resolving systemic issues was outlined in Issue 4 of The FOS Circular. The process is in line with our obligations to ASIC.

To learn more about our approach to systemic issues, you can take our online training module.

New definite systemic issues

Cancellation of policies
A dispute was referred to the systemic issues team arising from the financial services provider (FSP)’s purported cancellation of the applicant’s motor vehicle insurance policy from inception due to non-payment of the annual premium. At the time of taking delivery of the motor vehicle, the applicant was provided with a certificate of insurance confirming comprehensive insurance cover was in place.

The premium was to be paid in monthly instalments and the applicant provided his bank details to the dealership for the debits to be made. For unknown reasons, the initial premium payment was not debited from the applicant’s account.

The applicant contacted the FSP to make a claim following a motor vehicle accident and was informed that the policy had been cancelled due to non-payment of the policy premium.

Systemic issues requested that the FSP provide further information about its usual practices when cancelling such policies due to non-payment of premiums. We also requested information about whether it had cancelled any other policies in the same manner in the last 12 months.

Following consideration of the FSP’s submission, the Lead Ombudsman General Insurance took the view that the FSP’s cancellation procedures did not comply with section 59 of the Insurance Contracts Act and that the matter represented a definite systemic issue.

Suitability of product
We wrote to an FSP about its advisers inappropriately promoting a ‘dividend washing’ strategy to clients prior to completing an adequate investigation in regards to the strategy’s tax effectiveness, possibly causing the clients financial loss.  

We sought further information about the promotion. In particular, whether the advice given was personal or general advice, whether the FSP undertook any consultation with the Australian Tax Office (ATO), whether there were any other complaints about this issue and if so, had they been dealt with under the FSP’s remediation program.    

The FSP responded by advising that it did not issue any promotional material about the strategy to clients. However, it was aware of the dividend washing strategy being promoted by its advisers.

It also explained that it did not consult the ATO prior to giving the advice as the FSP was taking steps to stop its advisers recommending the strategy at the time. The FSP advised that when advisers made relevant orders, they were to receive an acknowledgement from the client confirming that they had not relied on advice or opinions from their adviser regarding the taxation consequences of the transactions.

In response, the FSP provided information about complaints received and acknowledged that the ATO and ASIC had also requested information about the strategy. 

The Lead Ombudsman Investments and Advice advised that, as a result of the complaints received and information sought by the ATO this issue would therefore be considered a definite systemic issue. FOS advised the FSP that as the issue has been reported to the regulator and remediation has taken place it would focus on whether any individual customers had experienced loss and may not have been put back into the position they would have been in but for any error.

Calculation of fees
A dispute was referred to FOS as a result of the applicant’s concern that he had been charged a fee for exceeding the monthly additional contribution limit on his fixed interest mortgage. The limit was exceeded as the applicant’s monthly contribution was applied on the following monthly cycle due to the direct debit date falling on a weekend.

As the applicant had set up the direct debit correctly, FOS was concerned that the applicant was penalised for the direct debit being applied in the following month. FOS further questioned whether a regular home loan repayment could be classed as an 'additional payment' under the relevant terms and conditions in these circumstances.

The dispute was resolved after the FSP made an ex gratia payment to the applicant and suggested he amend the direct debit date.

Systemic issues wrote to the FSP to request information about the prepayments and whether any other customers had been charged fees in similar situations. The FSP responded by stating that its terms and conditions define a prepayment and that these also enable customers to be clearly informed about when payments should be made and structured in order to avoid the payment being applied on the next banking day and the potential consequences associated with the delay.

Based on the information provided, especially the FSP’s comments about its interpretation and application of a prepayment, the Lead Ombudsman Banking and Finance’s view was that the matter represented a definite systemic issue. The Lead Ombudsman concluded that the FSP’s approach as demonstrated in the dispute giving rise to the systemic issue was inconsistent with its terms and conditions and that a wider group of customers may have been adversely affected.

In order to move towards a resolution of the definite systemic issue, the FSP was asked for its comments and, if it agreed with FOS’s interpretation of its terms and conditions, to provide details of a proposed remediation plan.

The FSP has also been asked to confirm the number of accounts affected and confirm the total compensation payable.

Processing error
Systemic issues approached an FSP in relation to a statement it had made in the course of a dispute considered by FOS that, due to an administrative error, no policy expiry letters were sent to customers who took out the relevant term life product. There was further reference in the dispute to a technical error having caused this issue.

The FSP responded advising that the technical error had caused numerous policies to be closed in its system a year earlier than they should have. It also took the stance that it is not required by law to send an expiry letter to life insurance customers.

Based on the information provided, the Lead Ombudsman Insurance and Advice considered that the technical error represented a definite systemic issue. We also advised the FSP that FOS takes the view that the provision of expiry letters to policyholders represents best practice. We requested further information in relation to the remediation of the technical error and for the FSP’s policies and procedures.

In its response, the FSP advised that a number of policies had expired one year early. The FSP confirmed that it had written to impacted policyholders informing them that their policy would remain in force for the full duration of the term and also waived the final year’s premium.

The FSP advised that the issue occurred as a result of errors during a technical migration. The FSP acknowledged that it is a good customer experience to send policy holders letters notifying them that their policy/cover is about to expire and that its standard process is to do this. However, a breakdown had occurred in the process, which resulted in some customers not receiving notifications. This was rectified by the FSP sending the notifications, with some customers receiving them after expiry.

Failure to account for Reduced Income Tax Credits (RITC)
A number of referrals had been made to systemic issues arising from disputes where the FSP had acknowledged that it did not pass on discounts and rebates which are available to its customers where enforcement costs have been incurred. This is contrary to FOS Bulletin 57 which requires that FSPs should only seek to recover from its customers those costs that are net of any RITC entitlement.

The FSP initially responded confirming that it does not have a policy for RITC, but has been aware of the issue since 2014. Prior to June 2016, the FSP advised that it had only passed on RITC benefit in the resolution of FOS disputes.

Based on the information above, FOS wrote to the FSP confirming that the Lead Ombudsman Banking and Finance took the view that the matter represented a definite systemic issue. In order to resolve the systemic issue, FOS asked the FSP for details of customers who have been impacted by this issue over the last two years, as well as for how the FSP intends to remediate the matter.

In its most recent response, the FSP has confirmed that since the end of June 2016, it had amended its processes to ensure invoices received from its litigating solicitor are net of RITC.   

Misleading conduct
This matter was referred to systemic issues following the determination of the applicants’ dispute by the FOS Panel. The applicants lodged a claim under their general policy for accidental damage to their caravan.

The Panel determined the dispute in favour of the FSP on the basis that the cause of the damage was excluded from cover under the terms of the policy.

Notwithstanding this, the determination raised concerns that the sum insured on the policy schedule was significantly higher than the market value of the caravan. The Panel noted that the claim was lodged within 18 days of renewal of the policy and concluded that the FSP either used an inflated sum insured to calculate the premium, or incorrectly assessed the market value when the claim was made.

The Panel took the view that either scenario was misleading and that if the assessed market value is correct, the premium should have been calculated on the lower value.

Systemic issues wrote to the FSP and requested further information about how it ensures the sum insured at policy renewal is a fair and reasonable estimate of market value and how many total loss claims in the last twelve months have been settled for a lesser figure than the sum insured. We also asked whether the FSP had received any complaints from policyholders about the quantum of the total loss settlement.

The FSP responded by advising that it had identified a number of policyholders who were entitled to a refund of premiums due to the variance between the sum insured and the market value of the vehicles. The FSP also confirmed it would pay interest on these amounts, as well as review claims made in previous years and take action to ensure it has a process in place to establish the market value of a vehicle at policy renewal. As a result of this information, the Lead Ombudsman General Insurance confirmed that the matter represented a definite systemic issue.

Subsequently, the FSP confirmed that it had reviewed a further tranche of policyholders where the total loss market value claims were settled for a lesser value than the sum insured. The FSP also advised it will request customers obtain an independent valuation from a certified valuer if they wish to insure their vehicle for more than the agreed value. The FSP has undertaken to contact affected policyholders and remediate as appropriate.

Possible systemic issues
Some details about trends and common issues under investigation as possibly systemic during the September 2016 quarter include:

  • Inadequate claims handling process/complaints handling procedures
    We have continued to liaise with various FSPs about both life and general insurers’ claims handling culture and practices, as previously reported.

    During the September 2016 quarter, three additional possible systemic issue investigations commenced under this code. These included a matter which arose from a dispute about a motor vehicle insurance storm damage claim being declined. We have sought further information about the FSP’s claims assessment process and whether it has appropriate measures in place to assess claims in an honest, fair, transparent and timely manner.

    Another possible systemic issue investigation has also arisen from a motor vehicle insurance claim. In this case we have sought information to establish if the insurer is improperly settling claims by applying depreciation, contrary to the cover provided under the policy.

  • Conduct of employees/Authorised Representatives
    Three separate investigations commenced under this systemic issues code in the September 2016 quarter. One matter dealt with whether the FSP had robust controls in place to ensure its Authorised Representatives complied with the conduct and disclosure obligations under the Corporations Act 2001 (Cth) and also whether the FSP adequately supervises and monitors the conduct of its Authorised Representatives.

    Another investigation dealt with similar issues, as well as raising concerns about whether the FSP complies with ASIC’s Regulatory Guide 156: Advertising of debentures and notes to retail investors.

  • Compliance with National Credit Code
    Two matters were referred to financial service providers under this systemic issues code during the quarter. One matter arose following concerns an FSP may not have provided sufficient notice to its customers about a change in interest rates for its investment loan and interest only loan portfolio in September 2015.

    A second investigation involved concerns that the FSP may have breached regulations which require that court proceedings relating to credit contracts must be brought in a court of the State or Territory where a debtor ordinarily resides. In addition, this investigation sought information about the contents of the FSP’s Statements of Account.

  • Policies for dealing with customers in financial difficulty
    Several investigations commenced under this systemic issue code during the September 2016 quarter. One investigation sought information to establish if an FSP was charging customers default interest when they were negotiating with an FSP about a hardship agreement or had agreed to an arrangement. Charging of interest in these circumstances is contrary to FOS’s approach. We further requested information about whether the FSP’s third party collections agent had appropriate policies in place to identify and refer customers in financial difficulty to the FSP’s internal hardship team.

    Another matter arose from concerns about several aspects of an FSP’s policies and procedures for dealing with customers in hardship. In particular, its practice of offering repayment arrangements that involve repayments above the minimum monthly contractual amount in order to repay the arrears over a specified period of time, as well as its apparent requirement for customers to provide an updated statement of financial position as a condition of arrangements where one was already held by the bank. We also sought information about restrictions which appear to prevent capitalisation of arrears for personal loan products and the requirement that approval of some hardship variations be subject to credit assessment and lending criteria/credit checks.

    Finally, we commenced an investigation involving an FSP following concerns that it may be declining requests for hardship assistance as a result of a customer’s failure to supply a statement of financial position.

  • Unauthorised transactions
    Three possible systemic issue investigations commenced during the September 2016 quarter under this code. One matter, related to whether the FSP had adequate policies and procedures in place to comply with the provisions of the ePayments Code relating to unauthorised transactions.

    A further matter related to concerns about whether an FSP had adequate processes in place to stop direct debits in accordance with customer instructions.

    Lastly, we approached an FSP about allegations of deducting premiums without the customer’s authorisation either before the customer had agreed to accept the insurer’s quote for insurance or after the customer decided not to renew their insurance.

A number of other codes were raised as possible systemic issues during the quarter with only one or two investigations per code so they could not be noted as representing a trend. They include:

  • Mistaken internet payment (process)

  • Privacy processes

  • Record keeping

  • Settlement conduct

  • Compliance with the EFT Code

  • Compliance with the ePayments Code

  • Incorrect interest charges

  • Collection activity while a dispute is with FOS

Positive outcomes from rejected systemic issues
Sometimes we investigate issues that are ultimately determined not to be systemic, but the investigation may result in a change to an FSP’s process or a comment from the relevant Lead Ombudsman about an industry practice. Some of the positive outcomes from rejected systemic issues this quarter include:

  • An FSP agreed to further develop existing hardship procedures for those life insurance policyholders who were experiencing financial difficulty as a result of the events relating to their claim. In addition, the FSP implemented a claims accreditation program for its consultants to further develop their learning and development.

  • An FSP made amendments to the content of documentation explaining the role of its internal reviewer. It also confirmed it would change the content of its internal dispute resolution (IDR) letters to comply with what FOS considers to be an adequate final IDR response pursuant to our Terms of Reference, our Operational Guidelines and Regulatory Guide 165.

  • The FSP updated its policies and procedures for identifying funds deposited in its trust accounts, including implementing a daily review of its trust account, conducting reconciliations and introducing proactive steps to identify customers who may have transferred funds using incorrect reference details.

  • The FSP confirmed it would undertake further staff training and update its training materials to provide better experience and outcome for those customers seeking to lodge complaints about credit cards.

  • The FSP confirmed it would make changes to letters used to decline hardship requests to ensure that it adequately sets out why the FSP, further to genuine consideration of the customer’s circumstances, would not provide hardship assistance. The FSP also made improvements to the way it recorded contact with customers in its collections system.

  • The FSP reviewed its lending procedures and made improvements to the way it makes enquiries about a customer’s personal and financial situations. It also expanded the types of enquiries made to establish the customer’s requirements and objectives and agreed to keep more detailed records about these discussions.

    The FSP also confirmed to FOS that it would move away from a scalable approach to verifying a customer’s stated income so that income verification procedures would be consistent across all portfolios.

  • The FSP provided further training to staff members about the FSP’s obligations to customer accounts subject to administration and guardianship orders, as well as updating its internal procedures.