Skip to content
Circular Home
Issue 28 - February 2017

Systemic issues update


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

This update also provides an overview of a selection of current systemic issue investigations, 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

Compliance with Corporations Act
A determination was issued which set forward FOS’s view that the financial service provider (FSP) did not have adequate policies and procedures in place to ensure compliance with its obligations to:

  • determine the relevant personal circumstances of its retail clients before providing them with personal advice
  • ascertain the objectives, financial situations and needs of its retail clients before providing them with personal advice
  • assess the risk tolerance of its retail clients before providing personal advice
  • maintain adequate records of the advice it has given to clients and the basis for that advice.

The matter was referred to the systemic issues team who requested further information as part of a possible systemic issues investigation from the FSP in relation to its policies and procedures, as well as asking for complaints data.

In response, the FSP said that, since the relevant determination had been issued, it had engaged a compliance consultant to improve its policies and procedures. The FSP also advised that it has restructured its fact find and risk profiling practices and its statement and record of advice documents.

The FSP also advised that it has introduced a short form fact find and is progressively completing this, as well as its new risk profiling approach, with these clients at review time or when new investment opportunities arise.

Based on the information provided, we wrote to the FSP during the December 2016 quarter to advise that the Lead Ombudsman, Investments and Advice, considered the matter represented a definite systemic issue. The FSP’s proactive approach to making its compliance systems more robust following the publication of the FOS determination was acknowledged. Further information was requested from the FSP to ascertain the scope of the issue and also what further steps, if any, may be required to resolve the definite systemic issue have been requested.

Inadequate claims handling process
The possible systemic issue concerned the FSP’s handling of claims, particularly in cases where it alleged fraud had been committed. It was noted that there was a significant increase in disputes lodged with FOS in January and February 2016 that had arisen from claim denial. In response to questions from FOS, the FSP advised it had recently expanded its portfolio and that it considered there was ‘inherent fraud’ throughout this new purchase.

FOS wrote to the FSP and requested further information about its process for investigating and denying claims on the basis of fraud, its processes when it does not invite renewal of insurance, details of the training provided to staff handling fraud claims and whether it provides information about FOS when it does not invite renewal due to fraud.

FOS also noted that the FSP may have notified customers of non-renewal of their insurance without providing notice in accordance with section 58 of the Insurance Contracts Act 1984 (the Act). Under this section, an insurer must provide notice no later than 14 days prior to the date on which the policy expires.

FOS requested further information from the FSP about the number of claims denied during January and February 2016 on the basis of fraud and how many of these claims were subsequently paid on an ex-gratia basis where the allegation of fraud was maintained. FOS subsequently requested the FSP provide samples of the claim denial letters that were sent to the affected policyholders.

As part of its response, the FSP advised that it was amending its procedures to avoid any potential accusation of fraud against its customers and advised that it was appointing a specialist investigator to assist in the handling of potential fraud claims.

Incorrect interest charges
FOS was concerned, following the resolution of a dispute, about how an FSP calculated interest charges on a credit card product. In particular, FOS was concerned that the FSP may be charging its card-holders interest on credit card accounts during an interest-free period.

As part of the possible systemic issue investigation, FOS approached the FSP seeking clarification regarding how it calculates interest in accordance with its terms and conditions. The FSP responded confirming to FOS that it considers that it does calculate interest in compliance with the published terms and conditions. It went on to advise in its response that it does not consider credit reversals which occur outside the billing month to be a payment towards an account and that a customer is only entitled to an interest free period if they make a payment.

FOS agreed that a credit reversal is not considered a payment when considering whether a customer has met their obligations under the relevant credit contract. However, it was the Lead Ombudsman, Banking & Finance’s  view that a credit reversal transaction should be read in line with the ‘date of the transaction’. This means, in the Lead Ombudsman’s view that an account should be read as if the transaction has not occurred. The effect of the above is that a credit reversal changes the account balance due. The Lead Ombudsman took the view that the FSP did not interpret a credit reversal from the date of the transaction.

The Lead Ombudsman therefore considered this matter to be a definite systemic issue and we approached the FSP seeking details on all reversal transactions it did not consider amended an account balance, as well as the volume of customers who could be potentially impacted from its approach.

We also requested information about how the FSP will remediate affected customers, including how it will amend its interest charges calculation procedure and what steps it will take in the interim to ensure that no other account holders are adversely affected.

Policies for dealing with customers in financial difficulty
FOS referred two concerns to the FSP arising from disputes considered by our financial difficulty teams:

  1. Whether the FSP is complying with FOS’s approach regarding default interest not being charged when a customer is negotiating with an FSP or is in a hardship arrangement.
  2. Whether or not the FSP’s third party collections agent has appropriate policies in place to identify and refer customers in financial difficulty to the FSP’s hardship team.

FOS requested details of the FSP’s processes and policies in place to ensure that the FSP’s collections agent were appropriate in referring customers to the FSP’s hardship team when taking collections calls.

FOS also requested details of policies with regards to charging default interest when a customer is experiencing financial difficulty.

The FSP responded with detailed policy and procedure documents that it submitted its collections agency follows when dealing with customers in financial difficulty. It also advised that it had not received any other complaints about this issue.

With regards to the default interest matter, the FSP stated that its position is that there is nothing within the relevant ABA Industry Guideline as to whether default interest cannot be charged while a hardship arrangement is being actively considered or a hardship arrangement is in place.

However, the FSP noted that if hardship is approved on consumer finance agreements, the FSP system, in accordance with recommended best practice, automatically credits customers the default interest charged during the consumer moratorium period and therefore customers are charged nil interest.

The FSP advises that as it considers each case on its merits, it does not have a written policy specifically with regards to the use of this option when a customer is in financial hardship.

The Lead Ombudsman, Banking and Finance was satisfied that the FSP does not charge default interest when a hardship arrangement is in place, an approach in accordance with FOS’s view.

However, the Lead Ombudsman remained concerned that the FSP’s lack of written policy to guide its staff members represented a definite systemic issue. The FSP has been encouraged to achieve best practice in this area and create a written policy to ensure its staff are aware of FOS’s view and do not levy default interest against customers in hardship.

Policy interpretation
FOS was concerned about the process implemented by an FSP when electing to void CFD/FX contract trades with customers under its terms and conditions. Following the resolution of multiple disputes considered by FOS, the Lead Ombudsman, Investments and Advice (Lead Ombudsman) considered that the FSP may not have a robust process in place, nor clearly explain to customers the reason it had voided contracts under its terms and conditions.

It is FOS’s view, in this regard, that if an FSP seeks to void a CFD/FX contract under its terms and conditions there needs to be transparency with the customer and clear details regarding why the FSP has exercised its right under the contract.

FOS approached the FSP seeking a copy of its policies and procedures along with any pro-forma documentation that the FSP may use when voiding a contract under its terms and conditions. The FSP responded to FOS advising that it did not have any policy and procedure in place, nor was any pro-forma documentation used when voiding CFD/FX contracts.

FOS disagreed with the response provided by the FSP as based on the documentation FOS held on multiple disputes, it appeared that the FSP had implemented a template response which did not clearly and concisely outline to customers the reason the FSP had voided contracts under its terms and conditions. As a result, the Lead Ombudsman considered the matter represented a definite systemic issue.

In order to resolve the systemic issue, FOS has requested that the FSP implement a policy and procedure and create pro-forma documents which can be used to ensure that customers who have their contracts voided are clearly advised of the reasons for the FSP’s decision. It is our view that this will increase and enhance the transparency or customers and reduce complaints.

Policy interpretation
We wrote to an FSP about its settlement of total loss motor vehicle insurance claims in Queensland as we considered it represented a possible systemic issue. We referred to the relevant legislation which states that for vehicles less than 16 years old, where the fair cost of repairs plus the salvage value exceeds the fair market value of the vehicle, it is to be classified as a total loss.

The possible systemic issue investigation arose following the publication of a FOS determination where the FSP used the agreed value under the policy when determining that the insured vehicle was a total loss. The decision-maker Ombudsman expressed concern in this case that the FSP was not complying with the Queensland legislation.

As part of the possible systemic issue investigation, we requested information from the FSP about its process for the assessment of total loss claims in Queensland. This included how long this has been its practice, how its assessors establish fair market value and what test is applied to establish that the agreed value represents the fair market value.

Based on the information provided, the Lead Ombudsman, General Insurance (Lead Ombudsman) took the view that the FSP was not complying with the Queensland legislation and that the matter represented a definite systemic issue. The FSP has been asked to remediate the systemic issue and is completing internal enquiries.

Policy interpretation
The possible systemic issue investigation concerns the FSP’s practice of charging customers a premium based on the estimated value of an insured vehicle at policy inception/renewal.

As the policy permits the FSP to use the lesser of the estimated value and the pre-accident market value when settling a total loss claim, FOS was concerned that the premium is charged on an estimated value that may not be paid in the event that the insured vehicle is assessed by the FSP as a total loss. Several disputes have been referred to the systemic issues team in relation to this issue.

FOS wrote to the FSP and requested further information, including the methodology used to calculate the estimated value, the number of total loss claims paid to policyholders since the introduction of estimated value and the number of claims that were settled for the lesser market value. FOS also requested the FSP advise whether it refunded any premium to policyholders in circumstances where the total claim was settled for the lesser value.

In its response to FOS, the FSP advised that it provides customers with an indicated value for their vehicle at point of sale which is sourced from Glass’s Guide. Customers are then able to increase or decrease the estimated value over a range of 75-115% of the indicated value, to allow for factors such as condition, kilometres travelled and accessories/modifications.

The FSP says that in August 2016, it became aware of a system error which caused the indicated value to be incorrectly inflated for some vehicles, which allowed those customers to increase their estimated value above the maximum amount the system would normally allow. It identified 2,940 customers that were affected by this error and refunded those customers affected by a premium difference of more than $30.00 as a goodwill gesture. As a result of this information, the Lead Ombudsman, General Insurance, confirmed that he considered the matter to represent a definite systemic issue and requested the FSP remediate appropriately.

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 during the December 2016 quarter include:

  • An FSP agreed to improve its policy wording ahead of its offer to renew a Group Life policy. It also advised that, as a result of the possible systemic issue investigation, it intended to implement additional improvements to its policies and procedures, including providing written guidelines for the calculation of policy benefits, together with safeguards to identify and warn of calculation errors.
  • An FSP advised that it concurred with FOS’s view about the correct procedures for cancelling life insurance policies due to the non-payment of premiums. The FSP also advised that as a result of the possible systemic issue investigation, it was reviewing its template letters for cancelling life insurance policies due to the non-payment of premiums to better reflect the FOS approach.
  • An FSP undertook to make amendments to the descriptions of the internal reviewer in its template letters and internal dispute resolution publications so it was clearer to customers that this role was not independent of the FSP.
  • The FSP further said it would change its IDR letters to ensure that they comply with what FOS considers to be an adequate final response pursuant to RG165 and the FOS Terms of Reference and Operational Guidelines.
  • The FSP, in response to our possible systemic issue investigation, sent instructions to its claims area to ensure that staff do not decline claims based on an interpretation of policy exclusions that the FSP is not entitled to make as these exclusions are not define. The FSP also instigated a process to change the wording in its Product Disclosure Statements (PDS) to ensure that any undefined terms were corrected.
  • The FSP identified an opportunity to further enhance its processes and procedures to ensure that determinations were enacted promptly. This included conducting training for relevant staff relating to the implementation and closure of FOS determinations and enhancements to its internal documents to clearly outline the steps that need to be taken to implement a determination and before a case is closed. The FSP has also advised that it requires staff to obtain information to support that the determinations have been complied with, such as copies of account statements to ensure that a complaint is not closed prematurely.
  • The FSP made amendments to documentation which incorrectly referred customers to a third party to lodge complaints about the product. The FSP issued a supplementary PDS to correct this error which was distributed to customers.
  • The FSP amended its template internal dispute resolution letter so as to more clearly disclose a customer’s right to refer a dispute to FOS.
  • The FSP agreed to allow for 20 days written notice of a unilateral change to a credit contract, in compliance with section 68 of the National Credit Code (NCC) although, at the conclusion of our possible systemic issue investigation, it was agreed that section 64 of the NCC may also apply and that this section did not require the same notice period.