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Issue 31 - October 2017

Systemic issues update

This article summarises some notable systemic issues that were newly identified during the September quarter of 2017. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC) in accordance with our processes.

We also provide an update on 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 is 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 do our online training module.

New definite systemic issues

Failure to comply with section 22 of the Insurance Contracts Act and Regulations plus complaints handling procedures
Two separate systemic issue matters arose from the sale of insurance products, including add-on insurance products, via motor vehicle dealership representatives acting as authorised representatives of the FSP.

We were therefore concerned that the FSP may not have adequate procedures for selling, and monitoring the sale of, insurance policies through its motor vehicle dealership representatives and whether it kept adequate records of the sales through its representatives.

In one dispute giving rise to our investigation, the FSP denied the applicant’s claim for the theft of his vehicle on the ground of innocent non-disclosure/misrepresentation. A determination issued by us found that the FSP had not clearly informed the applicant of his duty of disclosure prior to policy inception and had not provided a copy of the Product Disclosure Statement (PDS).

Additionally, we were approached by a consumer representative on behalf of consumers it had assisted to claim refunds from the FSP for add-on insurance. Concerns were raised that the FSP was requesting unnecessary information and complaints were being delayed with the potential that consumers would abandon potentially meritorious complaints.

The FSP provided us with information about its insurance sales and scripting process. It also told us that it did not inform customers of their duty of disclosure pursuant to section 22 of the Insurance Contracts Act 1984, because it no longer relied on this duty when assessing claims.

It also acknowledged that it had amended its processes for dealing with such complaints, and were now managed by a single senior point of contact. The FSP was satisfied it met its obligations under ASIC’s Regulatory Guide 165 Licensing: Internal and external dispute resolution

The FSP also provided us with information about the numbers of complaints received. It advised it was undertaking a review of its portfolios of add-on insurance products, with the aim of improving customer benefits under the policies and delivering remedial action. This also followed the publication of ASIC’s Report 492 A market that is failing consumers: The sale of add-on insurance through car dealers.

As a result of the number of complaints received and also the FSP’s acknowledgement that it would be working towards remediating past conduct, significantly improving customer outcomes and ensuring that robust governance arrangements were in place, we considered both issues to represent definite systemic issues. The matter remains under investigation.

Collection activity while a dispute is with FOS
We raised concerns with an FSP about whether it had appropriate processes in place to ensure it was suspending all debt recovery while a dispute is at FOS, in line with its obligations under clause 13.1 of the FOS Terms of Reference (TOR).

In response, the FSP confirmed that in 2014 it implemented a process to automatically suspend collections activities whilst disputes were being investigated. Upon notification of this issue, the FSP discovered that these processes were not working as designed and breaches were occurring. On the basis of this information, we considered that the matter represented a definite systemic issue.

During discussions, the FSP advised that it had yet to discover the cause of the error and how to remedy it. However, the FSP confirmed it had created an interim manual process to ensure that collections activity did not occur during the time disputes were being considered and provided assurances that this process had been successful.

The FSP agreed to provide us with updates on the system and process changes in order to resolve the systemic issue, including a general update on the effectiveness of its interim manual suppression process.

Processing error
The issue raised with the FSP related to margins on a mobile trading application not adjusting correctly when hedged trades were placed against existing positions. A determination found that the FSP was liable to reimburse the applicant’s loss because it had:

  • represented the information on the platform would be accurate, regardless of where it was accessed
  • the applicant relied on this representation
  • the applicant suffered a loss as a result of this representation.

While the FSP created a Margin Live Widget (the Widget) to address this issue, it was unable to establish that it informed all clients about the necessity to use the Widget, prior to or at the time that clients opened their accounts.

From the information provided during our investigation, we discovered that:

  • Since the trading application became available and to the date of its system fix, 124 accounts had been opened.
  • The FSP was not able to ascertain the exact number of those 124 accounts which used the platform via a mobile device experiencing technical issues. However, the FSP confirmed that a minimum of 12 accounts did use a mobile device to access the application but that the number was likely to be higher.
  • The FSP was unable to demonstrate that it contacted all 124 clients during the period in question, to advise of the need to use the Widget to view their margin level.

As a result of this information, we concluded that the matter represented a definite systemic issue. The FSP’s implementation of a system fix was also noted. Only one client made an official complaint. The FSP indicated that apart from this client, the system error is not known to have had a negative financial impact on clients.

We acknowledged that a system fix was implemented in June 2016 and from the number of clients that initially raised issues about viewing their margin level via a mobile device, only one client lodged a formal complaint about this matter.

We raised concerns, however, about the FSP’s inability to establish whether all clients were provided with sufficient information about the system issue.  We informed the FSP of our expectation that it thoroughly consider any further complaints about the system issue, individually and on their merits, should they be lodged by the 124 identified clients. 

Cancellation of policies
We raised concerns with an FSP about the cancellation of customers’ loan protection insurance policies (LPI) prematurely. This was inconsistent with the terms and conditions of the policy, as well as the FSP’s obligations under section 59 of the Life Insurance Contracts Act 1984.

We found that the FSP had cancelled the LPI policy after the creditor of the loan received a debt agreement proposal pursuant to Part 9 of the Bankruptcy Act 1966. The applicant disputed the cancellation as he sought to lodge a claim under the policy.

The adjudicator concluded in the determination that the FSP hadn’t established an entitlement to cancel the policy and, even if the adjudicator was persuaded that the FSP had the right to cancel the policy, this right had not been exercised in accordance with section 59 of the Life Insurance Contracts Act 1984.

The adjudicator therefore directed the FSP to reinstate the policy

In response to our systemic issue concerns, the FSP confirmed the following:

  • The FSP’s policy was to terminate LPI policies upon receipt of a Part 9 or Part 10 debt agreement proposal. When LPI Policies were terminated, customers received a full or partial refund of premiums which were credited to their loan accounts.
  • In future, the FSP confirmed that it would not terminate any LPI policies until a Part 9 or 10 debt agreement proposal had been approved or a prescribed event had occurred.
  • The FSP confirmed that 282 accounts received a Part 9 or 10 debt agreement proposal in the past two years and 29 of these accounts had their LPI policies terminated incorrectly.

As a result of this information, we concluded that the matter represented a definite systemic issue. The FSP was asked to resolve the systemic issue by offering:

  • If the customer elected to reinstate their LPI policy, the FSP would not recover the premiums that were previously refunded to their loan account. The FSP would also bear the cost of premiums for the remaining term of the loan so that there was no cost to the customer, or
  • If the customer elected not to reinstate their LPI policy or if the FSP did not receive a response from them, the FSP would credit $1,000 to the customer’s loan account to compensate them for any inconvenience.

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 comment from the relevant Lead Ombudsman about an industry practice. Some of the positive outcomes from rejected systemic issues this quarter include:

  • An FSP, who had previously sold add-on insurance products through car dealerships advised it was working with a third party who is acting on its behalf under a binder to ensure distributers clearly explain that add-on insurance is not mandatory, and that it is reviewing the sales process for its products.
  • An FSP confirmed it was amending its practice to allow complaints to be lodged orally and that it was updating the wording of its standard letters to more clearly explain that complaints can be lodged in this way. The FSP also provided updated training to all staff about its amended complaints process.
  • An FSP has improved its internal call recording and no longer permits employees to provide sales and service functions remotely. This reduces the risk of providing customers with information which would suggest their claim will not be accepted, thus discouraging them from lodging a claim in the first instance.
  • An FSP agreed to amend its processes to ensure that hard copy account statements will be sent to retail banking customers when it receives a warning that the customer’s email accounts were full.
  • An issue was raised about an FSP charging late payment fees for non-hardship arrangements which were being maintained by customers, and in particular, how the FSP distinguished between hardship and non-hardship arrangements in such circumstances. While the FSP maintained its contractual and legal right to charge such fees, it took the commercial decision to cease from charging them to improve its standard practice. An automated change to its system will not take effect until January 2018. However the FSP has implemented a manual process in the meantime to ensure that any fees applied to maintained arrangements, would be removed at the expiry of the arrangement.
  • An FSP confirmed that it complies with the FOS Approach to Terms of Settlement by providing notice and allowing a seven day period, to FOS applicants who had acted in breach of an arrangement to remedy the breach prior to resuming recovery action. The FSP incorporated a clause in more formal resolution agreements reached with applicants, and made practical attempts to ensure compliance by contacting applicants and providing time to remedy the breach in more informal arrangements. In an effort however, to ensure greater consistency, the FSP committed to incorporating the clause into its policy, and ensure that all arrangements, whether formal or informal, contained the clause in future.
  • An FSP confirmed that its process for claiming chargebacks for unauthorised transactions was in keeping with MasterCard Scheme Rules for purchases made on promotion for its credit card products. Although not a subscriber to the Code of Banking Practice, the FSP also committed to improve its disclosure of exemption of certain chargeback claims by updating the information on its website, and notifying customers of contact details where they wished to dispute certain transactions.
  • An FSP improved communications to customers experiencing financial hardship to better explain why a decision had been made to decline financial difficulty assistance.
  • An FSP confirmed it would remove a variation fee that had previously applied when a loan was re-written or restructured following a hardship agreement being made with a customer. The FSP also confirmed that it would reduce the default interest rate applicable for such loans moving forward and that it would review its current hardship application form to provide for greater accessibility for customers.
  • An FSP made improvements to its online banking platform to alert customers to the requirement that a new BSB for an existing payee must be complete and that if all six BSB digits were not included then the payee would not be saved.