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Systemic issues update - April-June 2012

 

This article summarises systemic issues that we identified during the June quarter of 2012 and reported to the Australian Securities and Investments Commission (ASIC). It also provides an update on some current and recently resolved systemic issue investigations.

The FOS process for identifying and resolving systemic issues was outlined in Issue 4 of The 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

Error in default and serious credit infringement listings (case A)

Several disputes were referred for systemic issue review that involved a financial service provider’s (FSP’s) practices for making default listings and serious credit infringement listings. We were concerned that applicants may have been deprived of their opportunity to remedy defaults before they were listed and that the listings may have breached the Privacy Act 1988 (Cth).

The FSP submitted information requested by FOS and confirmed that it had also reviewed complaints it received about default listings. The FSP concluded that a number of these listings had been made in error. It also provided copies of other documentation, such as its default notice.

We reviewed the FSP’s response and determined that there was a definite systemic issue, because the FSP’s review indicated that a number of listings had been made in error.

To move towards a resolution, we asked the FSP to:

  • review all serious credit infringements to identify other instances where listings had been made in circumstances that did not indicate to a reasonable person that the customer was intending to evade their obligations under the credit contract, and
  • review all default listings made in the last five years to determine whether any other listings had been made in error for amounts less than 60 days overdue. 

Error in default and serious credit infringement listings (case B)

FOS received several disputes from applicants who were concerned that an FSP had made both default and serious credit infringement listings against them incorrectly, potentially affecting a wider class of customers. After reviewing these cases, FOS formed the view that as well as possibly making default and serious credit infringement listings incorrectly, the FSP’s standard default notices were not compliant with the relevant legislation.

The FSP was asked to provide copies of its policies and procedures for making default and serious credit infringement listings. The FSP was also asked to review its listings to establish whether:

  • any other defaults had been listed where the amount owing was not 60 days overdue, or
  • any other serious credit infringements had been listed in situations that could not indicate to a reasonable person that the debtor did not intend to comply with their obligations under the credit contract.

The FSP was also asked to provide copies of its default notices.

FOS reviewed the information provided by the FSP. The information showed that the FSP:

  • acknowledged that it had made a number of serious credit infringement listings in error and indicated they would be removed
  • had amended its internal procedures for listing serious credit infringements so that they mirrored the approach set out in our Banking & Finance Bulletin 54
  • could not find any other cases, apart from those cited by FOS, in which a default listing had been made before a debt was 60 days overdue.

FOS reviewed the default notices provided by the FSP and determined that the matter represented a definite systemic issue. We advised the FSP of the requirements of section 88(3) of the National Credit Code, which sets out the prescribed content of default notices, and asked the FSP to make further amendments. The FSP was also asked to undertake to consider requests for compensation from any affected customer whose serious credit infringement listing had been made in error.

Improper collection activity (case A)

We saw several disputes that illustrated that a particular FSP had insufficiently robust procedures for ensuring collections and enforcement action were suspended after FOS notified the FSP of the disputes. A review of these disputes indicated that in a number of cases, default notices were dispatched to customers after FOS had notified the FSP of the disputes. In another case, security property was repossessed after FOS notified the FSP of the dispute.

The FSP responded by acknowledging that the disputes cited by FOS indicated there had been a breakdown in the process it used to ensure the cessation of collections and enforcement activity following notification of a dispute by FOS. We reviewed the information provided by the FSP and were satisfied that there were a number of instances where the FSP’s processes had failed. Consequently, we considered the matter was definitely systemic.

We advised the FSP that its processes must be sufficiently robust and compliant with paragraph 13.1 of our Terms of Reference in order to mitigate, as far as possible, the possibility of human error.

Improper collection activity (case B)

A number of disputes referred to FOS for resolution indicated that an FSP had inadequate procedures for suspending collections and enforcement action following FOS’s notification that it had received a dispute. Our review of these disputes appeared to indicate that in one case, legal proceedings against an applicant were initiated one week following FOS’s notification of the dispute. Similarly, the circumstances of a similar dispute showed that the FSP appeared unable to ensure that telephone contact from its collections team ceased during FOS’s investigation of the dispute. So, we wrote to the FSP and explained that we would be reviewing as possibly systemic whether it had appropriate policies and procedures in place to ensure that collections activity against customers ceased upon notification by FOS.

The FSP confirmed that it did not have a specific policy for dealing with FOS disputes, but it was able to provide a copy of the collections and recovery procedures used by its customer relations team. The FSP said that following the systemic issues investigation, it had reviewed and amended its internal processes. FOS reviewed the information provided by the FSP and noted its undertaking to make amendments to its policies and procedures document in order to ensure that collections and enforcement action does not continue after notification of disputes. However, in view of the number of disputes received by FOS where continuing collections activity had occurred, we determined that the matter represented a definite systemic issue.

Inconsistent product documents

Several disputes were received by FOS in relation to delays experienced by applicants who took out life insurance policies with the expectation that they would receive reward points within three months of taking out the policies. The systemic issue review focused on whether the FSP had unreasonably delayed crediting eligible life insurance policy holders with reward points, in breach of the promotional and product information supplied to customers. A further issue involved whether the FSP had procedures in place for identifying newly created life insurance policies that would be eligible to receive the points.

FOS reviewed the FSP’s response and was of the opinion that the delay in providing the reward points to eligible life insurance policy holders was definitely systemic because the FSP indicated that the delay led to a number of complaints being raised with the FSP, affecting a number of customers. In addition, following changes to the eligibility criteria of the campaign, the FSP continued to send promotional and advertising material to policy holders and the general public which referred to the original eligibility criteria.

Processing error

We received a dispute in which it appeared that an FSP had not actioned the applicant’s instructions to close his super fund account and transfer the account balance to a new nominated super fund. The FSP informed us that because the account held several different investments, it was not possible to roll over the account balance in one go; in these circumstances, the FSP’s procedure was to sell the liquid investments in the account and make a partial payment to the new nominated super fund. The account was then placed in a designated processing queue for illiquid (suspended) investments and additional sell orders were placed as it became possible to do so. Once all remaining investments were sold to cash, a second payment was made to the new nominated super fund and the account was closed. However, in the applicant’s case, following the partial payment of liquid investments, the account was not placed in the correct processing queue, meaning sell orders for the remaining illiquid investments were not submitted during the normal redemption windows for the relevant fund. Upon notification of this error, the FSP remedied the situation by purchasing units from the applicant in the quantity and value that would have been achieved had the applicant not missed the redemption windows.

We raised the matter with the FSP as a possible systemic issue. It informed us that the process that led to the applicant’s account not being placed in the correct processing queue was a manual one. As a result of this manual process, errors could be made in ensuring that clients’ instructions were actioned at the appropriate time. The FSP confirmed it was aware that other clients were impacted as a result of this manual process, and that consequently it has implemented a new automated process.

Disclosure of account operation and features

A dispute was lodged with FOS following an FSP’s introduction of a new trading platform which offered online share trading. The dispute suggested that the FSP’s ‘contra’ system was particularly problematic. The ‘contra’ system is a settlement method which offsets buy and sell transactions. Along with the errors that the introduction of the new trading platform may have caused, FOS raised as possibly systemic the operation of the contra system itself.

The FSP confirmed that other customers were also erroneously charged research package fees. As the FSP identified a wider class of customers that were affected by this issue, we determined that the matter is definitely systemic.

Conduct of employees/authorised representatives

A number of disputes were lodged with FOS relating to allegations against an FSP’s former financial advisor. The disputes allege that he purchased and redeemed certain investments without the applicants’ knowledge or authority, and/or without reference to their attitudes to risk. The applicants argued that they suffered financial loss as a result of the purchases and sales from their portfolios.

We wrote to the FSP and asked it to review whether other customers may have been affected by the representative’s actions, and if so, how widespread this may have been.

The FSP told us that it had commenced a review of each client whose portfolio had been previously operated by the representative some years ago. In its review, the FSP identified a number of clients who had not authorised the sale or purchase of the equities, and/or had not received adequate statements of advice. These identified customers were referred to an internal dispute resolution process set up specifically to assess these issues.

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