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Systemic issues update


This article summarises new systemic issues that we identified during the March and June quarters of 2013 and reported to the Australian Securities and Investments Commission (ASIC). It also provides an update on some current and recently resolved systemic issue investigations, a summary of the possible systemic issue investigations for the March and June 2013 quarters, and some positive outcomes from matters that we investigated but ultimately considered were not systemic.

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 – March quarter

Policies for dealing with customers in financial difficulty (A)

Several disputes were raised with the financial services provider (FSP) as raising possible systemic issues in the following areas:

  • its procedures to cancel direct debits
  • whether it gives genuine consideration to a repayment proposal
  • potential barriers to providing hardship assistance; the financial service provider’s procedures for dealing with authorised representatives
  • its privacy obligations to debtors, and
  • staff training.


The FSP has told us that it is amending its policy in order to offer hardship assistance to customers who have fully fixed loans, and that it is revising its third party authority procedure.

We considered that the matter was definitely systemic, and asked the FSP to make further revisions to its policies and procedures in order to:

  • better reflect that the FSP does not defer to its mortgage insurer for hardship assistance
  • clarify its position where a debtor is in hardship due to over-commitment
  • clarify to agents the process for agreeing a suitable repayment plan, and
  • allow hardship assessors to seek information verbally from debtors.

Policies for dealing with customers in financial difficulty (B)

In a financial difficulty dispute, the FSP wanted its settlement agreement to include reference to the Lenders Mortgage Insurer (LMI) when outlining how it would deal with any future requests for assistance. We were concerned with this action in light of our views on this issue which we published in the FOS Circular Issue 9.

The FSP agreed to remove any such references within future settlement agreements. We also looked at the information contained within the FSP’s policies and procedures because they showed that where the LMI provider had made a decision to not approve the sale of a property which would (or may) result in a shortfall, the FSP was unable to complete its own independent review of this decision.

Error in credit listings (A)

A large number of disputes highlighted that the FSP’s collection letters and statements gave debtors confusing and misleading information about what payments were needed in order to remedy a default, and in some cases debtors were not provided with the appropriate amount of time in which to remedy the default. In one case, the FSP had credit-listed the debtor even though it had offered a repayment plan. Other disputes showed that credit listings were made after default judgment had been obtained, or that duplicate listings were made, or clearout listings were made which may not have met the requirements of the Privacy Act 1988.

We investigated whether the FSP’s process for advising debtors of a default and/or credit listing (specifically its automated collection letters and statements) complies with the requirements of the Privacy Act, the National Credit Code and the ACCC/ASIC Debt Collection Guideline, and whether its staff is adequately trained in the legislative requirements.

Error in credit listings (B)

A number of disputes were referred for systemic issue review due to concerns that the FSP had listed credit defaults prior to the amounts in question being 60 days overdue. In particular, it appeared that the FSP was relying on the date of the Notice of Demand when calculating the date to make the default listings.

We were concerned that a broader class of the FSP’s customers may have been affected by this issue, which was resulting in listings being made on customers’ personal credit files for amounts that were not 60 days overdue.

Error in credit listings (C)

We reviewed a dispute relating to the FSP’s process of listing credit defaults. We were concerned that credit defaults were listed for amounts that were not 60 days overdue, and asked the FSP to provide a copy of its policies and procedures for notifying customers of a default and warning them of a possible listing, with specific reference to its processes for listing accelerated amounts owing under a contract. We also asked it to identify whether there had been any other instances where listings had been made of an amount not 60 days overdue.

The FSP confirmed that in situations where customers had fallen outside its standard collections strategy, for example as a result of having previously advised the FSP of financial hardship or having lodged a dispute with the FSP, default listings had been made for amounts that were not 60 days overdue.

Error in credit listings (D)

A dispute highlighted that the FSP did not update a credit listing once the debtor paid in full. This followed a change in the FSP’s system which automated updates to default listings. The FSP is currently working through the process of correcting this error for the relevant period.

Policy interpretation (A)

An Applicant’s motor vehicle policy covered ‘nominated drivers’ listed on the policy schedule. Nevertheless, the FSP denied the Applicant’s claim for an accident when another driver was driving the vehicle. The FSP denied the claim on the grounds that the other driver was not disclosed as a nominated driver on the policy and said that if he had been, it would have refused to insure him based on his driving history. The Applicant disputed the decision and argued that the policy wording did not require the disclosure of the other driver as an undeclared driver, and he did not fall within the definition of a nominated driver.

The FSP conducted a further review and confirmed that the nominated driver option has been included in the motor policy since early 1999. It also said that even though its documented practice is to only reject a claim where there has been a breach of the duty of disclosure by the insured, an initial review indicated that a number of claims may have been declined in the past 12 months, resulting in claims being denied rather than having the stated undeclared excess applied in accordance with the terms of the policy.

Policy interpretation (B)

We received a dispute in which it appeared the FSP had excluded the Applicant from accessing their policy, in circumstances where the eligibility criteria for the policy were possibly not clear. The systemic issue related to the provisions of the relevant cover being made clearer to the customer as a standalone process.

Inadequate claims handling process

A systemic issue referral was made relating to the claims process for a landlord’s building and contents insurance policy – in particular, a claim for unpaid rent. The FSP appeared to treat the commencement date of default as the last date that rent is received.

The FSP identified that an outdated process document had been used to process the claim. Its practice at the time of the claim was to calculate the rent default benefit from the commencement day of the unpaid rent. A review and remediation of affected customers is taking place.

Misleading conduct: representation of available credit

We received a number of disputes from consumers who had applied online for a credit card with an FSP. They all claimed that the communication sent to them in response to their application, saying that their credit card application had been successful, contained misleading information regarding the amount of credit being offered.

Although the decision to offer less credit than that requested by the consumer is a commercial one which the FSP is entitled to make, we considered that the FSP should have advised successful applicants, at the time that it sent the confirmation email, that the credit card offered to them may have a limit less than that specified on the application form.

Recording of customer address

We received a dispute relating to the FSP’s address management system – in particular, that its internal address management system did not allow for a fifth line to be included in the address field. In the circumstances of the dispute, this meant that there was no provision for the country of residence to be included (outside Australia).

We are concerned that a wider class of customers may be affected by the limitations of the FSP’s address management system, as customers who live outside of Australia may be disadvantaged by correspondence being undeliverable.

New Definite Systemic Issues – June quarter

Improper collection activity

During the March 2013 quarter a number of disputes raised concerns that the FSP had issued default notices when this was inappropriate or otherwise not permitted. The FSP told us that it is possible for default notices to be issued inappropriately after an account has been settled and after a repayment plan has expired, leaving an agreed outstanding balance.

We considered this to be a definite systemic issue. In order to move towards resolution of this systemic issue, the FSP is currently working on a solution to ensure default notices are not issued inappropriately in the future.

Policy interpretation (A)

A dispute illustrated that the FSP’s policy definition of market value did not include the cost of stamp duty or any allowance for warranty or transfer costs. In our view, the policy definition of market value implies that fees such as stamp duty and transfer costs are included in the determination of market value when assessing the replacement cost of the insured vehicle. The policy definition of market value states it is the replacement cost of the insured vehicle, taking into account its condition. On the basis of the normal or ordinary meaning of the term ‘cost’, our view is that stamp duty would be included by implication.

As we consider this to represent a systemic issue, we have asked the FSP to review all total loss claims dating back to 1 April 2011 – this date coincides with our publication of Circular 9,  which deals with this particular issue. We have asked it to identify the number of claims that did not include stamp duty and transfer costs in the calculation of market value, with a view to providing a timeline for reimbursing the affected customers.

Policy interpretation (B)

We contacted an FSP about a possible systemic issue regarding its interpretation of the exclusion clause of its refund protection policy wording. We were concerned that it is denying liability for claims for items listed under a policy exclusion when the items have not caused or contributed to the loss.

The FSP said that the current master policy between the FSP and the credit card provider has been in place since April 2008. It confirmed that the policy terms have been reviewed as a result of this dispute and that the policy wording is undergoing a general review to ensure there are no other potential errors. In the meantime, interim measures have been deployed to ensure there are no claim denials involving the relevant exclusion pending the publication of the updated terms.

Policies for dealing with customers in financial difficulty

We received a number of disputes that showed the FSP was not complying with its obligations to customers experiencing financial difficulty, specifically those who were estranged from their co-borrower. The FSP was also failing to correctly tell its customers of their right to refer an unresolved complaint to an external dispute resolution body such as FOS.

We told the FSP about our concerns regarding its apparent policy of not providing hardship assistance to one party to a joint debt in circumstances where that party is estranged from the other borrower, and our concerns about its policy was that a loan term could only be extended through the creation of a new loan contract.

The FSP acknowledged that the content of its template letters to customers experiencing financial hardship did not include contact details for FOS. It also acknowledged that the standard wording in these template letters could be interpreted as meaning that FOS was not a free service for the FSP’s customers.

The FSP also submitted a copy of its policies and procedures for dealing with customers in financial difficulty for us to review.

Processing error

We received a number of disputes which raised issues about customers’ accounts being impacted by the migration of trading platforms by the FSP. The FSP confirmed that there were a number of computer and/or system errors which occurred in connection with the migration from the former trading platform to the current platform, and which the FSP was still dealing with. These related to the incorrect registration of legal entity types, the incorrect registration of account holders as authorised representatives, the application of service fees in circumstances where the client was unable to accept the updated terms and conditions in which the fee was disclosed, issues regarding the recording of tax file numbers within the new trading platform, and incorrectly withholding the maximum amount of taxation payable by the account holder.

In total, over 10,000 accounts have been identified as having been affected by the various issues and system errors which occurred during the migration, and the FSP is still receiving complaints and enquiries from affected clients. The FSP has outlined in detail the actions it has taken to date to resolve the issues caused as a consequence of the migration, and has provided us with an outline and an explanation of the steps it will be taking to resolve all outstanding issues.

Inappropriate charging of service fee

A number of disputes highlighted that the FSP had passed on legal costs or other expenses to its customers in circumstances where they should not have been charged, including some instances of customers being double charged and a customer being charged for documentation which should have been provided for free.

The FSP outlined its process for passing on legal costs and other expenses, which appeared to be entirely manual and had caused a number of errors and complaints. The FSP also told us that currently there are no formal instructions in place for its third party providers regarding their obligations to provide customers with documentation relating to their credit contract free of charge and in a timely manner.

As the current invoice verification process can result in customers being inappropriately charged depending on the actions of a third party, and as the process has resulted in at least eight errors in the last two years, we considered this to be definitely systemic.

Possible Systemic Issues

Trends and common issues under investigation as possibly systemic include those that are carried forward from previous quarters, such as:

  • Improper collection activity: in particular, continuing collection activity after a dispute has been lodged with FOS.
  • Mortgagee sale policies: investigation of the proper exercise of power of sale.
  • Misleading conduct: disclosure of account operations and features.


New trends and common issues also under investigation as possibly systemic include:

  • Policies for dealing with customers in financial difficulty.
  • Conduct of employees and authorised representatives.
  • Inadequate claims handling.
  • Processing errors.
  • Policy interpretation.
  • Application and disclosure of interest.
  • Disclosure of fees and compliance with management agreements.


It is pleasing to note that in the June quarter there were no new referrals relating to inaccurate credit listings, whereas this has been an ongoing trend in the past. Nevertheless, improper collection activity continues to be an ongoing issue for many FSPs, particularly continuing collection activity once a dispute has come to FOS. One such investigation was re-opened following continuing collections activity even after the FSP had apparently completed a process review.

Positive outcomes

Sometimes we investigate issues that are ultimately determined to be not systemic, but the investigation may involve a change in process or a comment from the Ombudsman about an industry practice. For example, in this period:

  • As a result of a rejected systemic issue investigation, an FSP is going to amend its email notification sent to consumers who have applied online for a credit card, so that it notifies them that while their application has been successful, the amount of credit offered may be less than that requested.
  • Another FSP amended its margin call warning emails sent to investors so that it includes a warning as to what payment methods will be sufficient to satisfy the margin call.