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Issue 15 - Spring 2013

Systemic issues update


This article summarises new systemic issues that we identified during the September quarter 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 September quarter, 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

Application of incorrect interest rate

A dispute highlighted that there may be an error in the way the financial services provider (FSP) calculates when bonus interest is due to be paid into a savings account.

The FSP investigated the issue and told us that the period in which the minimum monthly deposit requirements must be met (and withdrawal restrictions apply) cycles one day later than the period in which interest is accrued. It was agreed that the matter represented a definite systemic issue and was also reportable to ASIC under section 912D of the Corporations Act (2001).

Improper collection activity (A)

After reviewing a number of disputes we were concerned about:

  • an FSP’s response to its customers’ request for assistance in their financial difficulty, and
  • its conduct when it advised customers, in writing, that if they did not return a Statement of Position Form within seven business days, then collection activity would recommence.

In its response to FOS, the FSP confirmed that its statements about the continuation of collection activity were also provided to customers with open FOS disputes. It also confirmed that it applied arrear follow up fees to those customers. We therefore considered that the matter represented a definite systemic issue.

Improper collection activity (B)

While investigating two FOS disputes, the FSP acknowledged that it had placed on its customer’s personal credit file a listing which actually related to a business/commercial debt. The FSP told us that it had reviewed the credit listings it placed on its customer credit files for a specific period and had identified a large number of incorrectly placed default listings relating to a commercial and/or business debt on a customer’s consumer credit file instead of the customer’s commercial credit file.

The FSP will be removing all of the incorrect listings and updating the affected customers’ commercial credit files, as well as providing an undertaking to FOS as to how it will deal with any disputes or complaints it receives from affected customers in the future.

Improper collection activity (C)

We were concerned that the FSP had made a number of serious credit infringement listings against customers in circumstances that were not based on what “a reasonable person” would consider was an intention to no longer comply with their credit obligations as required by the Privacy Act 1988 (Cth).

We were also concerned:

  • that the FSP’s default notices were not compliant with the requirements set out in the National Credit Code
  • that the FSP may be engaging in improper collection activity with respect to its apparent disregard of a debtor’s appointment of an agent
  • that an SMS campaign may have resulted in SMS messages being sent to customers in error
  • that the FSP’s Reminder Notices contained a warning to customers of the consequences of non-payment of a debt and the possible application of late fees and collection letter charges
  • about the FSP’s approach to dealing with customers in financial difficulty and, in particular, whether it has appropriate policies and procedures in place for dealing with customers in financial difficulty, and
  • about whether the FSP’s apparent policy of requiring extensive supporting documentation from customers before agreeing to consider a request for hardship assistance is fair and reasonable, and whether it has sufficient regard for our view on this issue, which we have set out in various FOS publications.

As the FSP confirmed that it had entered serious credit infringements for a wider class of customers in error, the matter was considered definitely systemic. The further issues will form the remainder of the systemic issue investigation and resolution.

Policies for dealing with customers in financial difficulty

A number of FOS disputes illustrated an FSP’s statements and conduct to its customers in financial difficulty in circumstances where the co-debtor was unable or unwilling to also request assistance. These statements and conduct did not match our expectations as set out in the FOS Approach financial difficulty series (document 4) and, following further review and investigation, we decided they were indicative of a wider issue regarding the FSP’s treatment of hardship requests from one debtor in relation to a joint debt.

Inadequate claims handling process

A FOS dispute raised concerns regarding an insurance claim. We were concerned:

  • that there had been a second interview even though the claim was uncomplicated and the FSP was not alleging fraud
  • about the conduct of the investigator generally
  • that the FSP had deducted their investigative costs from the final settlement amount.

We told the FSP that we consider investigative costs incurred by an insurer in the course of investigating a claim represent the costs of an insurer conducting business. Therefore, investigative costs should not be recovered from the insured when a claim is denied by the insurer or when the claim is withdrawn by the insured. We consider that the matter represents a definite systemic issue.

Compliance with management agreement

A large number of disputes were referred to FOS from customers of a managed investment scheme who were concerned that the FSP, the former responsible entity of the scheme, had charged more in particular fees than it was contractually entitled.

In one dispute, a FOS Panel Determination set out that the scheme’s constitution only allowed monthly fees of a specified percentage of the value of the investor’s investments before fees. However, the fees charged at specific times were in excess of those permitted under the constitution.

Following review and investigation, we concluded that the FSP had levied management fees in the same way for a wider class of customers than just the applicants who received the Determination. A wider class of customers was therefore entitled to a refund of management fees using the methodology outlined by the FOS Panel.

Error in credit listings

We investigated a dispute in which it appeared that the FSP had made a default listing for an amount that was not 60 days overdue and in which the default notice issued did not substantively comply with the requirements set out in section 88 of the National Credit Code. This matter was referred as a possible systemic issue. We told the FSP that FOS also requires, as a matter of good industry practice, that the intention to list should be brought to the attention of the individual at the time the demand for payment is made.

During the course of our systemic issue investigation, the FSP confirmed that an initial review indicated that 57% of default listings it had made were not correct. As a result, we told the FSP that the matter represented a definite systemic issue.

Processing error

We received a dispute from an applicant who claimed that the FSP was charging interest on monies owing towards his margin loan which had already been deposited by BPay. Specifically, the applicant said that BPay payments were usually processed by the FSP the day after payment but were backdated to the time of receipt, except for BPay payments received on the last business day of the month. Those payments were receipted on the first day of the next month, and this resulted in interest being charged erroneously for the additional day.

The FSP told us that it follows BPay’s own guidelines regarding timeframes for receipt. It said it receives a notification of a payment and the payment itself the day after the payment is made, however it will backdate receipt to the previous day, in line with when the payment was made. The FSP conceded that it needed to make an exception where a payment is made on the last day of a calendar month. This is because the end-of-month processes to calculate loan interest are already completed, and backdating a transaction would affect the interest amount already calculated and applied. The FSP has suggested an interim manual fix and the implementation of an automated process to resolve the systemic issue.


Possible Systemic Issues

Trends and common issues under investigation as possibly systemic during the September quarter include:

  • Improper collection activity: Issues regarding default notices and acceleration clauses; conditional settlement offers and continuing collection activity while a dispute is with FOS.
  • Compliance with section 22 of the Insurance Contracts Act: Possible failure by an FSP to clearly inform customers at policy inception of the duty of disclosure; also issues relating to the timing of the provision of the duty.
  • Policies for dealing with customers in financial difficulty: One new matter for assessment this quarter relating to the apparent practice of finalising and writing new loans to customers who have requested a variation of their original loan agreement due to financial difficulty.
  • Conduct of employees and authorised representatives: Concerns raised with one FSP as there were three disputes relating to the actions of one authorised representative.
  • Inadequate claims handling: Concerns raised with one FSP where a claim was rejected because written evidence was required that a third party was uninsured.
  • Processing error: Concerns regarding various processing issues such as the transfer of safe custody packets; the crediting of bonus rewards to customer accounts; and the processing of EFTPOS transaction vouchers.
  • Policy interpretation: An issue regarding particular policy definitions contained in the FSP’s long-term protection insurance policies.
  • Application and disclosure of interest: In one case it appeared that interest had been applied in breach of the account’s terms and conditions.
  • Disclosure of fees/compliance with management agreements: Two separate issues with this description were raised as potentially systemic. One relates to issues regarding the levy of an increased capital protection fee on a life insurance investment bond. The other relates to the apparent fee charged to a customer’s ‘pay anyone function’ of an online banking service.
  • Error in credit listing: The first issue concerns the appropriate number of addresses maintained on a customer’s credit file by the credit reporting agency; the second issue concerns the possibility that the FSP is entering default listings against its customers without properly accelerating the debt and without sending a compliant default notice; the third issue relates to the fact that it appears the FSP failed to give appropriate time for the default to be accelerated and for delivery and receipt of the default notice.
  • Disclosure of break cost methodology: One dispute raised an issue concerning the FSP's break cost calculation using the date of settlement not the date the rate is fixed.
  • Disclosure of account operation and features: A dispute raised queries as to whether the FSP provided sufficient information in relation to home loan repayments and whether it properly followed instructions to make interest and principle payments.
  • Compliance with RG165 EDR obligations: One dispute raised concerns that the final response letter from the FSP appeared to not provide FOS contact details as required by RG165.
  • Document storage: One dispute raised concerns regarding the storage of share documents following the transfer of part of the FSP's brokerage.
  • Cancellation of policies: Concern raised by one dispute regarding the documentation provided to customers where a term life policy was cancelled.
  • Inappropriate charging of fee: One dispute illustrated a concern that a contractual arrears fee charged to customers could represent a penalty.
  • Policies re third party cheques: Concern whether an FSP has appropriate policies and procedures in place for ensuring that its staff correctly deal with cheques presented for deposit by its customers and which are made payable to a customer’s business/trading name.
  • Compliance with ‘Know Your Client’ obligations: Concerns with an FSP's investment approach and the format of their Statement of Advice document.
  • Error in processing internet payment: Issue regarding whether an internet banking funds transfer delay affected a wider class of customers and whether these customers experienced financial loss.
  • Lending policies: Whether the FSP’s policy for permitting redraws of jointly held accounts in circumstances where a joint borrower(s) has passed away has affected a wider class of customers.
  • Direct debit – payment to third party without authorisation: One dispute raised concerns about whether the terms and conditions of the FSP’s passbook account allowed for authorisation of a direct debit.
  • Incorrect claim denial: Concern whether an FSP had properly discharged its obligation under section 35 of the Insurance Contracts Act to clearly inform the customer of the policy provisions – in particular, an elimination period it relied on to exclude the customer’s claim.


Positive outcomes

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

  • As a result of a possible systemic issue referral, one FSP provided further training to relevant staff regarding their obligation to ensure that no legal fees, including deed documentation fees, are charged once a matter is referred to FOS.
  • One FOS member has now corrected a number of its template documents that had previously contained incorrect FOS contact email details.
  • An FSP has added additional steps to its case quality process including identifying a failure to appropriately cease collections activity.
  • An amendment to documentation to provide increased disclosure when a default interest rate is being applied to a market rate facility.
  • When considering its approach to the Privacy Amendment (Enhancing Privacy Protection) Act 2012 changes in March 2014, one FSP’s project team will include FOS concerns about dishonour notifications appearing on statements for interest-only customers who are sticking to agreed repayment plans.
  • One FSP updated its third party procedures to include obligations under section 8 of ASIC RG96 and provided refresher training to staff.