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Issue 16 - January 2014

Systemic issues update

 

This article summarises new systemic issues that we identified during the December 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 December 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

Conduct of Employees/Authorised Representatives

We identified a number of FOS disputes that all related to the conduct of a single Authorised Representative. The disputes appeared to raise similar issues relating to the classification of the customer’s investment style and the appropriateness of advice the Authorised Representative had provided. Given the number of disputes we had received about the particular adviser (while they were an Authorised Representative of the financial services provider), we wrote to the financial services provider (FSP) to let them know there was a possible systemic issue.

We told the FSP that the issue we considered to be possibly systemic was whether it had appropriate measures in place to comply with its obligations under section 912A of the Corporations Act and ASIC Regulatory Guide 104.70 and if not, whether any other investors had been affected as a result. Following an audit, the FSP identified a number of investors who had potentially received inappropriate advice, and the FSP sent letters to potentially-affected clients inviting them to lodge a claim with the FSP. Given that the FSP determined that the conduct of the AR gave rise to the possibility of inappropriate financial advice having been provided to a wider group of customers, we considered the matter was a definite systemic issue.

Error in Credit Listings

The details of a FOS dispute showed that the FSP had placed default listings in relation to an accelerated debt within 60 days of the date of the default notice. In doing so, the FSP had failed to provide the necessary time required under the Credit Reporting Code of Conduct prior to listing. We were also concerned that the FSP had failed to give appropriate time for the default to be accelerated and for the delivery and receipt of the default notice in other instances.

The FSP undertook a thorough review of the default listings it had placed on customers’ credit files. It identified that there had been a large number of instances where it had placed a default listing in relation to an accelerated amount within 60 days of the default notice being issued to the customer. We have therefore written to the FSP and told it that we consider that the matter represents a definite systemic issue.

Processing Error

Three FOS disputes highlighted that the FSP may have an issue with crediting bonus reward points to customers’ credit card accounts. The FSP told us that there may be a delay between when the linked third party provides a bonus offer, when it tells the FSP of the bonus offer, and when the FSP updates its systems. Any transactions processed during this period will not receive the correct bonus reward points.

The FSP’s current process is to credit a discrepancy in reward points once a customer makes it aware of an offer. The FSP then updates its systems. The FSP told us it has not, to date, retrospectively credited all affected customers. The matter was therefore considered to be definitely systemic.

Improper Collection Activity

Several disputes highlighted that an FSP may not have robust policies and procedures in place to ensure that collections activity ceases once a dispute is referred to FOS.

The FSP told us that, until recently, it has been unable to suppress two system-generated collections notices for its secured loans. The system was coded in such a way that if it suppressed these letters, all other communications with the customer (such as statements, which it is required to send under the NCCP Act) would also be suppressed. We considered the matter to be definitely systemic. The FSP has now told us that it is undertaking a major review of its systems and communications with customers, and has established a process to suppress these two letters if necessary.

 

Possible Systemic Issues

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

  • Improper collection activity, in particular while a dispute is open with FOS.
  • Policies for dealing with customers in financial difficulty, especially 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, in particular the issues of record-keeping generally, and policies and procedures for complying with financial service law obligations.
  • Inadequate claims handling.
  • Processing errors, such as an apparent error in a direct debit arrangement.
  • Policy interpretation, in particular exclusions based on a pre-existing condition.
  • Disclosure of fees/compliance with management agreements, such as the levy of an increased capital protection fee on a life insurance investment bond.
  • Error in credit listings.
  • Disclosure of account operation and features.
  • Inappropriate charging of fees, in particular our concern that a contractual arrears fee charged to customers could represent a penalty.
  • Error in processing internet payments, in particular an issue regarding whether an internet banking funds transfer delay affected a wider class of customers and whether these customers experienced financial loss.
  • Misleading conduct, such as alleged misleading conduct regarding the purchase of credit card insurance.
  • Activity of foreign exchange accounts.
  • Inappropriate charging of fees, such as the charging of a contractual arrears fee and a failure by the FSP to pass on the Reduced Input Tax Credit (RITC) which it may be entitled to claim on legal costs.
  • Compliance with the National Credit Code (NCC), in particular providing loans that circumvent the 48% interest rate cap in NSW.
  • Recognition of Power of Attorney. Issues raised by a dispute illustrate that the FSP may not recognise powers of attorney and letters of administration in circumstances where it should.
  • Misleading conduct. Concerns relating to the fact that the FSP would not provide a discharge authority to a guarantor after the guaranteed debt was repaid, as not all parties provided the discharge authority.

 

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 December quarter include:

  • Amended processes to ensure that recovery action is halted when a FOS dispute is open.
  • Acknowledgement of potential ambiguities in terms and conditions with a commitment to review potentially unclear disclosure.
  • Improved communication to branches regarding the transfer of security packets.
  • Including more information in internal policy documentation about the FSP’s approach when dealing with customers’ requests for the capitalisation of accrued arrears.
  • One FSP confirmed that the certificate of insurance and itinerary for its travel insurance have been updated so that the documents now clearly state which type of cover is taken out by the customer and this is also noted on the travel reservation.
  • One FSP confirmed that it will amend its policy wording at the next review scheduled for the first quarter of 2014 and there will be ongoing training and monitoring by senior staff on the assessment of ownership and value of claimed items.
  • Better understanding of obligations to FOS, in particular not advising customers to withdraw their FOS disputes before entering into discussions with a view to reaching settlement or resolving a dispute.
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