This article summarises the new systemic issues that we identified during the December quarter of 2014 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 FOS Circular. The process is in line with our obligations to ASIC.
To learn more about our approach to systemic issues, you can take our online training module.
New definite systemic issues
Retention of documents
In one FOS dispute which related to a claim for irresponsible lending, the FSP advised FOS that, because the disputed credit limit increases occurred more than five years earlier, it was unable to locate any information to clarify what steps, if any, it took to assess the customer’s ability to service the credit limit increase. This is the case where the credit limit increase application is in response to a credit limit increase invitation in particular.
We are concerned that the FSP’s practice does not appear to comply with its obligation to retain a record of all material that forms of the basis of an assessment for a period of seven years. We considered the FSP’s inability to provide financial or credit information that it relied upon five years after the date of the increase amounted to a definite systemic issue. We also noted that the FSP’s practice may result in situations where it will be unable to demonstrate that it had exercised its obligations in accordance with the Code of Banking Practice when it considered its customers’ credit increase applications.
Error in credit listings (1)
A dispute was referred to the Systemic Issues team, raising concerns that a default listing was entered on a customer’s personal credit file after the FSP had obtained default judgment in relation to the same personal loan debt. FOS considers that the effect of a court judgment is that the underlying basis of the debt (the credit contract) merges in the judgment. Therefore, the listing cannot be made as the requirement for the default to be pursuant to the credit agreement has not been met.
The FSP cited the amended (March 2014) Privacy Act to argue that it was entitled to make the listings. Nevertheless, we noted that the provisions cited were not in effect at the time the listing in the relevant dispute was made. The matter was therefore considered to represent a definite systemic issue.
The FSP is required to identify how many such listings have been made in the preceding five years and remove any that had been made in error. It has also been asked to update its internal credit listing process document and undertake to consider any complaints received from customers on a case-by-case basis and consider if any compensation for non-financial loss is appropriate.
Error in credit listings (2)
A dispute was referred to the Systemic Issues team which raised concerns that the FSP had failed to comply with its obligations under the Privacy Act to ensure that default listings were accurate, up-to-date and not misleading. The default listing referred to the debt having been written off, when in fact the FSP was in the process of recovering it. In addition the listing referred to the entire amount owing, when the applicant had already reduced the amount outstanding significantly.
The FSP was asked to provide a copy of its policies and procedures for updating any default listings made where a customer has entered into a repayment arrangement and is reducing the debt. It was also asked to confirm whether, in the last five years, it has failed to update any other default listings made where a customer has entered into (and has complied with) a repayment arrangement.
We considered that the FSP’s practice of noting listings with the annotation ‘Bad Debt Written Off’ when the debt may not have been written off and may be repaid represented a definite systemic issue.
Conduct of employees/authorised representatives
A dispute was referred to systemic issues raising concerns about the FSP’s oversight of a former authorised representative (AR). The AR assisted a customer in withdrawing portions of his superannuation despite him being under the preservation age and not entitled to make such a withdrawal. The customer was later investigated by the Australian Taxation Office (ATO) which levied penalties.
We noted in publicly available information that the AR had been banned by ASIC. We asked the FSP for further information about its dealings with ASIC and also what remedial action had been undertaken to restore the affected clients to the position they would have been in but for the AR's conduct.
Following submissions about the AR’s conduct and the fact that a number of customers had been able to satisfactorily demonstrate that they were worse off as a result of obtaining early access to their superannuation, FOS considered that the matter represented a definite systemic issue. The FSP is required to contact all affected customers to advise them they are able to have their complaint considered individually and on their merits.
Conduct of Employees/Authorised Representatives (2)
In light of our review of a large number of disputes, some of which had been lodged with FOS’s predecessor scheme, the Financial Industry Complaints Service (FICS), we raised with the FSP the conduct of several of its Authorised Representatives (AR) as potentially systemic. The disputes which have been referred to the Systemic Issues team for review span a substantial period of time and relate to the conduct of a number of ARs, as well as arising from a variety of acts or omissions which occurred during the provision of financial services to affected customers.
In our correspondence to the FSP we noted information indicating that the FSP has acknowledged that a number of customers received a financial service from ARs or employees of the FSP which was provided in breach of a financial services law or was otherwise not in the client’s interest and caused a number of the FSP’s customers to be negatively impacted. On this basis, we advised the FSP that this matter is considered to represent a definite systemic issue.
A dispute illustrated that a customer continued to be charged monthly payments beyond the contracted period. The original contract had been provided by a dealer. Further investigation to establish whether this issue had affected a wider class of customers demonstrated that the contract provided by the dealer at inception had been amended so that the original requirement for a customer to provide a 90 day notice period to the FSP had been deleted. The FSP had been unaware of the deletion and had therefore continued to charge the monthly rental beyond the expiry of the original term.
The matter was considered to be a definite systemic issue. The FSP reviewed all possibly affected contracts and identified similarly affected customers in order to refund their payments made in similar circumstances.
Possible systemic issues
Trends and common issues under investigation as possibly systemic during the December quarter include:
- policies for dealing with customers in financial difficulty
- conduct of employees and authorised representatives, in particular regarding the conduct of advisers
- inappropriate charging of a fee, particularly relating to over-limit fees on accounts entered into after July 2012
- compliance with responsible lending provisions of the NCCP
- policy interpretation, in particular approach to calculating a benefit
- calculation of break cost methodology
- Improper collection activity including compliance with the debt collection guidelines
- privacy processes and the provision of information to third parties
- failure to include the stamp duty calculation in the market value when settling a claim.
It was again noted that a number of issues that have previously featured as common trends have reduced this quarter such as:
- errors in credit listings
- policy interpretation
- policies for dealing with customers in financial difficulty.
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 a comment from the relevant Lead Ombudsman about an industry practice. Some of the positive outcomes from rejected systemic issues this quarter include:
- Amendment by the FSP of its internal collections and credit listing policies and procedures to reflect recent updating of the Privacy Act regarding Serious Credit Infringements.
- Provision of further training to staff dealing with gift card promotions to ensure that refunds are appropriately made.
- Revision of hardship policy to more closely align the policy document with business practice.
- Revision of procedures and inclusion of an action plan including a timetable in its SOAs.
- Recommendation to review practice and procedure for providing detailed reasons when declining hardship applications
- On occasion additional affected customers are identified following the closure of a systemic issue investigation. In one case, further auditing of potentially affected client files was completed and the FSP self-reported to ASIC.
- The Systemic Issues team alerted the FSP that its claims staff were sending correspondence on the wrong entity letterhead to policy holders resulting in misleading information.
- In one case, even though it was determined that there was no systemic issue, the FSP confirmed that it would invite affected customers to re-submit their claims and provide an internal bulletin to claims staff confirming the application of an exclusion and committed to amendment of policy wording.
- The FSP became aware that circumventing of its electronic redacting of documents can occur resulting in improvement of processes and upgraded programming.
- Monitoring of outsourced legal servicing of IDR and EDR functions.