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Issue 25 - May 2016

Systemic issues update


This article summarises some notable systemic issues that were newly identified during the March quarter of 2016. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC) in accordance with our processes.

This article also provides an update on a selection of current systemic issue investigations, a summary of the possible systemic issue investigations for the March 2016 quarter as well as some positive outcomes from matters that we investigated but ultimately considered were not systemic.

Our 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 do our online training module.


New definite systemic issues

Failure to include stamp duty calculation
This case relates to a previously investigated systemic issue which arose from the FSP’s failure to include stamp duty and transfer fees in its calculation of market value when assessing the insured vehicle as a total loss.

Based on the information provided by the FSP a number of years ago, the matter had been considered resolved. However, the FSP contacted FOS during the March 2016 quarter to advise that it had failed to provide advice to all motor claims teams about the correct method of settlement for market value motor policies. Therefore, some teams had not been including these costs in total loss settlement amounts.

The Lead Ombudsman, General Insurance, acknowledged the FSP’s proactive stance in reporting the unresolved issue to FOS and noted that, as 82 claims had been identified where additional costs have not been paid, the matter represented a new definite systemic issue. The FSP has provided a remediation plan to FOS which sets out that refunds will be made promptly and also confirms what corrective action to communicate effectively with all teams.

Closure of credit card
We contacted an FSP about inconsistencies between the expiration date of certain prepaid foreign currency cash cards on its systems and in its physical cards.

The FSP responded by advising that the issue was a known issue involving legacy single currency cards distributed through a third party outlet. The affected cards had been identified as having an embossed card expiry date that was different to the logical system expiry date.

The FSP advised that during 2012 and 2013 the sale of the legacy cards was no longer permitted and card stocks had been replaced entirely. Further, in 2015 a project was established for the purpose of remediating this known issue which is currently being executed. As of March 2016, functionality to be able to load funds onto the legacy cards was completely removed and decommissioning of the card programs had been initiated.

As part of its investigation into this systemic issue, the FSP identified 45 complaints relating to inconsistent card expiration dates dating back to December 2013. As the FSP has confirmed that a wider group of customers has been affected we considered that the matter represents a definite systemic issue.

Calculation of fees
An FSP contacted FOS as a result of an administrative error which it confirmed affected a large number of customers. The error involved ongoing service fees continuing to be incurred for some customers although their ongoing service arrangements had concluded. The FSP noted that various processes had failed in this regard.

The FSP advised FOS that it self-reported the breach to the regulator and has commenced remediation with the regulator’s oversight. As a result of the report, we have established a definite systemic issue investigation to oversee the progress of the remediation and have also created a significant event code internally to ensure that any disputes received by FOS are handled appropriately and case workers advised of the remediation. We will seek information from the FSP about the remediation and its dealings with ASIC and seek to establish the numbers of customers affected as well as the amounts to be refunded.

Policy interpretation
We wrote to an FSP to advise that a determination issued by FOS raised concerns about the FSP’s assessment of the damage to an insured vehicle. Specifically, that the vehicle was initially assessed as a total loss and subsequently re-assessed as repairable on the basis of the cost of a new replacement vehicle.

The FSP was asked to review claims and advised that four other policyholders have been similarly affected. As a result, the Lead Ombudsman, General Insurance, has confirmed that the matter is considered a definite systemic issue. The FSP was asked to provide a timeline for the replacement of vehicles for affected policyholders as well as confirmation that it has updated its training and claims manual so as it more accurately describes the assessment process to be undertaken, including emphasising that a replacement vehicle benefit is not to be considered in determining if a vehicle is economic to repair or a total loss. The FSP has also been asked to update its current assessing audits to include a review of repair costs plus salvage estimate.

Possible systemic issues
Some details about trends and common issues under investigation as possibly systemic during the December quarter include:

  • Compliance with responsible lending policies of the NCCP:  Two new possible systemic issues were referred to FSP’s under this code in the March 2016 quarter.
    In one matter we have requested that the FSP provide information about its review of its lending practices, and have set out our expectations about keeping more detailed records when unsecured credit has been requested by customers, including the requirement to make further enquiries when staff assessing an application become aware of any inconsistencies in information provided. In the other investigation, we have asked the FSP for its comments about its apparent failure to verify the income of a customer and how this complies with its responsible lending obligations.
  • Incorrect claim denial and inadequate claims handling processes: During the March quarter we approached an FSP after a large volume of complaints were received about a general insurer from policyholders whose claims had been declined. We requested information about information contained within the declinature letters sent to customers regarding the denial of their claims as a result of allegations of fraud.
    We have also contacted a life insurer seeking information about its sales practices for indigenous communities in remote areas of Australia as concerns have been passed to the systemic issues team about mis-selling, the ability to cancel policies and also the FSP’s apparent failure to recognise the applicant’s appointed representative. We also continue to investigate matters that arise from claims denied or terminated in error.
  • Unauthorised transactions: Two investigations commenced in the March 2016 quarter. One investigation related to the FSP’s online account opening process, and whether this was sufficiently robust as it appeared to permit multiple fraudulent account openings for certain customers whose identity had been compromised. Another investigation related to whether an FSP’s processes for dealing with accounts operated by dual signatories breached customer mandate and failed to comply with its obligations under the National Consumer Credit Protection Act (2009).
  • Policies for dealing with customers in financial difficulty: We referred one matter to the FSP in the March 2016 quarter and requested information on its apparent practice of credit listing customers when they had entered into, and were complying with, a payment arrangement. We also sought clarification about its policy of capitalising arrears and also limiting, by time period, the amount of hardship assistance it is able to provide. Another matter remains under investigation which similarly deals with the FSP’s policy of capitalising arrears, as well as its approach to the provision of hardship assistance to co-debtors.
  • Error in credit listings: During the March quarter we have referred two matters to FSP’s under this code. One matter relates to the FSP’s compliance with the legal requirement for credit listings to be clear, up-to-date and not misleading and another about whether the FSP’s default notices are compliant and contain accurate information.

A number of other codes were raised as possible systemic issues during the quarter with only one or two investigations per code so they could not be noted as representing a trend. They include:

  • Calculation of fees
  • Limitation of account (third party use)
  • Compliance with EFT Code
  • Closure of credit card
  • Compliance with RG 165 obligations
  • Improper collection activity

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:

  • An FSP reviewed its claims processes to ensure that, in future, when considering the policyholder’s pre-disability income to calculate quantum payable under certain life policies, FOS’s preferred methodology would be used.
  • An FSP made process improvements to its handling of closed accounts to enable the most up-to-date contact details for customers transferring to new products were recorded. This complied with best practice in this area and ensured its privacy policies were robust.
  • An FSP, in response to our investigation, made improvements to its procedures to automate its default listings and undertook to have senior management conduct regular reviews of its account management system to ensure credit reporting is accurate and robust.
  • An FSP updated and revised its internal financial difficulty policies to ensure that all arrears fees incurred in error are, in future, refunded without delay. It also amended its communications to customers to reflect that such fees will not be incurred.
  • An FSP identified and refunded two disputed transaction claims which had been improperly declined as a result of isolated human error and undertook to review its policies for providing guidance to staff who consider disputed transaction claims.