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Issue 26 - August 2016

Systemic issues update


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

This update also provides an update on a selection of current systemic issue investigations, a summary of the possible systemic issue investigations for the June 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 consistent 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
Compliance with Know Your Client obligations
Following our consideration of several disputes, we wrote to the FSP raising a number of possible systemic issues, including whether it was properly advising customers of their cooling-off rights as required by the applicable ASIC Regulatory Guide, and whether it was conducting inquiries into potential customers’ financial situations as prescribed by the Corporations Act 2001 (Cth).

On receipt of information from the FSP, the Lead Ombudsman, Investments and Advice, formed the view that the Statement of Advice provided to the FSP’s customers was inadequate in content and disclosures, and represented a definite systemic issue. The Lead Ombudsman was not persuaded by information provided that the FSP conducts relevant inquiries into potential customer’s financial situations. In particular, the documentation provided by the FSP did not indicate that it made inquiries about affordability, by for example, asking questions relating to income and expenditure.

Incorrect claim denial
We wrote to an FSP further to FOS’s consideration of a dispute which dealt with the denial of an applicant’s claim in respect of the theft of machinery. The applicant had complained to FOS about the FSP’s decision to decline the claim and cancel the policy as a result of non-payment of the instalment premiums.

A determination was issued in which the Ombudsman noted that the FSP’s reliance on policy cancellation to refuse the claim was confusing and that the claim could not be refused on the basis that the policy was cancelled pursuant to section 59 of the Insurance Contracts Act (in particular, that the premium instalment remained unpaid).

In response to queries, the FSP noted the Ombudsman’s concerns about its policy wording and acknowledged it was not compliant with the Act. Based on this acknowledgement, the Lead Ombudsman, General Insurance, concluded that the matter represented a definite systemic issue. The FSP has now undertaken to review its policy schedules and renewal notices, as well as amend its Product Disclosure Statements and underwriting guidelines. A review of declined claims is also taking place.

Unauthorised transactions
FOS was concerned about the FSP’s process in considering its obligations under the ePayments Code as a result of a number of disputes received at FOS. The disputes indicated that the FSP did not appropriately consider its obligations under the Code when a customer disputed an unauthorised transaction.

We sought information from the FSP about its processes and procedures and requested its comments on how it ensures compliance with the Code. In response, the FSP advised that as a result of a review undertaken in response to the possible systemic issue investigation, it intended to lodge a significant breach report to ASIC. This was as a result of its practice of sending customers correspondence advising that an unauthorised transaction could not be disputed because it was out of time. Such a practice is inconsistent with the application of the Code and the matter has therefore been considered a definite systemic issue by the Lead Ombudsman, Banking and Finance.

Error in credit listings
This is a continuation of a previously investigated matter where it had been identified that the FSP had incorrectly made default listings against 503 customers after obtaining judgment for the debt. In remediation of the original matter, the FSP agreed to remove the listings against the affected customers. It also agreed to put system changes in place to identify judgment debts and ensure compliance with comprehensive credit reporting changes.

We contacted the FSP again when a dispute was referred which indicated that the FSP had again made a default listing against an applicant the day after it obtained judgment for the debt. In response to FOS’s queries, the FSP reviewed the previous resolution and acknowledged that it had failed to appropriately remediate the issue and that it would investigate further.

Subsequent information provided by the FSP confirmed it had identified an additional 2,127 instances where default listings have been made after judgment was obtained.

The FSP has been asked to remediate and the Lead Ombudsman, Banking and Finance, has confirmed that the matter represents a definite systemic issue.

Processing error
In June 2016, an FSP advised FOS that following an internal review, it had recently become aware of an issue impacting a number of its personal loan customers. These customers had taken out a Consumer Credit Insurance (CCI) policy before October 2011 and subsequently had their debts charged off as a result of arrears.

The FSP advised FOS that a manual process, designed to identify when a refund of an unearned premium (UEP) was due after the debt had been settled, had broken down. As a result of this breakdown, the FSP confirmed that a number of eligible customers had not received a rebate for their UEP.

The FSP provided details of its proposed remediation and the Lead Ombudsman, General Insurance, has confirmed the matter is a definite systemic issue.

Possible systemic issues
Some details about trends and common issues under investigation as possibly systemic during the June 2016 quarter include:

Improper collection activity: Two matters were raised with FSPs under this systemic issue code in the June 2016 quarter. One matter, which was eventually rejected as a systemic issue, dealt with whether the FSP’s correspondence to debtors complied with the requirements of ASIC’s Regulatory Guide 96 – Debt Collections Guideline: for collectors and creditors (RG 96). Another matter also dealt with compliance with this regulatory guide and remains under investigation. Its focus is whether telephone contact from an automated dialling system is excessive.

Misleading conduct: We raised four matters under this systemic issue category during the quarter. One related to concerns that the budget advice provided by an FSP was not in the client’s best interests. Another investigation arose from concerns that the FSP’s advertising of its products and services may have provided a misleading impression that the FSP provided loans. We have referred the FSP to section 1041H of the Corporations Act 2001 as a result and asked for comments about the structure of its products. 

The remaining investigations related to the contents of an FSP’s credit card statements, in particular whether an upgrade to certain life insurance policies as advertised on the FSP’s website may not have been sufficiently clear as to its application to certain legacy policies.

Policies for dealing with customers in financial difficulty: Two matters progressed to possible systemic issue status under this category during the June quarter, and other matters remain under consideration. In both cases we have requested information to establish the robustness of the FSP’s policies and procedures for dealing with hardship.

Error in credit listings: Four matters raising concerns about FSP’s approach to entering credit listings were raised with FSPs in the June quarter. One matter related to concerns that the time between issuing a default notice and the disclosure of a default was not 14 days and that the amount disclosed seemed to be different to that stated on the notice. We sought information to see whether these errors might apply to a wider group of customers. In another investigation, we sought information about whether the FSP complied with its obligations when entering serious credit infringements against customers. The final matter dealt with the FSP’s practice of entering credit defaults against customers complying with payment arrangements.

Conduct of employees/authorised representatives: Two matters progressed to possible systemic issue status in this quarter. One dealt with whether the FSP had controls in place to ensure that its authorised representatives complied with conduct and disclosure obligations under the Corporations Act 2001 when providing superannuation switching advice. An additional issue concerned whether the FSP had robust controls to review the advice given to an ongoing client of a new authorised representative. Another matter involved inquiring with an FSP about how it takes responsibility for the actions of its overseas agents and complies with its obligations under Australian law.

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

  • Calculation of fees
  • Compliance with the code of banking practice
  • Disclosure of account operation and features
  • Failure to account for RITC
  • Incorrect interest charges
  • Inappropriate charging of fee
  • Suitability of product
  • Intention to recover FOS costs from an applicant

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 agreed to amend the wording of its IDR letters in relation to the right to lodge a dispute at FOS. It corrected the previous wording which stated that a customer could not apply for an external review by FOS if their claim exceeded $500,000.
  • An FSP agreed to amend the ‘Market Value’ description in its internal claims systems and also agreed to amend the total loss standard template letters to include specific reference to the inclusion of GST.
  • An FSP confirmed it would strengthen its internal collections policies and procedures and conduct further staff training on the ASIC/ACCC Debt Collection Guidelines.