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Case studies

Click below to read case studies written by the Financial Ombudsman Service to highlight trends that appear to be affecting consumers and financial services providers. Whilst the details of these case studies are taken from actual disputes, any particular case study does not reflect the exact circumstances of any one dispute.

Banking & Finance
  1. Chargebacks
  2. Financial Planning and the Aged Pension
  3. Break Costs
  4. Financial Difficulty
  5. Merchant’s EFTPOS Facility
  6. Property Purchase by Bank Officer
  7. Inadequate Insurance Policy
  8. Disputed ATM Withdrawals
  9. Disability - Protective Measure Fails
  10. Maladministration in Granting Loan
  11. Non-financial loss
  12. Credit card stops working overseas
  13. A Frozen Account
  14. Misleading conduct by silence over construction funds
  15. Progress Payment to Builder
  16. Reports to Credit Reporting Agency
  17. Unauthorised Credit Card Transaction
  18. Unsolicited Credit Limit Increase
  19. Terms of settlement
  20. Online application leads to responsible lending dispute
  21. Systemic issue - errors in credit listings
  22. Role of a broker
  23. Broker’s conduct and consumers’ conduct
  24. Responsible lending and retirement
  25. Car loan and loss
  26. A loan for an investment property
  27. Good industry practice
  28. Inadequate inquiries
  29. Joint debtors
  30. Guarantors
  31. Closing a customer's account
  32. Guarantee for a company’s debts
  33. Guarantor’s remorse


Case 1: Effect of consumer delay in providing evidence of withdrawn authorisation
Mr A, a credit card holder disputed a charge to his account on the basis that he had paid by other means (cash). Mr A had purchased jewellery in Asia, offering his credit card for payment. He was told by the merchant, who had taken the card out of Mr A’s sight, that the card would not swipe. Mr A said he then paid in cash.

The bank requested evidence of the payment by other means and he provided a document headed “Estimate” that he believed would suffice. The bank asked if he had any documentation to show actual payment and he said that the document that he provided was all that he had. The bank attempted a chargeback using the Estimate, but this was rejected by the merchant’s bank as not being sufficient to show payment by cash. The merchant’s bank also provided a signed voucher for the transaction and the transaction was represented. The bank advised Mr A that its attempt to charge back the transaction was unsuccessful.

After his dispute was lodged with us, Mr A provided a receipt for the purchase, showing payment in cash. He said that he had not been able to provide the document earlier, as it was in Asia. Our Case Manager accepted that this receipt would have been sufficient to support the chargeback, had it been provided to the bank when the dispute was raised. On reviewing the signed voucher, the Case Manager was satisfied that the signature bore no resemblance to Mr A’s own signature and concluded that it had likely been forged.

The Case Manager found that the reason for the unsuccessful attempt to charge back the transaction was Mr A’s failure to provide the necessary supporting documentation within the time limits set by the card scheme. However, Mr A’s explanation, the receipt and the evident forging of his signature pointed to a conclusion that the disputant had not authorised the debiting of his account.

The Case Manager concluded that, while Mr A had a valid chargeback reason and the bank had tried to reverse the transaction, the reason that it this had been unsuccessful was Mr A’s own delay. Therefore, the Case Manager found that the bank was not liable to make good Mr A’s loss, in terms of the transaction amount. However, as he had not authorised the debiting of his account, the bank was not entitled to charge interest or other fees and charges in relation to the transaction.

Both parties rejected the Case Manager’s Finding and the matter was then considered by the Ombudsman. The bank argued that Mr A, by presenting his card for payment, had authorised the charge to his account and so interest, fees and charges should apply.

The Ombudsman rejected this argument, determining that where a card has been tendered for payment, but the cardholder has been informed by the merchant that the attempt to use it had failed and payment requested by other means, authorisation is effectively withdrawn. The Ombudsman did not accept that Mr A had authorised payment to be made twice. Additionally, the fact that the voucher bore a signature which was not the cardholder’s, the signed voucher could not be said to demonstrate authorisation for a charge to his account.

The Ombudsman confirmed the Case Manager’s Finding that Mr A was liable for the amount of the transaction, but that interest, fees and charges could not be imposed by the bank.

Both parties accepted the Ombudsman’s Recommendation.

Case 2: Cancellation of travel club contract during cooling-off period
John attended a presentation given by a travel club organisation and was persuaded to pay a deposit of $1,500 on a contract for full membership. John used his MasterCard to pay the $1,500.

John regretted his decision almost immediately. He contacted his state’s Department of Fair Trading and was told that a 'cooling-off' period applied to that type of contract. While he was still within the cooling-off period, he sent a registered letter to the travel club to cancel the contract and to request reimbursement of the deposit. The travel club did not refund the $1,500 to him.

John then contacted his financial services provider (FSP) and requested the $1,500 charge be reversed. He provided the FSP with copies of the cancellation letter, the transaction voucher, and a signed Credit Card Authority that he had given to the travel club. The FSP said it could not assist him, and suggested he go back to the merchant or to his state’s consumer authority. The FSP said that because John had acknowledged his participation in the transaction, it was not able to authorise the chargeback request.

The FSP also said where cancellation policies and procedures were involved, it could not credit his account unless the person selling the goods (the merchant) issued a credit voucher.

John went to his state’s Consumer Tribunal, which ordered the travel club to pay him $1,500. The order was worthless because the travel club had disappeared from its nominated address. John then lodged a dispute with FOS.

The FSP again declined to help John, saying it could not act without a valid credit voucher from the merchant. However, we considered that because John had cancelled the contract, the FSP should have taken into account that the merchant had a legal obligation to issue a credit voucher. The FSP could have exercised a chargeback right under Reason code 4860 – Credit Not Processed. The FSP had therefore not complied with its Code obligation to claim a chargeback right (for the most appropriate reason) where one existed.


Case 3: Bad call
Conrad ran a small computer sales business and was the victim of a credit card fraud. Conrad said that a consumer had paid cash for two laptops, then rang with a story that their friends also wanted to purchase laptops. The consumer provided credit card details over the telephone, and all but one of the transactions went through when Conrad sought authorisation.

Later, Conrad discovered that his financial services provider (FSP) had charged back these transactions because the cardholders said they had not authorised the transactions. Conrad complained that he had sold computers to the value of $10,000 and his FSP had no right to charge back these transactions.

Conrad lodged a dispute with FOS. We considered that Conrad had taken a risk by accepting the card details over the phone and not obtaining authorisation from the cardholder by signature or PIN. The FSP’s authorisation only verified that none of the cards had been reported stolen and that there was sufficient credit available on the cards to complete the transaction. It did not guarantee the cardholder’s authorisation for the transaction.

We decided that the FSP was entitled to chargeback the transactions, because the true cardholders had not authorised the use of their cards for the purchase of the laptops.

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Financial Planning and the Aged Pension
Mr and Mrs A had financial assets comprising a term deposit held with the bank for a number of years and Mr A’s company superannuation fund. Their other assets comprised their family home, contents and a car. Mr A was employed on a wage of $35,000 per annum but was due to retire in the following year. Mrs A earned income only from the term deposit investment which was held in her name and was shortly to qualify for the aged pension.

Mr and Mrs A approached their bank to seek the advice of a financial planner about how they could arrange their financial arrangements to allow Mrs A to qualify for the maximum aged pension and maximise their income. After a meeting with the bank’s planner, he provided advice that Mrs A would qualify for the full pension if her term deposit monies were invested in a superannuation fund in her name and recommended investment in a bank balanced superannuation fund.

Mr and Mrs A accepted the advice and transferred the funds to the recommended fund. Mrs A subsequently reached retirement age and applied for the aged pension. However, she was subsequently advised by Centrelink that her pension entitlement was approximately half the full pension. A review of the financial planner’s advice showed he had erred in his calculation. The lower pension entitlement therefore meant Mr and Mrs A’s overall already modest income fell after implementing the planner’s recommendation.

The value of Mrs A’s superannuation investment subsequently fell significantly.

Following an investigation, the Financial Ombudsman Service reached the view that it was reasonable to conclude that the error in the planner’s calculations had significantly impacted both the recommendations he had made and Mr and Mrs A’s acceptance of the advice. The Financial Ombudsman Service’s view was that the error made by the planner was not so obvious as to have been detectable by Mr and Mrs A and they therefore reasonably relied on the information supplied.

Furthermore, the Financial Ombudsman Service’s view was that the recommendation made by the planner was inappropriate given Mr and Mrs A’s financial position, their historical investment profile and the resultant reduction in their income. Had the correct pension information been stated, and the appropriate recommendation supplied, it was more likely than not, in the circumstances of this case, that Mr and Mrs A would have retained their existing investment arrangements together with a part pension.

On that basis, the Financial Ombudsman Service determined that the disputants were entitled to be put back in the position they would have been had the term deposit remained in place and the bank was liable to compensate them on that basis.

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Break Costs

Case 1:
Mr and Mrs N decided to sell their home. They contacted the financial services provider (FSP) to obtain a loan payout figure and were quoted a figure which included a break cost of approximately $20,000.

Mr and Mrs N said that they were not aware that there would be any penalty applying to the loan if they repaid it early. They said that, when entering into the loan, they were already considering selling their home possibly before the fixed interest rate period had expired. Mr and Mrs N said they would never have fixed the interest rate on their loan for 3 years if they had they known of the potential for such a substantial break cost.

Relevantly Mr and Mrs N did not discuss their plans to sell their home with the FSP at the time they entered into the fixed interest rate loan.

In assessing the dispute, it was necessary for FOS to establish:

  • Whether the break cost was properly disclosed to Mr and Mrs N
  • whether it was calculated in accordance with the loan contract
  • whether it was correctly applied, and
  • as the loan in this case was regulated by the National Consumer Credit Protection Act (NCCP), whether the charge exceeded a reasonable estimate of the FSP’s loss as a result of the early termination of the fixed rate loan (Refer Schedule1 Section 78(4)).

The loan contract signed by Mr and Mrs N when they entered into their loan contained a clause setting out the potential for a break cost in the event Mr and Mrs N repaid their loan before the fixed interest rate term had expired. The clause also set out the calculation method.

FOS concluded in favour of the FSP. It was not evident that the FSP misled Mr and Mrs N about the potential for a break cost because that information was adequately disclosed in the loan documentation they had signed and accepted. And no additional obligation had arisen to further discuss the cost because the FSP was not made aware of Mr and Mrs N’s plans to sell their home at the time they entered into the fixed interest rate.

FOS also reviewed the FSP’s calculations and method, and made its own estimate of the break cost based on published data. Its estimate correlated with that of the FSP and FOS, therefore, concluded that the FSP was entitled to pass on its break cost as it did not exceed a reasonable estimate of the FSP’s loss.

Financial Ombudsman Service Banking & Finance Bulletin 60
National Consumer Credit Protection Act Section 78 (4)
Financial Ombudsman Service Factsheet Breaking a Fixed Rate Loan

Case 2:
In 2008, the applicants took out a five-year fixed rate loan with the FSP. The applicants paid out the loan about one year later with a break cost of $32,795.

They told FOS they had expected this break cost to be no more than $3,000 based on phone conversations they had with FSP officers before entering into the loan contract.

FOS found it was more likely than not that the FSP discussed a break fee of around $3,000 but did not tell the applicants that a break cost might also apply based on falling interest rates.

We took into account that the applicants clearly and consistently recalled the conversations, while the FSP officers neither recalled nor recorded them.

We were satisfied that the applicants were misled, because any discussion about fees for ending a fixed rate contract early must be comprehensive. It must include both the known fees and the possibility that other fees might apply if interest rates fall.

However, we reduced the amount of compensation for the applicants by 70% because:

  • the FSP wrote to the applicants after their conversations to explain that a break cost might apply if the loan was prepaid and that it could not be calculated until it was actually prepaid
  • the applicants did not clarify the letter with the FSP, even though it went against what they had previously been told
  • they had always planned to sell their property and break the loan after 12 months, so they should have fixed it for 12 months rather than five years.

FOS found the FSP should repay the applicants 30% of the break cost paid – $9,838.70 – plus interest on this amount at the variable loan interest rate.

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Financial Difficulty

Case 1: Following a workplace injury
Mr and Mrs S were experiencing financial hardship as a result of Mr S suffering a workplace injury and Mrs S having recently given birth to their child.

There had been a delay in settlement of the sale of their home due to the impending approval of a subdivision and they had fallen behind in the repayment of their home loans.

Mr and Mrs S had kept the bank informed of any possible delays with settlement and were mindful of not having a default listed against their names.

Mr and Mrs S made a number of calls to the bank regarding their predicament and they say they were given differing responses about how the matter should be handled. Mr and Mrs S say that the bank officer who ultimately dealt with their concerns appeared insensitive to their financial predicament and would not consider any alternative solutions to their problem.

When the dispute was referred from FOS to the relevant bank for review, reference was made to the bank’s obligation under section 28.2 of the Code of Banking Practice, which applied in this case as the bank was a subscriber.

In resolving the dispute, the bank offered assistance to the disputants in the form of a repayment moratorium to each of their loans on the basis that settlement would be finalised within two months. This provided the disputants with an opportunity to finalise the subdivision and sale of their property. On the sale of the property, two of the disputants’ loans would be cleared and the arrears position cleared on the third loan.

This offer was accepted by the disputants in resolution of their dispute.

Points to note:

Section 28.2 of the code says:

“With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan. If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them.”

Section 66: Changes on grounds of hardship

Case 2: A refinanced home loan
Sally and Richard had an existing home loan of approximately $330,000 with another lender. In 2008, they asked the financial services provider (FSP) to refinance that loan and to lend them an additional $80,000. They offered to provide a mortgage over their home, which they estimated was worth $640,000. The FSP approved a loan for $410,000.

Sally and Richard failed to make their repayments, and they surrendered their home to the FSP in February 2011. The FSP sold their home in November 2011 for $410,000. Because of the interest which had been charged to the loan since 2008, there was still $189,989 outstanding on the loan after the sale proceeds were used to repay the loan.

Sally and Richard lodged a dispute at FOS. They said that the FSP should have known that they were in financial difficulty with their existing home loan. They also said that if the FSP had not granted the loan, they would have sold their home in 2008 and received proceeds of approximately $310,000 (after repaying their earlier home loan). They could not pay the shortfall in the loan and they believe they should not be responsible for it.

We reviewed the FSP’s credit assessment. The FSP had received copies of statements for Sally and Richard’s existing home loan, even though its policy did not require it to receive those documents. As it received the statements, the FSP should have considered the information in the statements. If it had done this, it would have realised that sometimes Sally and Richard were late in making repayments. Further, their existing loan was at a fixed rate of 7.36%pa, but they had applied for a variable rate loan at the FSP’s advertised rate of 8.98%pa. This information should have alerted the FSP that it needed to make further inquiries about why Sally and Richard wanted to refinance their loan. Therefore the FSP had not acted responsibly in providing the $410,000 loan to Sally and Richard.

We considered Sally and Richard should not be compensated for the drop in the value of their home since 2008, because they chose to refinance their existing home loan in 2008 rather than sell it. Any amount that Sally and Richard lost because of the drop in the house value was not caused by the FSP’s lending decision; it was caused by their decision to refinance.

Sally and Richard’s loss on their refinanced home loan was the costs they paid to refinance the loan, and the difference between the interest and fees they paid the FSP and the interest and fees they would have paid their existing lender. They were still required to repay the $80,000 which they still owed on the loan. However, their loss included the interest and fees charged on that amount of the loan. In total, we calculated their loss to be $40,220.

We considered that Sally and Richard should have taken more care to protect their own best interests. They knew they were having difficulties making their existing home loan repayments, but they decided to refinance with the FSP for a larger loan and at a higher interest rate. They did this because they did not want to sell their home. Therefore, it was fair and reasonable that they accept some responsibility for their decision. We determined that the FSP was required to compensate them for 50% of their loss, which was $20,110. This amount was to be deducted from the remaining debt. Sally and Richard were still liable for the rest of the outstanding loan.

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Merchant’s EFTPOS Facility
The disputants ran a small business as a partnership selling giftware. One partner had been in business since it started and the other had bought her share about a year before the dispute arose, after one partner retired. All of the documentation relating to the EFTPOS facility used by the business had been signed by the partner who had retired.

A customer of the business frequently telephoned the store over a period of five weeks to order gift hampers. To process the telephone orders, the disputants keyed the customer’s card number into their EFTPOS terminal. At no time did they swipe the card or obtain a signature, nor did the customer ever come into the shop. By keying in the card using the “off-line” system, the disputants were by-passing the electronic system which prevented transactions over the $100 floor limit from being accepted when the cardholder’s account did not have sufficient funds.

The cardholder’s bank subsequently sought to reverse the transactions, which amounted to approximately $16,000. The chargeback request was made on the basis that the transactions were not authorised.

The case manager reviewed the merchant agreement and noted that the disputants’ bank was entitled to charge back transactions which were not valid, including transactions not processed in accordance with the relevant procedures. It was found that the disputants had contravened the procedures by:

  • Processing the transactions “off-line” at times when the electronic system was functioning. (The process should only have been used when the electronic system was down);
  • Failing to seek authorisation for transactions above the floor limit; and
  • Failing to take reasonable care to detect unauthorised use of the card. (The case manager considered that the size, frequency and nature of the transactions should have given rise to a suspicion of fraud).

The disputants argued that they were not bound by the merchant agreement because neither had signed it personally. However, a review of the partnership agreements and partnership legislation led the case manager to conclude that the original partner who had signed the agreement bound the continuing partner, that on dissolution of that partnership the continuing partner assumed liability under the merchant agreement, that the new partner had agreed to assume equal liability for debts of the business and had adopted by conduct the terms and conditions of the merchant agreement.

The case was closed after a Finding was issued which stated that the bank could rely on its merchant agreement and charge back all of the transactions.

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Property Purchase by Bank Officer
Mrs A was selling her home through a real estate agent. A loans manager (J) employed by Mrs A’s bank was, however, interested in buying the property without the involvement of the estate agent.

J contacted Mrs A on four occasions and made offers by telephone, all of which were rejected. He eventually bought the property at auction.

Mrs A said that the approaches from J were unwelcome and amounted to harassment. She said that he had accessed her loan file and used the information to try to persuade her to accept a lower figure than she was asking. She said that she was traumatised and intimidated by J’s actions, and that she had sold the property for a lower figure than she wanted due to the actions of J. She sought compensation of $35,000.

J admitted that he had contacted Mrs A to discuss buying her house. Whilst he denied obtaining Mrs A’s telephone number from her account details, the case manager found that this was the most likely explanation for his knowledge of her telephone number. He admitted accessing her loan file but said that Mrs A had given him permission to do so.

The case manager found that J’s use of the account was inappropriate because it did not arise from the banker/customer relationship, but was rather, for J’s private purposes.

It was also found that J may have used the information about Mrs A’s home loan as a private bargaining tool. However, the lapse in time between the access and the auction, and the fact that the property was sold at auction meant that it could not be concluded that J obtained a financial advantage by his actions.

In light of the distress caused, and the inappropriateness of J’s actions, compensation of $1,500 was viewed as appropriate.

A Finding was issued, but was rejected by Mrs A. The Ombudsman then issued a Recommendation stating that $1,500 was an appropriate amount of compensation. Mrs A rejected the Recommendation also, and therefore, the Financial Ombudsman Service was unable to assist further.

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Inadequate Insurance Policy
Mr and Mrs C had operated a home loan with the bank for many years. The bank suggested to them that they should change the loan to a newer product that offered more benefits. Mr and Mrs C agreed to change the loan over provided that the same death and disability insurance was available with the new product. The bank officer indicated that this could be arranged and accordingly, Mr and Mrs C entered into a new loan contract.

When the new loan was drawn down Mr and Mrs C received a refund for an insurance premium. When they questioned this they were advised that their old insurance policy could not be transferred to the new loan because it was no longer offered by the bank. The new insurance policy did not offer cover for temporary disability.

Mr and Mrs C wrote to the Financial Ombudsman Service stating that they would never have taken out the new loan if they had known that their insurance policy could not be transferred.

After discussions were held between the parties, the bank agreed to establish an insurance policy under the same terms as the original policy. The bank agreed to underwrite the insurance policy itself, as the insurance arm of the bank no longer offered the product. The bank also refunded the $600 application fee.

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Disputed ATM Withdrawals
Mr L and Ms W disputed a large number of ATM withdrawals, totalling $27,000, made from their line-of-credit account over a three-year period with their debit cards. They acknowledged receiving monthly statements, but said they were only concerned with the closing balance. They only made a detailed check when they noticed that their home loan was not reducing as quickly as they had expected. They provided a detailed list of disputed transactions to the bank, but conceded that some of the withdrawals would have been their own. They claimed that access to their account could have been gained internally by the bank, or via a hacker on the internet.

The bank declined to make any refund. It said it was not clear why some transactions were disputed and others were not. It also noted that Mr L and Ms W had not disputed any transactions on their credit card account, yet on some days, valid credit card purchases occurred in the same suburb as disputed debit card withdrawals.

Facts that came up during the investigation included that: both debit cards were used, but most of the disputed withdrawals were made with Mr L’s card; both cards had bank-generated PINs; on two occasions it seemed that disputed ATM withdrawals had been used to make payments to the credit card account; on one occasion a disputed withdrawal was followed by a valid withdrawal only one minute later; and on at least one occasion there was a disputed cash withdrawal using a debit card on the same day that one of the disputants used a credit card to purchase goods in the same shopping centre.

The case manager found that there was nothing to support the contention that account access was gained internally by the bank or via a hacker on the internet. There was also no information to support a possibility that an unauthorised third party had gained access to the cards and PINs. On the weight of information, the case manager concluded that the most probable explanation for the disputed transactions was that they had been made by the applicants themselves. The bank was not asked to compensate the applicants.

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Disability – Protective Measure Fails
Mrs D’s son suffered from schizophrenia. To help him save and to protect him from the effects of a gambling problem, she and her son opened a passbook account and a term deposit account. The accounts required both to sign for any withdrawals.

Mrs D contributed about a third of the funds in the savings account and her son contributed the rest from income from his part time job. As funds built up in the savings account, they were transferred into the term deposit.

In 2000, the bank allowed Mrs D’s son to withdraw all the funds in both accounts, about $20,000, via telephone banking. Mrs D believed that the funds were spent in gambling venues. The error occurred because the operating authority information from the original applications was not transferred when the accounts were converted to a new format. Although telephone banking is generally not available for accounts which must be jointly operated, the accounts did not have the required restriction placed on the system.

After the Financial Ombudsman Service commenced an investigation, the bank made an offer to resolve the dispute by making a payment of $10,000 in full and final settlement. The offer was accepted and Mrs D requested that the funds be placed in a trust account in her name to be held on her son’s behalf.

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Maladministration in Granting Loan
Mr G was a self employed builder. In July 1999 he approached the bank about an organic fruit and vegetable business he was considering purchasing.

Mr G was provided with a loan of $125,000 which he used to purchase the business for $120,000, with the additional $5,000 being for working capital. The bank also provided lease finance of $39,000 for a new van for deliveries and a bank guarantee for $7,950 in relation to the rental of the business premises. Security was provided by a mortgage over Mr G’s investment property which was vacant at the time with a renovation about 75% completed.

At the time, Mr G’s existing debts included a loan in relation to the investment property, a loan in relation to a property he had purchased jointly with his girlfriend and a credit card debt.

It soon became apparent that Mr G could not meet his monthly commitments from the returns of the new business. In December 1999 he placed the business (including the van) on the market for $125,000. The business was ultimately sold over twelve months later for $35,000.

Mr G subsequently complained to this office claiming that the bank should not have granted him the loans because he did not have the capacity to meet the repayments.

The Financial Ombudsman Service obtained the bank’s lending file for Mr G which included loan applications and supporting documents, internal notes about the applications, and assessment documentation. After reviewing this information, the case manager formed the view that the bank had not acted prudently, and its decision to lend to Mr G constituted maladministration because:

  • The bank provided 100% finance plus working capital and a lease for a business in which Mr G had no prior experience. According to the bank’s internal lending guidelines, Mr G ought to have had at least 2 years’ experience in the industry to demonstrate “satisfactory management experience”.
  • Assessment of capacity to service the loans was based on incomplete and out of date financials. The bank relied entirely on vendor financial statements and did not request accountant prepared cash flow forecasts. The vendor’s financial statements apparently indicated that the net profit of the business increased by 300% from 1996/97 to 1997/98. Given this significant and unexplained improvement, the bank ought to have undertaken further analysis to satisfy itself about the sustainability of the 1998 results.
  • Serviceability relied on rental income from Mr G’s investment property. That property was, however, undergoing renovation and was not in a habitable state. Therefore, rental income should not have been taken into account.

A conference was held with the parties and the Ombudsman, and further negotiations took place over subsequent weeks. The dispute was settled with the bank reducing Mr G’s outstanding debt by $90,000. This represented a 75% reduction in the debt.

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Non-financial loss

Case 1: FSP repeatedly contacting or attempting to contact the Applicant to recover the debt
The 2005 ACCC and ASIC Debt Collection Guideline for Collectors and Creditors provides that a collector should not contact a debtor more than 3 times per week, or 10 times per month.

The FSP made repeated telephone calls to the Applicant’s home and mobile numbers between November and January. In one week in November, the FSP made 24 calls to the Applicant (14 of which were answered) and sent one collection letter. The FSP made similar numbers of calls to the Applicant, on a weekly and monthly basis, during December and January.

FOS determined:

  • the FSP’s conduct had breached the Debt Collection Guideline and caused the Applicant significant stress and unnecessary interference with his peace of mind
  • the repeated breaches of the Guideline caused the Applicant additional non-financial loss for each claim
  • there were three separate claims for non-financial loss and awarded the Applicant $1,000 compensation for the November claim, $2,000 for the December claim and $3,000 for the January claim.
  • Non-financial loss claims case 1: FSP repeatedly contacting or attempting to contact the Applicant to recover the debt


Case 2: Irresponsible lending
FOS concluded that the FSP’s advance of an investment loan to the husband and wife Applicants (who were made bankrupt on the petition of the strata plan owner of the block in which they had purchased the investment flat) represented irresponsible lending.

FOS concluded the Applicants had contributed to their loss by signing the loan application which they did not read, and which had been completed incorrectly by their broker. Given this, FOS apportioned liability for their financial loss 50:50 between the Applicants and the FSP. (The lending had occurred before the NCCP Act became law).

FOS determined the Applicants had suffered considerable stress, upset and inconvenience as a result of the irresponsible lending and all that had flowed from it, including their consequent financial difficulty, the need to move from their home, the strata plan owner’s issue of proceedings and obtaining of judgment against them, and ultimately, its petitioning for their bankruptcy. Taking into consideration their contribution to their loss, FOS awarded each Applicant $1,500 for their non-financial loss, to be paid to them personally, and not to their trustee in bankruptcy.

Case 3: Poor response to financial difficulty
The Applicant requested a payment arrangement for his home loan, which was in joint names with his ex-partner. The FSP declined to assist the Applicant unless the co-borrower consented to any variation. The FSP also required the co-borrower to provide a statement of financial position before it would consider any payment arrangement.

FOS determined that the FSP should have considered the Applicant’s financial difficulty request even though the co-borrower was not involved, and its failure to do so caused the Applicant unnecessary stress and inconvenience. FOS awarded the Applicant $500 for his non-financial loss, to be applied to reduce the home loan balance.

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Credit card stops working overseas
Mr and Mrs W went to Europe for their honeymoon. They intended to stay for one month, but after two days, their credit card stopped working and they decided to cut short their holiday and return to Australia.

Mr and Mrs W lodged a dispute with the Financial Ombudsman Service, claiming that the bank should compensate them for their loss of enjoyment of their holiday.

When the Financial Ombudsman Service referred the dispute to the bank for its consideration, it offered an ex-gratia payment of $3,000. Mr and Mrs W did not accept this offer, and it was subsequently withdrawn by the bank.

The information provided by the bank did not establish why the credit card had stopped working. However, it was the case manager’s view that as the bank represents to customers that the particular type of card can be used in most countries, the bank would be potentially liable for losses resulting from the failure of the card to work.

The case manager then investigated whether, according to the Ombudsman’s guidelines for assessing non-financial loss, Mr and Mrs W were entitled to any compensation from the bank.

The case manager noted that:

  • Mr and Mrs W did not contact the bank to try to rectify the problem with the credit card; and
  • Whilst the credit card did not work, they could still have accessed alternative funds by using Mr W’s Keycard. This would have allowed them to make EFTPOS purchases and ATM withdrawals of up to $A800 per day, which appeared to be more than adequate for their travelling needs.

The case manager concluded that Mr and Mrs W acted with extreme haste in deciding to return to Australia. As they had not given the bank an opportunity to resolve the matter, and did not take any reasonable steps to minimise the inconvenience they were suffering, the case manager found that it was not reasonable for Mr and Mrs W to expect to be compensated by the bank.

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Frozen account
Ms H and Ms P operated a pet supplies business as a partnership. The partnership had several facilities with the bank including an EFTPOS machine, a business credit card and a business trading account. Either proprietor was authorised to operate the accounts.

The partners became involved in a financial dispute and ceased to operate the business together. Ms P continued to trade as a sole proprietor, and the relevant change of ownership forms for the registered business name were lodged.

Ms P’s dispute with the bank arose when she deposited funds she had earned as a sole proprietor into the partnership account, and drew cheques against these funds. As soon as the bank became aware of the partnership dispute, it froze the account and dishonoured the cheques Ms P had issued. Ms P said that she was unable to continue to trade and was forced to close the business.

Ms P argued that the bank should not have frozen the account when it had been a bank officer who had advised her to continue to use the partnership account. The bank officer concerned denied giving Ms P this advice.

The main issue for the case manager’s consideration was whether the bank officer had advised Ms P that she could continue to operate the partnership account. It was difficult to determine this issue because there was no documentation recording the nature of the discussion between Ms P and the bank officer.

The Ombudsman considered that a conciliation conference was an appropriate method of trying to resolve the matter. The dispute was resolved at the conference, with the bank agreeing to pay Ms P $9,000. The early conciliation conference avoided the need for a long and difficult investigation.

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Misleading conduct by silence over construction funds
The applicants applied to the FSP for low doc loans to buy two blocks of land, which they intended to build on. The FSP was aware of their plans at the time. However, when they later applied for finance to develop the blocks, the FSP declined their application.

The FSP’s loan file included a handwritten note to the lending officer saying it could not provide a low doc loan for construction. Its policy also stated that low doc loans were not available for property development. Yet the FSP did not communicate this to the applicants when they applied for the original loans.

FOS found that the applicants had a reasonable expectation that the FSP would disclose its inability to fund construction as it was aware they were:

  • buying the blocks as investments and intended to build on them
  • likely to need funds for future development.

By remaining silent, the FSP misled the applicants and needed to compensate them.

This meant the FSP should take possession of the blocks, pay the costs of selling them and keep the proceeds. The FSP should then extinguish the applicants’ loans and:

  • refund all repayments the applicants had made to the loans
  • pay the applicants’ costs for obtaining the loans and purchasing the blocks (including deposits, stamp duty and legal costs)
  • pay their costs for owning the land (including council rates, water rates and pre-building costs)
  • pay $4,000 for stress and inconvenience.

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Progress Payment to Builder
Mr and Mrs T engaged a building firm to construct their home. They entered into a loan contract with the bank to finance the construction whereby progress payments to the builder were made at five defined stages. Mid-way through the construction the builders went into liquidation. Mr and Mrs T disputed the payment made by the bank to the provisional liquidators at the “lock-up” stage because they said the construction was not at that stage and in fact, the house had to be demolished due to defective workmanship.

Mr and Mrs T acknowledged signing the authorisation to pay the provisional liquidators at “lock-up” stage but argued that the bank owed a duty to them and should not have paid the invoice without inspecting the property.

The case manager issued a Finding on the merits of the dispute after considering the bank’s policy for progress payment inspections, the bank’s building payment practice and the Ombudsman’s legal counsel’s review of the relevant terms and conditions of the loan contract.

The Finding concluded that the bank’s policy did not require it to make inspections of the building of a residential home where the contract price was less than $1 million and that it was not the bank’s practice to inspect constructions prior to releasing a payment authorised by the owner. In this case the first two progress payments had been released without a bank inspection of the construction.

There had been no allegation that the bank represented to the disputants that it would inspect the property at each of the stages before releasing the payment to the builder. Furthermore, the loan contract specifically absolved the bank for any contractual liability to the borrowers to inspect before releasing a payment. The case manager also considered that Mr and Mrs T’s written authorisation meant that the bank was entitled to release the payment and was a representation to the bank that they were satisfied that the payment could be made. Taking all these factors into consideration, the case was closed after the Finding confirmed that the bank had acted appropriately in releasing the payment to the provisional liquidators.

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Reports to Credit Reporting Agency
Mr R’s dispute related to two default listings that had been reported to a credit reporting agency by the bank.

Mr R conducted two business related cheque accounts with the bank. Both accounts were in overdraft. One account had an approved temporary overdraft limit, the other operated in overdraft from time to time without the specific approval of the bank. Mr R failed to reach an agreement with the bank to regularise the overdraft and also exceeded the temporary limit on the other account. After appropriate warnings, the bank listed the defaults to repay the overdrafts with a credit reporting agency. The default listings were made to Mr R’s consumer (individual) file.

Mr R argued that the default listings should not have been made to his consumer file when the accounts had been used for business purposes.

Legal Advice
The file was referred to the Ombudsman’s legal counsel for advice. It was legal counsel’s view that a default on a business cheque account should not be listed on an individual’s consumer credit file because “credit”, as defined in the Privacy Act, has not been extended to that individual. However, a business default listing could be made to a person’s commercial file.

A Finding was made that as the listings to Mr R’s consumer file had been made in error, they ought to be removed. The Finding also dealt with Mr R’s claim that the wrongful listing had prevented him from obtaining credit elsewhere, and that he should be compensated.

It was found that Mr R was in default of his obligations to repay the overdrawn funds and, as a result, suffered no loss because of the listings to the consumer file. This was because the default listings could have been made to Mr R’s commercial file. Mr R required further credit to fund the business and had the listings been made to the commercial file, this would have prevented Mr R from obtaining such credit. Therefore the listing to the consumer file, although in breach of the Privacy Act, left Mr R in the same financial position he would have been in had the default listing been made to the commercial file.

The bank accepted the Finding and removed the default listing on the consumer file. As the debts had been repaid, no listing was made to the commercial file.

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Unauthorised Credit Card Transaction
Ms K applied for a credit card but says the application was declined and she never received the card. Some time later, Ms K was contacted to make payments on a debt of $1,000 owing on the credit card account. Although Ms K did not believe she was responsible for the debt, she became nervous when the bank threatened to list the default with a credit reporting agency. She reluctantly agreed to repay $50 per month towards the debt.

Ms K then received a letter from a collection agency demanding repayment of the full amount of the debt. Ms K contacted the bank to ask how the account could have been opened in her name when her application was declined. She requested copies of the identification that had been shown when the account was opened, but she was advised that she would have to pay a fee for the information.

A default listing was subsequently entered against Ms K’s name and when this was discovered, Ms K wrote to the Financial Ombudsman Service requesting assistance.

The dispute was referred to the bank for its consideration. The bank conducted an investigation into the matter and advised that its records showed that the credit card application had, in fact, been approved but that it was not able to confirm that Ms K had received the card. The bank accepted that the card may have been used fraudulently by a third party, and the dispute was promptly resolved with the bank agreeing to extinguish Ms K’s liability for the debt and removing the default listing.

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Unsolicited Credit Limit Increase
Ms E complained about a $7,211 unauthorised transaction made with her credit card without her knowledge or consent.

The issue for the case manager’s consideration was whether Ms E had disputed the transaction within the timeframe set out in the bank’s Conditions of Use for Credit Cards.

After the case manager issued a Finding stating that Ms E was liable for the transaction because she had not disputed the transaction within the required time frame, Ms E appealed and introduced a new argument: that she should not be liable for the unauthorised transaction because the bank did not assess her ability to repay the amount of credit when it offered her extensions of credit.

The case manager investigated this new aspect of the claim and noted that:

  • Ms E had been employed by the bank in 1994 when it approved a credit card with a limit of $2,000. She had, however, ceased working 13 months later to look after her children. She never returned to work and the only income she received was approximately $6,000 per year in government benefits;
  • Despite this, over the next six years, the bank offered Ms E six unsolicited increases in her credit limit which were accepted. This saw her credit limit rise from the original $2,000 to $10,000; and
  • At no stage was Ms E required to advise the bank of her financial details. (The bank said that offers for increases in the credit limit were based on the bank’s assessment of the good conduct of the account.)

The view of the Ombudsman’s Banking Adviser was that a limit of $2,000 was the maximum that could be justified based on Ms E’s financial position.

The case manager summarised the banking advice in a letter to the bank and the matter was subsequently resolved by negotiation between the parties, facilitated by the case manager. The bank agreed to refund the amount of the disputed transaction and interest, and Ms E agreed to have her credit card cancelled.

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Terms of settlement

Case 1: Unclear third party settlement payment prevents a claim
The applicant had a joint account with her husband and either could make withdrawals. Their relationship assets were:

  • the home, valued at $500,000 (each had a 50% share)
  • $100,000 in the joint account.

Before her husband died:

  • he changed his will, leaving all his assets, including his share of the house, to her step-daughter rather than to her, as had been the case
  • she transferred $50,000 from their joint account into an account in her name only
  • he then transferred that $50,000 into an account in his name only.

After her husband died, the applicant made two claims against both his estate and her stepdaughter:

  • that his new will had been made under duress and was not valid
  • for the return of the $50,000 he had transferred from her account.

She settled this claim in exchange for a lump sum of $100,000. But the settlement did not apportion that payment between her two claims.

She then lodged a claim with us against the FSP for the $50,000 it had allowed her husband to withdraw from her account without authority.

We took the view that:

  • the FSP had breached its obligations to the applicant by allowing the unauthorised withdrawal
  • settling the claim with the estate and her step-daughter did not prevent a further claim against the FSP because it was not a party to that settlement.

However, we could not determine if the applicant had been fully compensated for $50,000 taken from her account because her lump sum payment had not been apportioned. We could not consider the dispute.

We could have done so, for instance, if the previous terms of settlement had specified that in the settlement sum:

  • $80,000 was for her claim the will was invalid
  • $20,000 was for her claim about wrongful access to her account.

She then could have made a claim against the FSP for the remaining $30,000 for wrongful account access.


Case 2: Broad settlement terms allowed a further claim
The applicant had a home loan with the FSP and fell into default after losing his job. After unsuccessfully negotiating with the FSP to vary the loan repayments due to financial difficulty, the applicant lodged a claim with us.

The dispute was settled with an agreement the applicant could make lower monthly repayments for three years. The terms of settlement were broadly in satisfaction of ‘all claims’ against the FSP.

One year later, the applicant lodged a further claim against the FSP about being misled over the home loan interest rate. The FSP argued we would not consider the dispute as the applicant had previously settled ‘all claims’ against it.

We took the view that despite this broad expression in the previous terms of settlement, it applied only to applicant’s initial dispute with the FSP over the lowering of the loan repayments.

We accepted that the applicant could make the further claim against the FSP.\

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Online application leads to responsible lending dispute
An applicant’s online credit card application approved by a financial services provider (FSP) accepted income and expenditure figures provided by the applicant without any form of reliability testing, according to a determination by FOS.

The dispute centred on whether the FSP breached its responsible lending obligations under the National Consumer Credit Protection Act when it issued the credit card to the applicant with an $8,000 limit.

In October 2012, the applicant completed the application form and said that per month, she earned $2,500 after tax, had income of $1,500 from other sources and $1,951 in expenses including rent.

But the Ombudsman found that she did not have any regular income when she applied for the credit card, and the credit card had caused her financial hardship.

The determination said that the under the National Consumer Credit Protection Act, an FSP must make reasonable inquiries and take reasonable steps to check the information provided by consumers in their loan application. “As a minimum, the FSP should obtain documents to check the consumer’s ability to repay the loan,” the Ombudsman said.

The Ombudsman found that the applicant held a transaction account with the FSP at the time she applied for the credit card. The account did not reflect a regular source of income and this was one of “many discrepancies in her application form which should have raised alarm bells”.

In February 2013, the balance of the credit card exceeded the approved limit, and in March 2014 the balance was $8,475 in arrears.

The FSP acknowledged that it had automatically approved the application based solely on the figures provided, but said the application included questions about whether she had experienced difficulty in repaying loans in the previous two years and whether she anticipated any changes in her employment, income and expenses in the following 12 months. She had answered ‘no’ to both these questions.

The Ombudsman said the FSP had not shown that its automatic system was sophisticated and had otherwise failed to make reasonable inquiries about whether the applicant could repay the credit card debt without substantial hardship. The Ombudsman said that while it appeared the applicant provided incorrect information about her financial position, it was not appropriate for FOS to reduce any compensation it may award.

“In the case of credit contracts regulated by the National Consumer Credit Protection Act, we generally consider that the FSP should compensate the consumer for their entire loss, even if the consumer is partly responsible,” the Ombudsman said.

The Ombudsman determined that the FSP should not have provided the applicant with any credit because she did not have demonstrated capacity to make repayments.

On that basis, the Ombudsman found that the FSP should not have collected interest or fees on the credit provided. The FSP was required to reduce the balance owing to $5,541, which reflected only the purchases the applicant had made.

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Systemic issue - errors in credit listings
Several instances of incorrect credit listings identified during the FOS dispute process were found to be systemic issues in 2013-2014.

In one instance the FSP entered a default listing on the applicant’s personal credit file for an amount that was not 60 days overdue.

FOS examined the default notice sent to the applicant and found that it was not compliant with the relevant section of the National Credit Code because it did not comply with the strict requirement to provide specific information about the debtor’s rights.

We asked the FSP to provide its policies and procedures for entering credit listings, to comment on concerns that its default notice was not compliant, to confirm how many listings had been made in the previous five years, and to review any listings made for amounts that were not 60 days overdue.

The FSP told FOS that its default notice did not meet the requirements of section 88 of the National Credit Code and that about 70% of the credit listings had been entered in error. As a result of the investigation, the FSP removed or amended the credit listings that had been made in error.

In another definite systemic issue, we found that an FSP had made a number of default and serious credit infringement listings in error.

The FSP told us that a portion of the errors were the result of defaulting cross-referenced credit files as well as credit files directly associated with customers. A cross-referenced file is one that is identified as a match with a customer. Cases where a cross-referenced file exists may include maiden names, name changes, identity fraud and manipulated identity fraud.

However, the FSP also acknowledged that some serious credit infringement listings were made in circumstances where a reasonable person would not consider that the debtor had shown an intention to no longer comply with their obligations in relation to credit.

In order to resolve this particular issue, the FSP confirmed it had reconsidered its approach to the listing of serious credit infringements and had implemented a policy change to reflect this new approach. Based on the policy change, the FSP also confirmed it would remove all serious credit infringement listings it had made in the past.

In another case, an applicant tried unsuccessfully to obtain credit after a default listing was placed on his personal credit file. This happened after judgment was obtained for amounts owed by the applicant to the FSP.

In FOS’s view, the effect of a court judgment is that the underlying basis of the debt (the credit contract) merges in the judgment. This means that we consider an FSP cannot list a default after judgment has been obtained, as the requirement for the default to be pursuant to the credit agreement has not been met. On this basis, we determined that this was a definite systemic issue.

The FSP confirmed that about 500 default listings had been made after judgment was obtained. As a result of our investigation, the FSP arranged for the incorrectly made listings to be removed, and took steps to change its processes so that the issue didn’t recur.

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Role of a broker
John wanted to purchase a new home. The real estate agent referred him to Sam, a mortgage broker, to obtain finance. Sam asked John to sign a low documentation (low doc) application. John subsequently accepted an offer from the FSP for a $430,000 home loan, secured by a mortgage over his home. He failed to make his loan repayments on time and the financial services provider (FSP) started legal proceedings for possession of his home. John lodged a dispute with FOS.

John said that the FSP should not have given him the home loan because he could not afford the repayments. After John signed the loan application, Sam changed information on the loan application so that it would meet the FSP’s servicing requirements. If the FSP had checked the details in the loan application with John, the FSP and John would have discovered the inaccurate information and the FSP would not have provided the loan to John.

We considered that the FSP was not responsible for Sam’s conduct. While the FSP did not have any agreement with Sam, it did have an agreement with a mortgage manager Sam was affiliated with. In that agreement, the mortgage manager acknowledged that it was independent and did not represent the FSP. Therefore, Sam did not have any actual authority to act as the FSP’s agent. There was also no information showing that the FSP had represented to John that Sam was its agent. Even though the FSP paid commission to Sam, we considered that the commissions were not enough to establish an agency relationship.

We also considered that the FSP was entitled to rely on the information in John’s loan application when assessing his ability to repay his home loan. There was no inconsistency in the loan application or other information provided to the FSP had which should have caused it to check any details with John or Sam.

We concluded that the FSP had acted responsibly when it granted the home loan to John.

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Broker’s conduct and consumers’ conduct
In 2008, Mike and Felicity asked for advice from a mortgage broker about the best way to borrow $30,000 to help Felicity develop her business. At that time, they already owed the FSP $50,000 for a home loan. The broker advised them to apply to the financial services provider (FSP) for a loan to purchase an investment portfolio and for a line of credit for the business. The broker advised them to mortgage their home to provide security for the loans.

The broker completed their loan application with incorrect details. In particular, the application stated that:

  • Mike’s income was $75,000 and Felicity’s income was $50,000. However, Mike’s true income was approximately $16,000 and Felicity’s true income was $14,000.
  • Felicity contracted as a child care centre provider and Mike was a locum teacher.

The FSP provided Mike and Felicity with three loans totalling $342,000 and Mike and Felicity provided a mortgage over their home as security for the loans.

Mike and Felicity later lodged a dispute at FOS. They said:

  • They had signed three pages of the application and had not seen any other pages of the application. They did not see the other pages of the application until the FSP provided them with a copy of the application after they lodged the dispute at FOS.
  • The broker encouraged them to sign blank documents. When they signed the income declaration in the application, it did not state their incomes, it only stated the amount of the loans.
  • The FSP did not check their income with their accountant.
  • They had taken legal action against the broker and recovered $80,650 in compensation.
  • They used one of the loans to make repayments on the other two loans. When there were no remaining funds in the first loan, Felicity used a pension from her superannuation funds to make loan repayments.

In responding to the dispute, the FSP said:

  • Its low doc lending policy did not require it to verify their income.
  • It had relied on information provided by Mike and Felicity’s broker.
  • Mike and Felicity’s repayment history on their existing home loan was satisfactory and their credit reports were clear.

When we considered their dispute, we noted that Mike and Felicity’s age was a “red flag” because they were both 60 years old when they applied for the loans. The FSP had made further inquiries with the broker about Mike and Felicity’s ability to repay the loans, and the broker told the FSP that Mike and Felicity had $450,000 equity in their home and $360,000 superannuation which they could use to reduce their debt when they retired. The FSP also knew that Mike and Felicity were currently working and that the loans were for investment purposes, which could be expected to create additional income and possible capital gains.

We could see that the FSP had complied with its low doc lending policy when it approved the loans. There were no “red flags” which might have alerted the FSP to the false information in the application, so it was entitled to rely on the information in the application to assess whether Mike and Felicity could afford the loans.

We analysed Mike and Felicity’s ability to service the loans based on the information in the application and the FSP’s knowledge of their existing home loan. We concluded that Mike and Felicity could afford the loans.

Although the broker may have done the wrong thing, the FSP did not know and had no reason to suspect that the information the broker provided was inaccurate Also, the broker was Mike and Felicity’s agent, not the FSP’s agent. For those reasons, the FSP could not be held liable for the broker’s conduct.

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Responsible lending and retirement
In 2006 Bill (aged 51) and Joan (aged 47) applied to the financial services provider (FSP) for finance to purchase an existing business with their son and daughter-in-law. The FSP offered Bill and Joan a $320,000 home loan to refinance their existing loan with another lender, a $270,000 variable rate interest only loan, and a $190,000 principal and interest loan. Their loans were secured by a mortgage over their home.

The business was not successful and had to close. Bill and Joan lodged a dispute at FOS, claiming that the FSP should not have given them the loans.

When we reviewed the FSP’s credit assessment, we found that:

  • The FSP failed to comply with its lending policy as it did not obtain a balance sheet for the business, which was a requirement under its policy and was also consistent with good industry practice.
  • The FSP had not analysed whether the business income was sufficient to cover all of the living expenses that Bill, Joan and their son and daughter-in-law would reasonably incur.
  • Bill and Joan had borrowed heavily (in relation to their overall financial position) to buy the business and had no prior experience of running a retail outlet. The FSP should have more thoroughly considered and investigated Bill and Joan’s capacity to repay the loans.
  • The FSP had concluded that Bill and Joan could afford the loans on the assumption that Bill would continue to work as a pilot. However, Bill and Joan had said in their business plan that Bill would not continue that job.
  • The FSP should also have been aware that commercial airline pilots are generally unable to fly passenger planes after age 65. The $270,000 loan was for 30 years with the first five years being interest only. To repay a loan with that term, Bill would have had to work as a pilot until he was 82. Bill had $115,000 in superannuation, but that would only have been sufficient to repay their refinanced home loan until Bill turned 65, and Bill and Joan would have needed that money when they retired. Therefore, the only reasonable way for Bill and Joan to repay the $270,000 loan would have been for Bill and Joan to sell their home.

We concluded the FSP had not acted responsibly when it granted the loans to Bill and Joan.

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Car loan and loss

Case 1: Loan refinanced without consumer credit insurance
In 2010, Wayne entered into a credit contract with the financial services provider (FSP) for $48,500. Wayne used the funds to purchase a Holden Commodore V8 car for $42,222 and to finance a consumer credit insurance policy and a shortfall insurance policy.

In 2011, Wayne was in financial difficulty and the FSP refinanced the credit contract. The new contract included finance for a shortfall insurance policy, but not for Wayne’s consumer credit insurance.

Wayne lodged a dispute at FOS. He said he could not afford his new contract and the FSP had not acted responsibly when it agreed to the new contract.

FOS considered the FSP’s decision in 2010 to grant the initial credit contract (because the refinanced contract was only a variation of the old contract). We concluded that the FSP should not have approved the $48,500 loan.

We required Wayne to return the car to the FSP, and calculated Wayne’s loss to be:

  • the $200 deposit he personally paid for the car
  • his loan repayments of $18,214
  • interest on his total loss of $18,414, which we calculated to be $1,973.

According to Glass’s Guide (a trade publication about used car prices), the current retail value of Wayne’s car – having travelled 50,000 kilometres –was $33,225. We therefore calculated that the benefit to Wayne of using the car was $8,997 ($42,222 minus $33,225).

We determined that the FSP must pay Wayne $11,390 ($18,414 loss plus $1,973 interest less $8,997 value of use).

Case 2: Obligations under the National Consumer Credit Protection Act (NCCP)
Will was 20 years old, lived at home and had a job at the local supermarket. He found a car he wanted to buy at a Prestige Cars dealership and applied through the dealership’s finance broker for a loan for $50,000 from the financial services provider (FSP). That amount covered the purchase price of $40,000 plus comprehensive insurance and consumer credit insurance. The FSP approved a seven year fixed interest loan which required Will to make monthly repayments of approximately $800.

Will struggled to make his repayments. His mother lodged a dispute at FOS on Will’s behalf, in which she said that the FSP:

  • failed to take into account the high operating costs of a high performance car
  • failed to make any enquiries about whether Will had any upcoming significant expenses

We considered the dispute and found that the FSP had relied on the information in Will’s loan application and on its own generic data to determine his living expenses. The application stated that Will was employed, he already owned a car worth $6,500, he owed $10,000 in “other loans” and he had no savings.

We concluded that the FSP had failed to meet its NCCP obligations to lend responsibly because:

  • The FSP had not contacted his employer or made any enquiries about Will’s requirements or objectives (except for his obvious desire for a high performance car). If the FSP had contacted Will’s employer, it would have learned that he was employed on a casual basis, and he earned more from irregular incentive payments than his casual wage.
  • Before the loan, Will owned a car worth $6,500 and owed $10,000 in personal loans. After Will bought the car, he increased his overall debt to $50,000 without the FSP making any enquiry about his potential employment opportunities or other ways he could repay this substantially larger debt.
  • The FSP also failed to consider Will’s future expenses if he moved away from home, which was a reasonable consideration given his age.
  • Given that Will had no savings, it was obvious that his living expenses were greater than the FSP’s estimate allowed, and there was no reasonable basis to presume Will could afford a further liability of $800 per month.

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A loan for an investment property
Carol and Bruce obtained a loan for $260,000 in 2007 from the financial services provider (FSP) through a broker. They used the funds to buy an investment property and they rented it out.

They later lodged a dispute at FOS. While they had made all of their loan repayments, they said they had only been able to make the repayments by not buying other little luxuries. Carol and Bruce also said that although they had provided their broker with correct information about their financial position, the loan application contained incorrect information about their income. They said they would not have bought the investment property if the FSP had not approved the loan, and they wanted the FSP to write off the outstanding debt (that is, not require them to repay the remaining debt).

The FSP said it had relied on Carol’s and Bruce’s tax returns and payslips which the broker had provided with their loan application. The FSP also said that it had seen statements for their existing home loan with another lender which showed that their home loan was being repaid.

Carol and Bruce did not want to sell their investment property. They wanted to keep it for their children to use when they went to university.  They knew that their decision to keep the property might mean that they could not receive compensation for their claim, but they still wanted a review of the FSP’s credit assessment.

It was not possible to assess whether Carol and Bruce had suffered any loss, because they did not want to sell the property, and their loan repayments were up to date. Therefore, Carol and Bruce were required to continue making loan repayments in accordance with the terms of their credit contract and we closed our file.

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Good industry practice
Doris and Bill obtained a $200,000 line of credit from the financial services provider (FSP) which they used in their business. Their business went into liquidation. Doris and Bill lodged a dispute with FOS, claiming that the FSP should not have provided the line of credit.

The FSP said that FOS did not have jurisdiction to consider their dispute because:

  • the line of credit was not a regulated credit contract under the NCCP and the NCC
  • the credit contract was not a financial product under the ASIC Act
  • there was no relevant case law which applied to a lending decision which required the FSP to meet any standard of care in assessing Doris and Bill’s loan application
  • it was not a subscriber to any industry code which imposed responsible lending obligations

We said that we would consider Doris and Bill’s dispute, because our Terms of Reference state that we can consider a small business dispute, and that we are not limited to considering only regulated lending under the NCCP or NCC. Our jurisdiction is broader than a court because we not only consider legal principles but also how the FSP should conduct itself to comply with good industry practice. Even though the FSP was not a subscriber to any industry code, we still apply the guidelines of relevant codes when we consider if an FSP has followed good industry practice.

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Inadequate inquiries
Bruce and Barbara had loans with another lender that totalled approximately $263,400. In December 2006, they accepted the financial services provider’s (FSP’s) home loan offer for $284,000 to refinance their existing loans. This amount included additional funds of approximately $20,600.

In November 2007, Bruce and Barbara found a block of land they wished to purchase. They made a low doc loan application to the FSP for $240,000 to assist in their purchase. In their application, Bruce declared that he earned $200,000 per annum from his crash repair business.

Bruce and Barbara had planned to build a new family home on the block of land. However, there were delays for over five years in getting their plans drafted and approved by the local council. They had difficulty making repayments on their total debt of $524,000.

In 2012, Bruce and Barbara lodged a dispute at FOS, claiming that the FSP should not have provided them with the $240,000 because they were not able to service their total debt. In 2013, while we were considering their dispute, Bruce and Barbara refinanced the two loans with another lender. After 2013, the land dropped in value.

We considered the FSP’s credit assessment and concluded that the FSP had failed to make adequate enquiries. While it was appropriate to provide a low doc loan to Bruce because he was self-employed, the FSP should also have taken into account the information it already had about Bruce and Barbara from their existing $284,000 loan. Bruce and Barbara’s transaction account statements showed that they received Family Tax Benefit Part A payments, which are not available to a family whose principal income earner makes $200,000 per annum. The FSP should have made more enquiries with Bruce and Barbara about the difference between Bruce’s declared income and Bruce and Barbara’s receipt of family tax benefits. If the FSP had made those enquiries and had asked for tax returns for Bruce’s business, those tax returns would have shown a net income for the financial year of only $23,527.

As the FSP failed to make those enquiries, we concluded that it had not acted responsibly in providing the $240,000.

Bruce and Barbara’s loss was the amount of money they contributed to the purchase of the land, repayments they made on the $240,000 loan, and holding costs they paid for the land (such as council rates). However, their loss did not include the costs of refinancing the loan with the new lender, or the interest they paid to their new lender. This is because it was Bruce and Barbara’s choice to move to the new lender instead of selling the land. Bruce and Barbara’s loss also did not include the drop in the value of the land, because the land’s value had not changed between 2006, when they purchased the land, and 2012, when they refinanced their loan with another lender.

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Joint debtors
Anne, a retiree and pensioner, owned her home. She entered into a loan contract with her son, Brian, to provide funds to extend her home so her son could live with her. Anne secured the loan with a mortgage over her home, and Anne and Brian’s ability to pay the loan was based on Anne's pension and Brian's wage. Anne could not afford the loan solely on her income.

After approving the loan, the financial services provider (FSP) also provided further advances under the loan contract. The money was used to pay Brian's outstanding credit card debts, and for Brian to purchase a car.

Brian left his job to travel overseas and stopped making repayments on the loan. Anne could not afford the repayments and the FSP said it would take possession of Anne's home. Anne lodged a dispute with FOS.

After considering the dispute, we concluded that Anne was appropriately a co-debtor in the original loan contract, as she had received a direct benefit from the loan (the extension to her home and therefore an increase in its value). However, we considered that she was not liable for the further advances as she did not directly benefit from the application of the funds. Even though the repayment of Brian's credit card debts may have provided more towards the household income, this was not a direct benefit to Anne. Neither was the purchase of a car for Brian, as there was no information to show that Anne used the car or relied on Brian to transport her.

We decided that the FSP was obliged to work with Anne to reach a repayment arrangement for the original loan. If Anne could not repay the loan even if it was varied, then Anne would be required to sell her home.

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Bill and Julie entered into a guarantee to secure a credit facility provided to a company that was managed by their son, Chris. When the company stopped making payments, the financial services provider (FSP) called on the guarantee to require Bill and Julie to make payments, and they lodged a dispute with FOS.

Bill and Julie said that they had only entered into their guarantee on the understanding that their son, Chris, and the company’s sole director and secretary, Wendy, would also provide a guarantee. Chris had signed a guarantee but Wendy had not.

The information given to us as part of the dispute showed that Bill, Julie, Chris and Wendy had all signed the loan application in which they offered to provide guarantees, and the failure to obtain Wendy's guarantee was an oversight. The information also showed that Bill and Julie had provided guarantees to other FSPs for their own business enterprises and had previously obtained legal advice about their obligations as guarantors. We considered that, without consideration of the FSP's obligations under clause 28 of the Code, Bill and Julie's guarantee would be enforceable as they appeared to be aware of a guarantor's obligations, and in all likelihood they would have supported their son by providing their guarantee.

However, we noted that the FSP had delivered the company's letter of offer, supporting financial information and the guarantee to Bill and Julie on 1 September, and witnessed them signing their guarantee that same day. There was no information to show that Bill and Julie had been given the opportunity to seek independent legal advice about the guarantee after they received the documents. By accepting Bill and Julie's guarantee without allowing them the opportunity to properly consider the documents and to obtain independent advice, the FSP had failed to strictly comply with clause 31 of the Code. As a consequence, the FSP could not rely on Bill and Julie's guarantee to recover the outstanding company debt.

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Closing a customer's account
Zara had a cheque account with the financial services provider (FSP), which was seeking to recover $6,234.37 that Zara owed on the account.

Zara said that she had asked the FSP to close the account. The FSP told her that the account would need to be cleared before it could be closed, so she paid straight away what the FSP told her was the account balance. Afterwards, Zara sent an email to the FSP confirming that the account should be closed. Zara said the $6,234.37 the FSP sought to recover related to transactions that were charged to the account after she instructed the FSP to close it, and which she therefore had not authorised.

The FSP said Zara's payment did not cover the interest and fees that had accrued and were subsequently charged to the cheque account, and this meant that it could not close the account. Zara lodged a dispute with FOS.

The information given to us as part of the dispute satisfied us that Zara had intended to close the cheque account, and had paid the balance owing on the account as at the date of her request. This was confirmed by her email to the FSP. Therefore, the FSP should have stopped all transactions on the account from that date– including direct debits, presented cheques and interest.

In our view, the additional transactions and charges on the account were the result of the FSP’s mistake. However, Zara had still enjoyed the benefit of the FSP covering her liabilities and therefore she needed to pay the FSP for the cheques and direct debits it had paid on her behalf after she asked it to close her account. But we decided that the FSP was only entitled to receive interest from the date it had demanded that Zara pay these charges. This was because the courts have held that a person who is entitled to recover a mistaken payment is entitled to recover simple interest on the amount of the mistaken payment from the time a demand for payment is made.

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Guarantee for a company’s debts
A small business defaulted on its repayments. The FSP took possession of the company’s assets and then sold them, which resulted in a shortfall of $100,000. The company was then placed in liquidation and the FSP claimed the shortfall debt from the guarantor, Mr B.

Mr B had concerns about the way the FSP had sold the company's assets, and lodged a dispute at FOS.

Even though the company borrower was in liquidation, we decided that the guarantor was entitled to lodge a dispute alleging that the FSP had failed to comply with its duties as a mortgagee in possession when it sold the company's assets. We decided this because in the circumstances, it would have been unfair to allow the creditor to recover the debt under the guarantee without considering this part of the dispute.

After we asked the FSP to give us more information about the process it followed when it sold the company's assets, the FSP decided to abandon its claim against Mr B.

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Guarantor’s remorse
Charlie’s friend wanted a personal loan in order to purchase a popular restaurant and cafe in the city, and he asked Charlie to be a guarantor. Charlie obtained a copy of the relevant documents (including the proposed guarantee) from the FSP, and sought independent financial and legal advice. After a few days, Charlie signed the guarantee and provided the FSP with security over his home.

Charlie’s friend’s business failed after running up debts of $250,000 and Charlie’s guarantee was called on to cover his friend’s debts.

Charlie regretted his decision to sign the guarantee and refused to acknowledge any liability. He lodged a dispute at FOS.

We found that the FSP had:

  • given Charlie sufficient notice about seeking independent legal and financial advice and about the financial risks involved in providing a guarantee
  • given Charlie sufficient information about the credit facility
  • given Charlie a copy of the credit contract and guarantee, and
  • given Charlie sufficient time in which to consider all the information relevant to the guarantee.

On this basis, we determined that Charlie was liable for the full amount of the guarantee. A guarantor is not able to avoid liability simply because they later regret the decision to sign the guarantee.

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General Insurance
  1. Maximum demerit points
  2. Travel insurance and exclusion for “insurrection
  3. Accident Insurance
  4. Insurance broker disputes
  5. Cancellation of instalment contracts
  6. Section 47
  7. Insurance claim delays

Maximum demerit points – you cannot disclose what you do not know
The financial services provider refused to pay the claim of Mr B for damage to a motor car following an accident, on the basis that he, as policyholder, had not made disclosure that he had reached the maximum 12 penalty points. Mr B claimed he was unaware he had reached the maximum number of allowable demerit points . Mr B said he did not receive the warning letter and the law of non-disclosure is clear that you cannot be obliged to disclose what you do not know.

At relevant times, Mr B held both a Queensland and New South Wales licence.

During the course of the dispute, financial services provider wrote to Mr B offering to “welcome him back” as a policyholder. The issue arose as to whether this was a marketing tool or a direct invitation to Mr B. Whilst this was not central to the decision making, it demonstrated the risk a financial services provider runs when on the one hand it says it would not insure an individual because of their particular driving history, and on the other hand sends them marketing material, with an invitation to re-insure.

In this determination, the Financial Ombudsman Service panel found accepted that a person cannot disclose what they do not know. After considering all the material provided by the parties, the Panel was not satisfied that the financial services provider had discharged the burden of proof that Mr B failed in his disclosure obligations to disclose he had received the maximum allowable demerit points at policy renewal.

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Travel insurance and exclusion for “insurrection”
Mr B was stranded in Thailand in September of last year when the Phuket airport was closed due to an anti-government protest. As a result, Mr B had to purchase new flight tickets, and incurred additional costs. The member denied his claim on the basis that the proximate cause for the loss arose from an excluded clause in the policy that is “a loss that arises from any act of war, or from a rebellion, revolution, insurrection or taking power by the military”.

The policy however provided cover if Mr B could establish the incurred additional travelling expenses as a result of cancellation of public transport services caused by riot, strike or civil commotion.

The critical issue for determination was to whether the events giving rise to the claim should be categorised as a riot or civil commotion, or whether they should be categorised as an insurrection.

In order to support its case that the events giving rise to the claim should be categorised as an insurrection, the member provided the Financial Ombudsman Service with press reports from the New York Times, the Washington Post and other international newspapers, using terms like ‘protest’ and the ‘demonstrators’.

In determining this dispute, the Financial Ombudsman Service considered it was important to examine the exclusion as a whole and to apply what is called the “ejusdem generis rule of interpretation” which requires the court or decision maker to interpret words in their context. In this regard, it was noted that other words used in the policy exclusion included “war, rebellion, revolution, or taking of power by the military”.

The Financial Ombudsman Service felt the term “insurrection” needed to be construed in that context i.e. a significant element of violence needs to be established. It was concluded from the press report that there was little evidence of violent revolution, at least as of 1 September which was the critical date in terms of the determination. It was decided that the events might more comfortably be described as a “riot” or “civil commotion” rather than an “insurrection”.

The Financial Ombudsman Service upheld Mr B’s claim.

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Accident Insurance
The dispute arose from a claim made on behalf of the applicant, a 17 year old school boy, who allegedly suffered a severe asthmatic attack as a result of exposure to chemicals during the school’s musical production following the operation of a ‘fog machine’ and exposure to other allergens. As the applicant had previously been diagnosed as an asthmatic, the issue arose as to whether he sustained an injury as covered by the policy.

In applying relevant case law, the Panel found that the injury was indeed suffered by violent external and visible means. The Panel decided that the inhalation of fumes from the fog machine and other fumes, satisfies that definition of injury in the same way as exposure to dust and other pollutants. In this regard, the Panel applied a High Court decision where the Court held that the addition of these words to the definition of injury means "no more than to draw attention to the distinction between the injury suffered and the means by which it was caused”.

The next critical element considered by the Panel was whether the injury had been suffered independently of any other cause. This was a difficult issue for the Panel because the applicant had previously suffered from asthma, although the condition was under control with the use of medication. In other words, the evidence was that the applicant functioned without difficulty in terms of leading an active life, prior to the incident giving rise to the claim, albeit with the use of medication when required.

Whilst the Panel was satisfied that the applicant had an increased propensity to suffer an asthmatic attack than other persons, this of itself was not a separate cause of the injury. The Panel stated that if the applicant had been actively suffering from asthma at the time of the exposure to the allergens, a different result may have ensued. However, the Panel was satisfied that in the particular circumstances of this case, there was only one cause of the injury which had been described above. The Panel therefore determined the dispute in favour of the applicant.

The Panel has also had to deal with disputes requiring determination as to whether the policyholder’s claim was excluded by virtue of a pre-existing medical condition. In several cases recently determined by the Panel, the member alleged that as the individual had an increased propensity to suffer from an illness, they suffered from a pre-existing medical condition. In one case, the person had undergone surgery for a small bowel obstruction in 2003 and required similar treatment in 2008 causing cancellation of a journey. As the member’s medical advisor said the applicant was at a much higher risk of the condition reoccurring than other members of the community, she in effect suffered from a pre-existing medical condition.

However, the Panel rejected this argument on the basis that simply because a person was at greater risk of developing a condition (e.g. a bowel obstruction) than other members of the community, the increased risk factor could not be translated into diagnosis that the person was actively suffering from a pre-existing medical condition, in the same way that the student was entitled to compensation following the severe asthmatic attack notwithstanding his vulnerability in this regard.

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Insurance broker disputes
Case 1: Flood cover for a medical practitioner
The applicant is a medical practitioner providing business services through a company and is a long-standing client of the FSP.

In January 2008, the applicant’s business was relocating to a new address. As a result, the applicant contacted the FSP to ensure appropriate insurance cover was arranged. In addition, the applicant requested flood cover “if not too expensive”.

The FSP arranged insurance cover for the new address. Although it appeared the FSP made some inquiries about flood cover with insurer X, this was not arranged.

During the renewal period of 2010-11, the applicant’s business premises sustained damage as a result of water inundation. X denied the claim due to “flood”. Neither party has disputed X’s decision.

FOS found that because the FSP was specifically instructed to arrange flood cover, the FSP was obliged to give effect to those instructions and if it could not do so, to inform the applicant.

The fact that the FSP supplied a copy of the policy was insufficient because the flood exclusion was a relevant policy exception and the method of communication was not appropriate in the circumstances.

Further, FOS was satisfied flood cover could have been arranged for a reasonable price if the FSP had undertaken reasonable inquiries. Therefore, the FSP was liable for the applicant’s losses, subject to any deductions for additional premiums and excesses that would have been applicable in the alternative policy.

Case 2: Agreed value vs market value
An applicant insured a pleasure craft with the help of a broker (the FSP). The policy was effective from 5 January 2005. The applicant alleged that they instructed the FSP to arrange an agreed value policy of $170,000 which they sought to be amended to $200,000 in December 2006.

The FSP disputed it received these instructions.

The policy that was arranged insured the vessel for market value. This policy was continually renewed up to 2009-10. Following the 2009-10 renewal, the vessel was involved in an accident. It was assessed as a total loss.

The insurer settled the claim for $140,000 based on the vessel’s pre-accident value. The applicant accepted this offer and then pursued a dispute against the FSP for $60,000. The dispute was based on the FSP’s failure to arrange an agreed value policy of $200,000.

Based on the available information, it was accepted that:

  • the applicant’s insurer and another insurer had a fairly substantial share of the pleasure craft insurance market
  • both insurers would have insured the vessel for an agreed value only if a written valuation was provided in support.

After reviewing all the material, FOS found that even if the FSP failed to notify the applicant that the policy did not insure the vessel for an agreed value, the applicant did not suffer loss as a result.

This was because the applicant could not satisfy FOS that they would have been in a position to arrange an agreed value policy of $200,000 at the relevant time given that:

  • the market value of the vessel at the time was only $140,000
  • there was no evidence that the applicant would have been able to source a valuation for $200,000 at the 2007 renewal, or that this agreed value would have been maintained at the relevant renewal. In particular, given the market value of the vessel, it was improbable that a written valuation of $200,000 could have been sourced
  • without a written valuation, the insurers the applicant would have used would have been prepared to offer only a market value policy, which is the policy available at the time.

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Cancellation of instalment contracts
Case 1: Unclear intention expressed
The consumer arranged a policy with the FSP on 1 February 2014. The term was for one year and the parties agreed that the premium would be payable in monthly instalments.

The consumer failed to pay a premium instalment on 1 July 2014.

The FSP sent a letter on 17 July 2014 stating the following:

“As your instalment has not been paid by its due date, under the terms and conditions of your policy, it will be cancelled effective from 1 August 2014.

However, you can still make a payment up until 1 August 2014 to continue this policy cover.”

The FSP relied upon this letter, particularly the first paragraph, as evidence of it exercising its right to cancel the policy.

However, when reviewing the contents of the entire letter, FOS did not accept it contained a clear and unequivocal intention to cancel the contract. This is because the second paragraph contradicted the first paragraph because it stated that the policy would not be cancelled if the premium was paid before 1 August 2014.

FOS’s view was that the contents of the whole letter expressed an intention by the FSP to refrain from exercising any right under the policy until 1 August 2014 passed.

Therefore, the FSP could not rely upon this letter as evidence of an effective cancellation notice.

Case 2: Letter clear and unequivocal
This case is similar to the first except for one difference.

In this case, the FSP sent a letter on 17 July 2014 that contained the following:

“Under the terms of your policy, as your payment has not been paid by its due date, your policy will be cancelled effective from 1 August 2014.

If you would like your insurance cover to continue, please call us on [number] …”

FOS accepted this was a valid cancellation notice because the first paragraph clearly and unequivocally expressed the FSP’s intention to exercise its right to cancel the policy.

Further, the second paragraph did not contradict that first statement. It simply said that if the consumer seeks to have insurance cover, it must contact the FSP.

This could result in the FSP choosing to offer a replacement policy. This is separate to the decision to cancel the existing policy.

In particular, there was no suggestion in the letter that on contacting the FSP, the decision to cancel the policy would be withdrawn.

As a result, the FSP was able to rely on this letter as evidence of exercising its right to cancel the policy. The cancellation took effect on 1 August 2014.

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Section 47
Case 1: Chronic fatigue syndrome (CFS)
The Applicant arranged a travel policy on 20 August 2012. On 10 September 2012, the Applicant was diagnosed with CFS and subsequently hospitalised in November 2012.

The Applicant cancelled the trip and lodged a claim for the costs incurred.

The insurer denied the claim on the basis that the CFS was a pre-existing medical condition.

FOS considered that section 47 operated to prevent the FSP from relying on the policy exclusion on the following basis:

  • The Applicant only first consulted a GP on 28 August 2012.
  • While the Applicant suffered from symptoms, such as lethargy, for 8 months before this, she was attending work and playing regular competitive sport. She also engaged in various other activities.
  • Her symptoms could reasonably be expected to have been associated with her extensive activities, rather than a particular medical condition.

Based on the above FOS, did not accept that the Applicant was aware of, or a reasonable person in her circumstances could have been expected to have been aware of, the CFS before the policy was issued.

Case 2: Recurring sickness
A life insurance policy was issued to the Applicant and her partner on 13 December 2006. On 11 February 2012, the Applicant lodged a claim as a result of her partner’s death a month before.

The insurer denied the claim on the basis the death arose due to a pre-existing condition, namely a grade 3 anaplastic oligodendroglioma. FOS was satisfied the illness that resulted in the husband’s death was related to that pre-existing condition.

The Applicant argued neither she nor her husband were aware of the condition. This is because they did not receive the diagnosis until 22 December 2006, being over a week after the policy commenced.

However, the following had been undertaken by the Applicant’s husband prior to the contract being entered into:

  • He visited his general practitioner (GP) on 4 December 2006 presenting with symptoms including an inability to complete sentences, disorientation, and lack of motivation and memory lapses.
  • He undertook a CT scan later that day on the GP’s instruction – the result was the identification of a 6cm lesion.
  • On 12 December 2006, he had the lesion surgically removed.

In context of the timing, the symptoms suffered and the degree of medical consultations and procedures undertaken, FOS concluded that a reasonable person in the husband’s circumstances would have been aware of the sickness, even though he had yet to receive the precise diagnosis.

Therefore, section 47 did not assist the Applicant.

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Insurance claim delays
Case 1: FSP did not unreasonably delay repair
The applicant claimed for damage to her motorcycle, which the FSP accepted and authorised its repairer to repair. However, the repairer could not complete the repair for more than a year because:

  • some parts were unavailable locally and had to be ordered from overseas
  • there were delays in the delivery of the parts.

FOS did not consider it appropriate to award compensation in this case because the evidence showed:

  • the FSP did not unreasonably delay the repair
  • the FSP was experiencing a genuine difficulty in sourcing the parts locally
  • the motorcycle was an imported model and its parts were not readily available locally
  • the repairer ordered the required parts from overseas early in the claims process and, in the meantime, painted most of the parts it had
  • the applicant was told that there would be a delay early in the claims process as parts had to be ordered from overseas.

Case 2: Applicant received compensation after unreasonable delay by FSP
The applicant claimed for damage to her car, which the FSP accepted and authorised its repairer to repair. However, the repairer did not complete the repair for some 9 months because of:

  • the lack of a wiring harness that had to be ordered from overseas
  • there was a delay in the delivery of the part.

FOS considered it appropriate to award compensation in this case because the evidence showed:

  • the FSP had unreasonably delayed the repair
  • the FSP authorised the repair to its preferred repairer without finding out if the applicant’s preferred repairer or other repairers were able to complete the repair more quickly
  • the FSP did not try to source the unavailable part elsewhere
  • the FSP did not make any reasonable attempts to speed up the repair
  • the FSP gave the applicant several estimated completion dates, although it had no idea when the part would arrive from overseas or the repair would be completed
  • the applicant was overwhelmingly left on her own to pursue the claim
  • the FSP asked the applicant to chase the manufacturer for the part, although it undertook the obligation to repair
  • the vehicle was poorly repaired

The applicant was awarded:

  • compensation for financial losses arising from the FSP’s delay, such as storage cost, subject to her supplying evidence of the loss
  • $3,000 for being subjected to unusual inconvenience, delays and interference with her enjoyment of her car

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Investments, Life Insurance & Superannuation
  1. Superannuation
  2. Stockbroking
  3. Life Insurance
  4. Fixed interest investment
  5. Statements of Advice (SOA)
  6. Inappropriate advice places family deeper in debt
  7. Loss calculation in financial advice

Superannuation and how far the obligation to advise extends

Mr and Mrs D made contributions to a superannuation fund on the recommendation of the member’s employee, a superannuation consultant. Mr and Mrs D were both in their early forties and still working, so the fund was in its accumulation phase. The superannuation rules at the time permitted them to withdraw their contributions without taxation provided they met a condition of release. For this reason, Mr and Mrs D were treating the fund as a short term investment vehicle rather than strictly for retirement income purposes.

Eight years later, changes to superannuation rules meant that a component of Mr and Mrs D’s superannuation contributions would be taxed substantially if it were withdrawn.

Mr and Mrs D complained that the member breached its contractual obligation to warn them of such changes ahead of their operation, and claimed compensation.

The issue in dispute
Mr D alleged that the consultant agreed to advise the consumers into the future and for an indefinite period of changes to the superannuation rules which would prevent them withdrawing their contributions without incurring tax or other penalties. He alleged that the agreement arose by reason of his facsimile to the consultant containing a request to that effect and the consultant’s email reply the same day.

Key findings
The consultant’s reply addressed Mr D’s individual queries of which the request was one and yet was silent as to the undertaking sought. Mr D also alleged that the member’s consultant provided the requested undertaking verbally during a telephone conversation around the time Mr D’s facsimile was sent. However, there was no written confirmation by the member.

The Financial Ombudsman Service found that no agreement to advise arose as a result of the exchange of facsimiles and or the alleged verbal undertaking. It observed that the member’s silence in its email reply was neither indicative of its acceptance or rejection of Mr and Mrs D’s request, and that no legal obligation will be attributed to a person who has not clearly given their assent.

The Financial Ombudsman Service found that there was no ongoing retainer to provide financial advice, Mr and Mrs had not paid any fees for advice, and that there had been no contact between Mr and Mrs and the member during the eight.

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This dispute arose when a retired husband and wife alleged that a stockbroking firm inappropriately advised them to invest a disproportionately large amount of their assets in options trades without disclosing to them the risk associated with such trades. The options trading subsequently resulted in losses to the couple.

At the time of the advice, the Applicants were retirees in their eighties. They had previously dealt with the adviser when he was acting as a representative of a different stockbroker. Prior to becoming clients of the financial services provider, the adviser had recommended the Applicants sell two investment properties and obtain a $125,000 bank loan in order to fund the investments, and that the investments would generate an income of $20,000 per year.

Key findings
The Panel found that the financial services provider had engaged in risky options trades on the Applicants’ behalf, including the use of high risk uncovered calls.

The Panel found that although the financial services provider had provided requisite documents to the consumers explaining the risks of options, such as an ASX explanatory booklet and a Product Disclosure Statement, in the circumstances the financial services provider’s duty of care meant it was required to do more to explain the risks to the Applicants. These circumstances included the inexperience of the Applicants; the relatively complicated nature of options and the fact the trades extended to writing options and the use of uncovered calls; the fact that the financial services provider was engaged in discretionary trading; and the fact that the consumers were funding the trades through a loan.

In addition, the Panel found that the options trades were inappropriate for the Applicants’ needs and circumstances.

The Panel also found that the financial services provider had failed to provide the Applicants with a Statement of Advice. Further, the financial services provider had failed to seek the Applicants’ instructions prior to each trade.

The Panel awarded the Applicants approximately $37,000, being the amount of their losses from the options trading, plus interest. In the circumstances of the case, the Panel did not consider it appropriate to compensate the Applicants for interest paid on their bank loan or brokerage charges.

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Life Insurance

The Applicant's husband held an Accidental Death Plan Policy for $80,000. He had a heart condition. In 2005, he lost consciousness while driving his truck. The truck left the road and drove into a dam, and he died.

The coroner's report stated that his cause of death was consistent with drowning in a man with a heart condition. There were no witnesses to the event.

The issue in dispute
The Applicant made a claim on the policy.  The claim was denied by the insurer on the basis that the he had suffered a heart attack while driving, and this was the effective cause of death.

Heart attack was not covered under the policy as an accidental external event. The Applicant said that the actual cause of death was the drowning.

Key findings
The Panel found that the medical evidence and findings of the Coroner and Forensic Pathologist indicated that the death was as a result of drowning, and not as a result of a heart attack. The medical evidence did not show that the husband had suffered a heart attack prior to driving into the dam and the proximate cause of death was the drowning.

The complaint was upheld and the Member directed to pay the insurance benefit plus interest.

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Fixed interest investment
FOS considered a dispute about advice to invest in a particular managed fund which was marketed as a fixed interest product.

The fund had the following features which made it different from a straightforward fixed interest product:

  • whilst it provided regular payments to investors, the rate of this return was variable
  • the fund manager was investing in Australian and International Equities, as well as having exposure to the US sub-prime market, and could invest in below investment grade assets
  • the fund was neither income nor capital guaranteed
  • the fund had a high gearing ability, as high as 300%, and
  • the fund was governed by Cayman Islands regulations rather than Australian regulations.

The Panel said that the FSP’s recommended asset allocation was made on a generic basis without any real understanding of the product, the product manager’s discretions or the influence of those discretions on the possible outcome of the performance of the product.

The product was classified as a defensive asset when a review of its underlying investments would have shown:

  • it was not a defensive asset
  • the adviser failed to exercise any degree of care with respect to monitoring or understanding the effects of the internal gearing of this product, especially as it related to its overall risk and performance, and

the fund had a mandate which, if exercised, would make it inappropriate for the investor. It may only have been appropriate for an investor under the most favourable conditions, for example, low/no gearing and holding only investment grade assets or the like.

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Statements of Advice (SOA)
The Applicant was a very elderly war widow and had exceeded the life expectancy of an Australian female. Her financial situation was uncomplicated. She received more than enough income from her pension and from a small annuity to meet her needs.

The Applicant received a significant legacy from her sister’s estate. This was the first time she had received a large sum of money. She had previously obtained financial advice about her annuity from a financial adviser, but she was otherwise inexperienced in financial matters.

The Applicant sought financial advice from her regular adviser. She told the adviser that she wanted to top up her annuity with $100,000 and sought her advice about how to invest the balance of the inheritance.

During her discussions with her adviser, the Applicant said she wanted to invest a small amount in her granddaughter’s name, but later she changed her mind because she was concerned about how other family members would view the investment when she passed away and they were dealing with her estate.

The adviser recommended that the Applicant invest the balance of the inheritance in a managed growth fund. The SOA prepared by the adviser stated the investment in the managed growth fund was “not capital guaranteed”, “the balance may fluctuate daily due to changes in unit prices” and there was a risk of capital loss if the Applicant withdrew from the investment early.

The Applicant accepted the advice and made the recommended investment. The investment performed badly and suffered significant losses. The Applicant lodged a dispute with FOS, claiming she did not understand the advice provided to her and the managed growth fund was not an appropriate investment in her circumstances.

We noted that an SOA is a disclosure document that is intended to help a retail client understand advice and decide whether to rely on it. Client understanding of the advice is a critical part of the advice process.

After investigating the case, we drew the following conclusions:

  • The Applicant was inexperienced in financial matters and had very limited knowledge of financial markets and products (as shown by her uncomplicated financial arrangements prior to receiving the inheritance).
  • The Applicant’s primary objective was to leave a legacy for her sons and grandchildren and therefore she wanted to place the money into a secure, capital-protected investment (as shown by her concern about how a proposed investment in a granddaughter’s name would be perceived).
  • The information in the SOA about capital volatility associated with the managed growth fund was generic in nature and was not likely to alert the Applicant to the potential for capital loss. It would have been prudent to put these warnings in language the Applicant was likely to understand.

We found that if the SOA had been expressed in language the Applicant was likely to understand, she would not have made the investment. We ordered the adviser to pay compensation to her.

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Inappropriate advice places family deeper in debt
Mr and Mrs A sought financial advice in 2008 from an authorised representative of the financial services provider (FSP). They were looking to reduce their debt and create wealth, both personally and as trustees for their self-managed superannuation fund (SMSF). Mr and Mrs A had two young children and mortgages on their home and investment property totalling more than $1 million.

The authorised representative, who was also Mr and Mrs A’s tax accountant, provided verbal advice and then asked them to fill in an application form for a series of agribusiness investments in both their personal names and their SMSF, and a leveraged Australian equities fund for the SMSF. Only after they had taken these steps did the authorised representative provide Statements of Advice.

After the investments were made, Mr and Mrs A’s personal portfolio comprised 56% direct property and 44% agribusiness, and their SMSF had 79% in the leveraged equities fund and 21% in agribusiness.

The agribusiness investments, in aquaculture and nuts, increased their debt significantly but provided tax benefits. The leveraged equities fund later failed but Mr and Mrs A received about $40,000 of their initial investment of $70,000.

Mr and Mrs A’s combined salaries fell after the first year, and they began struggling to make the required repayments. Eventually, they had to sell their investment property.

In 2013-2014, they brought a complaint to FOS against the authorised representative’s FSP.

The FSP originally contested liability but as the case progressed, it focused on the amount of loss compensation.

FOS found that:

  • the risks associated with the investment advice were not adequately disclosed
  • the applicants could not afford the investments given their debt levels and other financial commitments
  • their investment goals and objectives could not be achieved, and
  • the investment portfolio was not diversified.

FOS recommended that Mr and Mrs A’s losses from the investments be reimbursed. These losses, after tax benefits, were calculated at $206,000 (personal) and $162,000 (SMSF).

The recommendation was accepted by both parties.

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Loss calculation in financial advice
Mr & Mrs Smith were both in their early 60s and had received an inheritance of $1,000,000. In early 2006 they sought advice from a financial services provider (FSP) about how to invest this money. The FSP recommended Mr & Mrs Smith each invest $500,000 in allocated pension accounts and advised them to invest 90% in growth investments and 10% in defensive investments.

The allocated pensions initially performed well, but the global financial crisis caused capital losses. Concerned about the poor performance of their investments, in October 2008 Mr & Mrs Smith withdrew $340,000 and $315,000 respectively, incurring capital losses of $160,000 and $185,000. Mr & Mrs Smith complained about the FSP’s advice. They said that they believed they had invested 40% in growth investments and 60% in defensive investments, and were shocked to learn they had in fact been invested 90% in growth investments and 10% in defensive investments.

Mr and Mrs Smith lodged a dispute with FOS. We considered that the FSP’s advice was inappropriate because it exposed Mr & Mrs Smith to a greater level of investment risk than they were prepared to take on. We said that the amount of the loss suffered should be measured by comparing Mr & Mrs Smith’s actual net position as at October 2008 (when they withdrew the money) with the net position they would have been in as at October 2008 if they had received appropriate advice.

Based on all the information, we considered Mr & Mrs Smith would have invested in a moderately conservative allocated pension accounts with 40% growth 60% defensive investments. So we compared the difference between the inappropriate 90% growth, 10% defensive investments and the appropriate 40% growth, 60% defensive investments as at October 2008. The comparison showed that Mr Smith had lost $35,500 and Mrs Smith had lost $45,000, and we determined that the FSP should pay this amount of compensation.

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