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Systemic Issues Update


This article summarises new systemic issues that we identified during the September quarter of 2012 and reported to the Australian Securities and Investments Commission (ASIC). It also provides an update on some current and recently resolved systemic issue investigations.

The FOS process for identifying and resolving systemic issues was outlined in Issue 4 of The Circular. The process is in line with our obligations to ASIC.

To learn more about our approach to systemic issues, you can do our online training module.

New Definite Systemic Issues

Error in Credit Listings

A dispute that had come to us showed that the financial services provider (FSP) had listed an amount equivalent to the accelerated amount of a debt and had not waited till it was 60 days overdue, thus depriving the applicant of the opportunity to remedy the default listing prior to it being made.

We asked the FSP to provide us with copies of its policies and procedures regarding credit listings. We also asked it to review whether there had been any other instances where listings had been made for debts that were not 60 days overdue.

The FSP told us that it considered there was ambiguity in the relevant provisions of the Privacy Act 1988 (Cth) but that it was willing to adapt its processes to reflect FOS’s interpretation of the law, which was set out in our Banking & Finance Bulletin 57. The FSP confirmed that from 2007 to 2012 it had made 4340 default listings for debts that were not 60 days overdue (according to the timelines set out in Bulletin 57).

We confirmed that the matter represented a definite systemic issue. This was because the FSP acknowledged that a number of customers had been affected by the FSP’s approach – not just the applicant who brought their dispute to FOS.

Policy Interpretation (Case A)

FOS issued two Determinations in relation to the FSP’s pet insurance policy. In both cases, the FSP had denied claims for veterinary expenses on the basis that the respective medical conditions were pre-existing. Both disputes were determined in favour of the applicant.

The FOS decision-makers commented that the FSP had considered the conditions were pre-existing not because there was a medical link but because the policy purports to artificially link medical conditions together by the form of its words. For example, in the first case the FSP argued that both conditions affected the ear, even though they were different conditions. In the second case, the FSP argued that both conditions affected the skin, but they were in fact different conditions.

The FSP relied on its policy wording – in particular the definition of the term “Condition”. It also stated that, as the law allows an insurer to identify the cover it wishes to provide in the policy, it is common practice for insurers to insert definitions of particular terms in their policy that may not accord with the insured’s common understanding of the term. It nevertheless advised us that it was prepared to update the policy wording to address the concerns we had raised .

We advised the FSP that our main concern was the policy definition of the term “Condition” and its reliance on this definition in the absence of supporting medical evidence that suggested an animal's medical problems were pre-existing conditions. 

Policy Interpretation (Case B)

We contacted an FSP regarding apparent errors made in disclosing and interpreting life insurance policy values. The FSP investigated the policy and confirmed that it had discovered an error, and that it would report this to ASIC. In brief, the error stemmed from a rounding error when customers sold units of the investment element of their policies. The FSP told us that this rounding error resulted in disclosure errors of up to a dollar in around 20% of customers’ annual investment statements.

Based on the information provided, we therefore considered the matter to be definitely systemic.

Misleading Conduct

We were alerted to a possible systemic issue in relation to documentation issued as part of an FSP’s mortgage investment scheme in which money was loaned to third party borrowers so that they could develop properties. A dispute had been lodged at FOS when the loan went into default and notices of default were issued.

The dispute was determined in the applicant’s favour, with the Panel determining that the FSP’s promotion of the mortgage investment scheme was misleading. In particular, the Panel noted that the PDS and the Specific Proposal provided by the FSP did not comply with its disclosure obligations under the Corporations Act 2001 (Cth), and also breached provisions of ASIC’s Regulatory Guide 144 by not containing information about the value of the property to be mortgaged.

We asked the FSP for more information about the number of customers who had invested in the mortgage investment scheme and had been provided with the PDS and Specific Proposal, as well as the total sums invested. We also requested information about how many complaints had been received from customers and how these had been resolved.

An additional similar dispute was then also decided by FOS in the applicant’s favour. Following receipt of the FSPs response and the details of the additional similar dispute, we informed the FSP that we considered its failure to comply with its disclosure obligations represented a definite systemic issue. Our view, which was reflected in the Determinations, was that the FSP had not met the requirements outlined in section 1013B of the Corporations Act, and that lodging a PDS or Specific Proposal with ASIC was not indicative of ASIC’s approval of such documents. In this regard, we referred to ASIC Regulatory Guide 168.

Improper Collection Activity

We received three separate complaints from applicants who had legal proceedings issued against them in New South Wales when the debtors resided in different states. This is in contravention of Regulation 36 of the National Consumer Credit Protection Regulations 2010 (Cth). We therefore wrote to the FSP to enquire about its process for issuing legal proceedings.

The FSP confirmed that its current process is to only enforce credit contracts via the New South Wales court system against debtors who reside in New South Wales. However, the FSP identified nine instances where a breach of Regulation 36 occurred when enforcing consumer credit contracts entered into after 1 July 2010.

The FSP told us that it had provided refresher training to staff and enhanced its monitoring process, and is satisfied the errors will not continue. With regards to the nine debtors pursued in breach of Regulation 36, the FSP said it would assess any potential disadvantage to the debtors resulting from the breach, and would consider what might be done to remediate on a case-by-case basis.

As there were nine instances where proceedings had been brought against a debtor outside of their place of residence, we considered this to be a definite systemic issue.

Failure to Advise About FOS

An applicant lodged a dispute with FOS after they made a transfer via the FSP to a third party’s account held with a bank outside Australia. The applicant said the FSP reversed the transfer almost immediately after it was made, and the applicant was seeking the reimbursement of the amount remitted.

As part of our investigation of the dispute, we reviewed the FSP’s website. This review indicated that the website provided details of the FSP’s internal dispute resolution process; however, it did not provide information about FOS as the external dispute resolution scheme available to customers.

During the course of the dispute investigation, the FSP told us that there were no terms and conditions in place governing the applicant’s remittance, and that the Remittance Request form available to customers on their website did not contain any terms and conditions.

We wrote to the FSP and asked for information to confirm whether it was complying with its obligations to refer customers with unresolved disputes to FOS, and to provide a PDS and terms and conditions to its customers.

The FSP has confirmed that it now provides contact details for FOS on its website, and provides its amended terms and conditions to customers when they make a remittance request. Because the FSP confirmed that there was an issue with informing customers about FOS and the applicable terms and conditions, we considered it was a definite systemic issue.

Possible Systemic Issues

Trends and common issues under investigation as possibly systemic include those that are carried forward from previous quarters such as:

  • Reviewing policies for dealing with customers in financial difficulty, including issues such as not processing direct debits when an FSP is on notice that a customer is in financial difficulty (and the direct debit might be dishonoured).
  • Whether an FSP has complied with its legal obligations to take reasonable steps to ensure that its authorised representatives comply with relevant financial services laws, such as the classification of an investor or the provision of sufficient or appropriate information to an investor.
  • Whether an FSP has complied with its duty of utmost good faith: its policy appeared to provide that the insured was obliged to provide a costly repair quote before it would even assess liability for the claim.
  • Whether an FSP had provided appropriate notice to customers at the time they entered a mortgage income fund that the FSP could unilaterally suspend withdrawals.
  • Final FSP decision letters that do not refer to EDR.

Trends and common issues under investigation as possibly systemic that are new this quarter include:

  • Continued apparent errors in credit listings.
  • Processes for compliance with section 94 of the National Consumer Credit Protection Act 2009 (NCCP).
  • Possible processing errors.
  • Issues of policy interpretation.
  • Compliance with an ASIC Enforceable Undertaking.
  • Continued apparent issues in dealing with customers in financial difficulty.
  • Improper collection activity while a dispute is with FOS.