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Systemic Issues update


This article summarises new systemic issues that we identified during the December 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, a summary of the possible systemic issue investigations for the December 2012 quarter and some positive outcomes from matters that we investigated but ultimately considered were not systemic.

The FOS process for identifying and resolving systemic issues was outlined in Issue 4 of the 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

Policies for Dealing with Customers in Financial Difficulty (A)

We received a dispute in which the Applicant had experienced a change in her personal and financial circumstances and was unable to make the payments required under her home loan. She had contacted the financial services provider (FSP) to request hardship assistance, but the request was not approved and the FSP did not allow a variation to her contract. The Applicant continued to fall behind in her payments and the FSP commenced recovery proceedings.

As part of our investigation into the dispute, we asked the FSP to provide a complete copy of its policies and procedures relating to financial difficulty. After reviewing this document, we were concerned about whether the policies and procedures for dealing with customers in financial difficulty met the requirements of section 72 of the National Credit Code (NCC) and clause 25.2 of the Code of Banking Practice (CBP). In this regard, we noted that the definition of ‘hardship’ focused strongly on the FSP’s apparent requirement that there should be reasonable cause for a customer’s financial difficulty. We were concerned that by focusing on ‘reasonable cause’ for hardship, the FSP may not be providing assistance to customers whose financial situation may be the result of poor choices and budgeting. If this were the case, the FSP would not be meeting the standards set out under clause 25.2 of the CBP.

The FSP then submitted a more comprehensive document than the one it originally gave us, and told us that it did not consider the matter represented a definite systemic issue. The FSP said that identifying financial difficulty and complying with both section 72 of the NCC and clause 25.2 of the CBP was embedded in its procedures. The FSP sent us information about the training materials it provides to staff and identified the number of hardship requests it had received and approved in the previous twelve months.

We reviewed this information and encouraged the FSP to adopt a ‘best practice’ approach to meeting our expectations regarding dealing with customers in financial hardship. We confirmed that it may not be appropriate to reference a prescriptive list of causes when assessing hardship requests from customers, which appeared to be the procedure outlined in the FSP’s hardship policy document. We also expressed concern that the FSP would not give hardship assistance if two restructures had previously been arranged; this is particularly important in the case of long-term loan products.

We also reviewed the FSP’s approach to loans where lender’s mortgage insurance was held. In this regard, we had concerns that the decision to approve hardship assistance was being referred to the insurer, who required an extensive list of supporting documentation. Such a practice would not comply with the FOS approach that we set out in Circular 5 which advised that such a requirement would be considered a barrier to providing hardship assistance.

As a result, we told the FSP that we considered the matter represented a definite systemic issue and requested that it consider amending its hardship policies and procedures. We asked it to clarify whether it defers its hardship assistance decision making to the entity underwriting its lender’s mortgage insurance. The FSP was also asked to undertake to consider applications for hardship assistance in accordance with our view of best practice in the field of dealing with customers in financial difficulty.

Policies for Dealing with Customers in Financial Difficulty (B)

The Systemic Issues team reviewed a number of disputes which related to the FSP’s response to customer requests for financial difficulty assistance that were made between 1 January 2010 and 1 October 2010. In particular, we asked the FSP to explain a number of instances where it had proceeded to perform direct debit transactions on the customer’s nominated third party account despite having being told that the customer would not, or may not, have sufficient funds in the account to meet the direct debit transaction.


The FSP told us that it did not have a documented hardship procedure in place until mid 2010. It also said that it had received a substantial number of complaints from its customers in relation to its response to the customers’ requests for financial difficulty assistance.

We concluded that during the period 1 January 2010 to 1 July 2010, the FSP’s policies and procedures for dealing with customers in financial difficulty did not accord with good industry practice and did not give genuine consideration to the customers’ requests for assistance in financial difficulty. We therefore considered that this matter did represent a definite systemic issue, insofar as it related to the FSP’s policies and procedures during the period 1 January 2010 to 1 July 2010.

Policies for Dealing with Customers in Financial Difficulty (C)

We received a number of disputes that highlighted an apparent policy of the FSP not to provide hardship assistance to one party to a joint debt if that party is estranged from the other borrower.

The FSP confirmed that its usual practice is to consider a request for hardship from only one borrower, and it provided us with a copy of its policy regarding hardship requests. The process for dealing with only one borrower was not specifically documented, but the FSP highlighted that neither was it specifically stated that all parties must be engaged in the process and part of the application in order for it to be assessed. The FSP said that it would update its document to be more specific about this type of request. As the previous policy was unclear and could have affected a wider class of customers, we confirmed that the matter was a definite systemic issue.

An additional issue highlighted by another FOS dispute was also raised with the FSP regarding the practical application of its policy for assessing a debtor’s financial difficulty. The dispute highlighted that the FSP said it required a completed application and supporting documentation from debtors before it would consider providing assistance, otherwise it would refuse to consider a hardship request.

Processing Error

An Applicant lodged a dispute with us about a number of processing errors in their salary continuance policy. After a few years of accruing benefits under the policy, the Applicant’s employer requested that the FSP make payments directly to the Applicant. This meant that the FSP needed to deduct tax from the benefit and therefore produce a Group Certificate to satisfy the Applicant’s Pay As You Go (PAYG) requirements.

The Applicant had been corresponding with the FSP over numerous errors that had occurred since he started accruing benefits, including incorrect payments and missing superannuation fund payments. The FSP conceded it had not correctly paid the Applicant’s benefits under the policy, mainly due to its incorrect annual application of rates of change in CPI. The FSP also made errors when it introduced a new system which resulted in miscalculations in the superannuation benefit, and there were errors in some of the Applicant’s PAYG Group Certificates.

We raised these matters with the FSP as a possible systemic issue. The FSP’s response satisfied us that some of the issues were one off and/or human errors; however, the Ombudsman considered the following to be definite systemic issues, as the issues affected a wider class of customers than just the Applicant:

  • CPI calculation errors prior to the introduction of an automated process, and
  • the FSP’s failure to both follow its unpresented cheques policy and to reissue the cheques.

Improper Collection Activity

We received a number of Disputes where an FSP had commenced legal proceedings in New South Wales against applicants who resided in other states. This is in breach of regulation 36 of the National Consumer Credit Protection Regulations 2010 (Cth). We wrote to the FSP, requesting a copy of its documented approach to determining the jurisdiction for issuing debt recovery proceedings.

The FSP confirmed that it had issued court proceedings in New South Wales without first having regard to where the debtor resides. This was due to the FSP’s mistaken belief that its contracts contained a jurisdictional clause allowing this practice. The FSP told us how many incorrectly lodged and incorrectly enforced judgements had occurred since 1 July 2010 and the matter has been considered definitely systemic. The FSP is now taking steps to identify affected customers and resolve the 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 refraining from proceeding to process a direct debit.
  • Whether an FSP had 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.
  • Final decision letters that do not refer to EDR.
  • Continued apparent errors in credit listings.
  • Issues of policy interpretation.
  • Continued apparent issues in dealing with customers in financial difficulty.

Trends and common issues under investigation as possibly systemic that were new for the December quarter include:

  • Conduct of employees or authorised representatives.
  • Deduction from claim funds in error.
  • Inappropriate complaints handling procedures.
  • Inconsistent product documents.
  • Provision of PDS documentation.
  • Compliance with ‘Know Your Client’ obligations.
  • Error in credit listings.
  • Policies for dealing with customers in financial difficulty.
  • Failure to advise about FOS.
  • Inappropriate cancellation of policies.
  • Inaccurate closure of credit card.
  • Adequacy of balance transfer system.
  • Improper collection activity.
  • Recognition of Grant of Letters of Administration.
  • Limitation of account (third party use).
  • Policy interpretation.
  • Delay in availability of asset causing loss.
  • Incorrect application of interest rate to credit card.


Positive outcomes

Sometimes we investigate issues that are ultimately determined to be not systemic, but the investigation may involve a change in process or a comment from the Ombudsman about an industry practice. For example, in the December 2012 quarter:


  • A number of FSPs amended their policies in relation to section 94 of the National Credit Code to clarify procedures for the timeliness of responses when concerns are held for the authenticity of an Applicant’s signature.
  • An industry-wide issue relating to Visa authorisations being taken off accounts early (leading to funds being made available to people in error who may then as a result lose access to 90% of their Centrelink benefits) was found to be in breach of the Centrelink Code.
  • An FSP made modifications to its internal computer systems to ensure that a clerical error relating to the cessation of an interest charge would not recur. This involved modification of account access for staff.
  • An FSP revised its processes to ensure that collection activity ceases during FOS disputes.
  • FSP staff members were retrained regarding the correct process for removing guarantors from a particular loan product.
  • As a result of possible systemic issue correspondence and a meeting with FOS, an FSP put in place new policies, procedures, staff members and systems to ensure its agents provide FOS responses on time.
  • Following a possible systemic issue investigation, we were satisfied that the relevant terms of an ASIC Enforceable Undertaking had been amended, with ASICs approval.
  • While in one case the Ombudsman determined that there was no definite systemic issue, we put forward the view that the FSP should include examples in its underwriting guidelines of instances where it is appropriate to seek to reduce the level of cover under a motor vehicle policy.