This is a collection of case studies that have appeared elsewhere in this edition of the Circular. It includes the case studies from the FOS Approach document that demonstrates our approach to the 2013 Code of Banking Practice. You can read more about our approach to this and other issues by visiting www.fos.org.au/approach. More case studies are available on our website at www.fos.org.au/casestudies.
Chargebacks - 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.
Chargebacks – 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.
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.
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.
Closing a consumer'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.