This article summarises new systemic issues that we identified during the March quarter of 2014 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 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
Several disputes raised concerns about the financial services provider’s (FSP’s) policies for dealing with customers in financial difficulty. In particular, we were concerned at the FSP’s apparent inability to vary a regulated credit contract when a customer in financial difficulty requested a variation (as permitted by section 72 of the National Credit Code). We were concerned that the FSP’s systems did not allow for best practice compliance with section 72.
The FSP confirmed that if a customer was experiencing hardship and wished to reduce the contractual amount payable under the remaining loan term, he or she must re-finance. This process involves satisfying the FSP’s usual lending criteria as well as paying an establishment fee. We told the FSP that we remain concerned about its practices and sought further information about its system limitations.
We also became aware of a known error with the FSP’s automated telephone collections system, where staff do not follow the correct process when recording the appointment of an authorised representative on its systems. The error results in direct contact with the customer. We told the FSP that we consider this represents a definite systemic issue and have also noted that there is little guidance available for staff about their obligations under the FSP Guidelines.
Inappropriate charging of fee
In one dispute, the Applicants complained that enforcement costs charged by the FSP following default on their home loan were excessive. The dispute was the subject of a Determination by the Ombudsman. While the Ombudsman expressed the view that the legal costs were reasonably and properly incurred, he noted that the FSP had passed on the entire amount of GST even though it was entitled to claim a rebate through a Reduced Input Tax Credit (RITC). This is because debt recovery services qualify for an RITC of 75% of the GST which has been paid by the FSP on invoices rendered by its own supplier for those services. The Ombudsman stated it was his view that it would not be fair and reasonable in all the circumstances for the FSP to pass on the entire amount of the GST where it would be entitled to an RITC.
We therefore wrote to the FSP to tell it the Ombudsman was concerned that its failure to account for the RITC entitlement in the Applicants’ case may be representative of its general accounting practice in this area and could therefore have financially disadvantaged a wider class of customers.
Possible Systemic Issues
Trends and common issues under investigation as possibly systemic during the March quarter include:
- Improper Collection Activity, in particular while a dispute is open with FOS.
- Policies for dealing with customers in financial difficulty.
- Conduct of employees and authorised representatives, in particular regarding the management of personal superannuation funds.
- Processing errors, such as apparent errors in direct debit arrangements and the process for managing lost cheques.
- Disclosure of account operation and features. In particular, one new matter was raised for investigation during this quarter regarding an account daily limit operation.
- Inappropriate charging of a fee regarding the proper accounting for any Reduced Input Tax Credit entitlement.
- Compliance with the National Credit Code and providing loans that may circumvent the interest rate cap in New South Wales.
Compliance with paragraph 13.1 of the Terms of Reference
We have noticed an increased trend in referrals of possible systemic issues relating to FSPs’ compliance with paragraph 13.1 of the FOS Terms of Reference, which deals with collection activity. To read more about this issue, please click here.