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Issue 18 - August 2014

Systemic Issues update


This article summarises new systemic issues that we identified during the June 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 June 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
Content of default notice

A number of disputes involving linked financial services providers (FSPs) highlighted that the group of FSPs was issuing default notices that did not comply with various provisions in the National Credit Code (NCC). The FSPs told us that they agreed the default notices in use prior to May 2013 did not meet the requirements of the NCC, specifically sections 88(3)(e), 88(3)(f), 88(3)(g), 88(3)(i),and 93(1).

The group of FSPs said that they had incorrectly default listed a number of customers and repossessed vehicles on the basis of these non-compliant default notices. We therefore considered the matter was a definite systemic issue.

Compliance with National Credit Code

We received a number of disputes relating to an FSP’s conduct when it provided short term, small amount credit contracts to consumers in New South Wales. Following our review of the disputes, we contacted the FSP to raise concerns about whether the FSP had acted in breach of the National Credit Act or in breach of a duty or obligation otherwise owed to a consumer when it provided credit to its customers. In particular, we looked at the inclusion of a non-NSW borrower for the purpose of avoiding the applicable interest rate cap (48%) which applies to credit contracts governed by NSW legislation.

Policies for dealing with customers in financial difficulty

We considered a number of disputes regarding the FSP’s collection activity against customers in financial difficulty. We looked at whether the FSP was engaging in improper collection activity by entering default listings when it was aware that customers had made applications for the release of superannuation funds.

The FSP confirmed that it did not have a formal policy regarding credit listing customers when it is aware that they have made an application to the relevant government department for the release of their superannuation funds. Instead, the FSP explained that its approach was to continue with collection activity until the funds are received.

In FOS’s view, a default listing should not have been entered when the FSP was aware that an application had been made for the release of superannuation funds, particularly as at it knew when it made the listing that the outcome of the application was unknown. For this reason, we considered the matter was a definite systemic issue.

Processing error

A dispute illustrated that the FSP had failed to contact a customer for four years despite no payments being received during that time. We were concerned that the system error which caused this failure may have impacted other loan account holders.

The FSP told us that it had detected an internal system issue indicating that where a billing cycle became ‘corrupted’ it would not record or take any action in relation to arrears or overdue payments. This was despite repayments not being made for what could be years at a time. We considered this a definite systemic issue.

Intention to recover FOS costs from applicant

A dispute illustrated that, in circumstances where an FSP had appointed solicitors to manage legal proceedings against the applicant, the FSP had passed on to the applicant the legal costs it incurred for work conducted in responding to the dispute. There was also some concern that the FSP had not ceased all enforcement activity and therefore had breached clause 13.1 of FOS’s Terms of Reference.

We are concerned that such costs have also been passed on to other customers, causing them loss.

Compliance with EFT Code

A dispute illustrated that the FSP’s initial response to a customer’s unauthorised EFT transactions claim (to which the ePayments Code applied) appeared to have relied on the fact that the card and PIN transaction was successful on the first attempt as the only evidence to indicate that, on the balance of probabilities, the user contributed to the claimed loss. The FSP had denied reimbursement of the disputed transaction amount on the basis of clause 11.2(a) of the ePayments Code. However, the FSP had not provided in its Decline Notice reference to any other information or documentation it relied on when it declined the claim, apart from the fact that the card and PIN transaction was successful on the first attempt.

On the basis that we did not consider that the Decline Notice complied with the ePayments Code requirements and given the FSP’s statement that the Notice, or a form similar to it, had been sent to other customers, we told the FSP that we consider the matter to be a definite systemic issue.


Possible Systemic Issues
Trends and common issues under investigation as possibly systemic during the June quarter include:

  • Improper collection activity, particularly while a dispute is open with FOS.
  • Policies for dealing with customers in financial difficulty.
  • Conduct of employees and authorised representatives.
  • Processing errors, such as whether processes for releasing pre-authorisations were subject to unreasonable delay and/or caused a wider group of customers financial difficulty or loss.
  • Error in credit listing, for example placing on a customer’s credit file a default listing relating to a debt the FSP had previously told its customer had been assigned to a third party. Also, placing a default after judgment had been obtained.
  • Inappropriate charging of a fee, particularly relating to over-limit fees on accounts entered into after July 2012.
  • Compliance with the NCC and providing loans that may circumvent the interest rate cap in NSW.
  • Disclosure of terms and conditions such as the cancellation of alleged scalped trades.
  • Policy interpretation, in particular the calculation of income protection benefits using the lower paying position performed by the policyholder when on light duties and not the original occupation.
  • Intention to recover FOS costs from applicants.
  • Compliance with responsible lending provisions of the National Consumer Credit Protection Act (NCCP), particularly the policies and procedures relating to home lending, such as suitability of breaking a fixed rate loan and re-financing of existing loans.
  • Mistaken internet payment (process).
  • Compliance with ASIC’s Regulatory Guide 165 EDR obligations.


Positive outcomes from rejected systemic issues
Sometimes we investigate issues that are ultimately determined to be not systemic, but the investigation may result in a change to an FSP’s process or a comment from the relevant Lead Ombudsman about an industry practice. Some of the positive outcomes from rejected systemic issues this quarter include:

  • Amendments made to the covering letter sent to customers wishing to fix a loan to ensure consistency between the letter and the FSP’s internal processes for time frames to fix.
  • Even though the FSP confirmed that the dispute giving rise to the systemic issue investigation was a one-off, it is using this dispute as an example in its training of all customer relations managers to ensure that customers’ requests for hardship assistance are dealt with in conjunction with a referral to the insurer to see if the claim is eligible under a linked insurance policy.
  • An FSP will amend its complaint handling procedures to include content reflecting FOS Circular 8 (ensuring FOS costs are not recovered from customers). It will also train its staff to remind them of this obligation.
  • An FSP enhanced its processes and procedures for when an adviser leaves, and confirmed it would review customers affected by the one-off error and, if necessary, reimburse fees paid for a service not delivered.
  • An FSP revised its complaints policy and procedures to include a specific notation to ensure that no costs relating to an approach to the IDR procedure or FOS are passed on to complainants.
  • An FSP took steps to remind all relevant staff that scheme timeframes are not a cause for declining a disputed ATM transaction.
  • One FSP is in the process of reviewing and, where necessary, amending the reference to its withdrawal limit included in the template documents sent out with customer replacement debit cards.
  • Following review of its current internal processes and procedures, one FSP has put in place new systems and conducted refresher training of IDR/EDR staff to ensure that it complies with EDR obligations and responds to FOS requests for information properly and within appropriate time frames.
  • One FSP has amended its internal procedures so that the requirement to consider assistance from a single borrower is explicit and clear to all relevant staff.