This is a collection of case studies that have appeared in our 2013-2014 Annual Review. You can read more about our approach to a variety of issues by visiting www.fos.org.au/approach. More case studies are available on our website at www.fos.org.au/casestudies.
Online application leads to responsible lending dispute
An applicant’s online credit card application approved by a financial services provider (FSP) accepted income and expenditure figures provided by the applicant without any form of reliability testing, according to a determination by FOS.
The dispute centred on whether the FSP breached its responsible lending obligations under the National Consumer Credit Protection Act when it issued the credit card to the applicant with an $8,000 limit.
In October 2012, the applicant completed the application form and said that per month, she earned $2,500 after tax, had income of $1,500 from other sources and $1,951 in expenses including rent.
But the Ombudsman found that she did not have any regular income when she applied for the credit card, and the credit card had caused her financial hardship.
The determination said that the under the National Consumer Credit Protection Act, an FSP must make reasonable inquiries and take reasonable steps to check the information provided by consumers in their loan application. “As a minimum, the FSP should obtain documents to check the consumer’s ability to repay the loan,” the Ombudsman said.
The Ombudsman found that the applicant held a transaction account with the FSP at the time she applied for the credit card. The account did not reflect a regular source of income and this was one of “many discrepancies in her application form which should have raised alarm bells”.
In February 2013, the balance of the credit card exceeded the approved limit, and in March 2014 the balance was $8,475 in arrears.
The FSP acknowledged that it had automatically approved the application based solely on the figures provided, but said the application included questions about whether she had experienced difficulty in repaying loans in the previous two years and whether she anticipated any changes in her employment, income and expenses in the following 12 months. She had answered ‘no’ to both these questions.
The Ombudsman said the FSP had not shown that its automatic system was sophisticated and had otherwise failed to make reasonable inquiries about whether the applicant could repay the credit card debt without substantial hardship. The Ombudsman said that while it appeared the applicant provided incorrect information about her financial position, it was not appropriate for FOS to reduce any compensation it may award.
“In the case of credit contracts regulated by the National Consumer Credit Protection Act, we generally consider that the FSP should compensate the consumer for their entire loss, even if the consumer is partly responsible,” the Ombudsman said.
The Ombudsman determined that the FSP should not have provided the applicant with any credit because she did not have demonstrated capacity to make repayments.
On that basis, the Ombudsman found that the FSP should not have collected interest or fees on the credit provided. The FSP was required to reduce the balance owing to $5,541, which reflected only the purchases the applicant had made.
Inappropriate advice places family deeper in debt
Mr and Mrs A sought financial advice in 2008 from an authorised representative of the financial services provider (FSP). They were looking to reduce their debt and create wealth, both personally and as trustees for their self-managed superannuation fund (SMSF). Mr and Mrs A had two young children and mortgages on their home and investment property totalling more than $1 million.
The authorised representative, who was also Mr and Mrs A’s tax accountant, provided verbal advice and then asked them to fill in an application form for a series of agribusiness investments in both their personal names and their SMSF, and a leveraged Australian equities fund for the SMSF. Only after they had taken these steps did the authorised representative provide Statements of Advice.
After the investments were made, Mr and Mrs A’s personal portfolio comprised 56% direct property and 44% agribusiness, and their SMSF had 79% in the leveraged equities fund and 21% in agribusiness.
The agribusiness investments, in aquaculture and nuts, increased their debt significantly but provided tax benefits. The leveraged equities fund later failed but Mr and Mrs A received about $40,000 of their initial investment of $70,000.
Mr and Mrs A’s combined salaries fell after the first year, and they began struggling to make the required repayments. Eventually, they had to sell their investment property.
In 2013-2014, they brought a complaint to FOS against the authorised representative’s FSP.
The FSP originally contested liability but as the case progressed, it focused on the amount of loss compensation.
FOS found that:
- the risks associated with the investment advice were not adequately disclosed
- the applicants could not afford the investments given their debt levels and other financial commitments
- their investment goals and objectives could not be achieved, and
- the investment portfolio was not diversified.
FOS recommended that Mr and Mrs A’s losses from the investments be reimbursed. These losses, after tax benefits, were calculated at $206,000 (personal) and $162,000 (SMSF).
The recommendation was accepted by both parties.
Systemic issue - errors in credit listings
Several instances of incorrect credit listings identified during the FOS dispute process were found to be systemic issues in 2013-2014.
In one instance the FSP entered a default listing on the applicant’s personal credit file for an amount that was not 60 days overdue.
FOS examined the default notice sent to the applicant and found that it was not compliant with the relevant section of the National Credit Code because it did not comply with the strict requirement to provide specific information about the debtor’s rights.
We asked the FSP to provide its policies and procedures for entering credit listings, to comment on concerns that its default notice was not compliant, to confirm how many listings had been made in the previous five years, and to review any listings made for amounts that were not 60 days overdue.
The FSP told FOS that its default notice did not meet the requirements of section 88 of the National Credit Code and that about 70% of the credit listings had been entered in error. As a result of the investigation, the FSP removed or amended the credit listings that had been made in error.
In another definite systemic issue, we found that an FSP had made a number of default and serious credit infringement listings in error.
The FSP told us that a portion of the errors were the result of defaulting cross-referenced credit files as well as credit files directly associated with customers. A cross-referenced file is one that is identified as a match with a customer. Cases where a cross-referenced file exists may include maiden names, name changes, identity fraud and manipulated identity fraud.
However, the FSP also acknowledged that some serious credit infringement listings were made in circumstances where a reasonable person would not consider that the debtor had shown an intention to no longer comply with their obligations in relation to credit.
In order to resolve this particular issue, the FSP confirmed it had reconsidered its approach to the listing of serious credit infringements and had implemented a policy change to reflect this new approach. Based on the policy change, the FSP also confirmed it would remove all serious credit infringement listings it had made in the past.
In another case, an applicant tried unsuccessfully to obtain credit after a default listing was placed on his personal credit file. This happened after judgment was obtained for amounts owed by the applicant to the FSP.
In FOS’s view, the effect of a court judgment is that the underlying basis of the debt (the credit contract) merges in the judgment. This means that we consider an FSP cannot list a default after judgment has been obtained, as the requirement for the default to be pursuant to the credit agreement has not been met. On this basis, we determined that this was a definite systemic issue.
The FSP confirmed that about 500 default listings had been made after judgment was obtained. As a result of our investigation, the FSP arranged for the incorrectly made listings to be removed, and took steps to change its processes so that the issue didn’t recur.