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Issue 21 - April 2015

Systemic Issues update


This article summarises the new systemic issues that we identified during the March quarter of 2015 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 March quarter, and some positive outcomes from matters that we investigated but ultimately considered were not systemic.

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

Conduct of employees/authorised representatives
FOS received a substantial number of disputes relating to the conduct of an FSP’s Authorised Representatives (AR). The FSP acknowledged that a number of clients had received a financial service from AR’s or employees of the FSP which was provided in breach of a financial services law or which was otherwise not in the client’s interest and caused a number of clients to be negatively impacted.

While the precise number of potentially affected clients and the precise amount of loss incurred by affected clients is currently unknown, it has been substantiated by publically available information that a wider class of customers than those that complained to FOS have been affected by this conduct. We confirmed that the matter is therefore considered to be a definite systemic issue.

Credit card: Application of interest rates
A dispute at FOS indicated that the FSP had applied the higher ‘cash advance’ interest rate to lottery ticket purchases, despite such a purchase not being explicitly listed in the definition set out in the account’s terms and conditions.

In our view the wording of ‘cash advance’ in the account's terms and conditions did not accurately reflect the FSP’s intention to categorise the purchase of a lottery ticket as a cash substitute. A lottery ticket cannot be considered a cash substitute as it cannot be considered a medium of exchange, nor is it specifically identified in the list of relevant examples in the terms and conditions. We therefore considered that the FSP had charged the higher ‘cash advance’ interest rate in error and the matter to be definitely systemic.

Misleading conduct
A customer arranged a travel insurance policy with the FSP at the time of booking an overseas flight on an airline website. The customer was not an Australian resident and was not in Australia when he arranged the insurance. When the customer lodged a claim on the policy it was rejected by the FSP on the ground that the policy eligibility criteria was not met. The FSP advised that the policy is available to Australian residents and non-residents provided they are in Australia at the time the Certificate of Insurance is issued.

The FSP accepted that there may be an issue with the distribution of travel insurance policies through the airline website. The eligibility requirement to be an Australian resident, or if a non-resident to be in Australia at the time of the purchase, is not clear and effective during the sales process.

Failure to include stamp duty calculation
A number of disputes at FOS concerned the FSP’s failure to include stamp duty and transfer fees in the calculation of the market value of the insured vehicle. We raised this issue as potentially systemic on the basis that the issue of the inclusion of stamp duty when calculating market value has been the subject of previous FOS Determinations, FOS has discussed the issue widely with the industry and also that information was provided to the industry in The FOS Circular in March 2011.

The FSP confirmed that the methodology it uses to calculate market value for total loss motor vehicles does not include a specific calculation for stamp duty and transfer costs. Rather, it ensures a claimant suffers no detriment after a total loss, by allowing a sufficient margin in the settlement figure to accommodate the additional costs associated with the purchase of a replacement vehicle (including stamp duty and transfer fees).

Processing error
Information was provided directly to FOS by the FSP in which it identified a systemic failure by the FSP to correctly link offset accounts to relevant home loan accounts.

In light of this correspondence we advised the FSP that, given it had itself identified a systemic failure to correctly link offset accounts to the relevant home loan accounts, this matter gives rise to a definite systemic issue.

Possible systemic issues
Some details about trends and common issues under investigation as possibly systemic during the March quarter include:

  • Policies for dealing with customers in financial difficulty: Despite indications that this is an area where FSPs have improved in compliance with their obligations, there continue to be issues to investigate as possibly systemic.
  • Conduct of employees and authorised representatives: This is an increasing trend in referrals as possibly systemic and in informal referrals to ASIC.
  • Compliance with responsible lending provisions of the NCCP: There is an increasing trend in referrals of conduct of this nature.

As in the last edition of The FOS Circular, it was again noted that a number of issues that have previously featured as common trends have reduced this quarter such as:

  • Improper collection activity including compliance with the debt collection guidelines
  • Privacy processes and the provision of information to third parties

Positive outcomes from rejected systemic issues
Sometimes we investigate issues that are ultimately determined not to be 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:

  • The provision of ex-gratia offers in writing to customers with explanatory commentary to ensure that applicants don't feel pressured to accept the offer and not refer their complaint to FOS.
  • Re-wording of renewal notices to provide an accurate reflection of TPD benefits for policy holders over 65 years of age.
  • Providing feedback and further training to front-line branch staff regarding the privacy policy for the disclosure of personal information.
  • Confirmation that when the FSP receives information that a customer is in financial difficulty, it has implemented processes to ensure that collections activity ceases on corporate accounts as well as personal accounts.
  • Using the circumstances of a dispute to better educate advisors on handling difficult circumstances and reviewing hiring processes.
  • Enhancing the content of policy for making contact with a debtor to expressly set out the approach to comply with the debt collection guidelines.
  • Reviewing resolved disputes to ensure any payment arrangements are properly recorded to avoid a default notice being automatically sent following introduction of automated processes.
  • Review the Sale Discharge Authority Form to ensure it is clear how sale proceeds can be deposited.