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Issue 22 - July 2015

Systemic Issues update


This article summarises the new systemic issues that we identified during the June 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 June 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

Error in credit listings
A number of disputes were referred to the systemic issues team where it was found that the FSP had made incorrect default listings with credit reporting agencies. The disputes raised concerns that the FSP had listed defaults, either incorrectly or inaccurately, for other customers.

It was established that a number of defaults had been listed in error because they were for amounts under $150. Also a number of defaults relating to savings accounts had been listed due to an incorrect classification of account. The FSP requested that the credit reporting agency remove all of the erroneous listings.

Increase in premium
Following a Determination issued in December 2014, it was confirmed that the FSP was not entitled to index customer premiums after the age of 55 in certain circumstances. The FSP advised FOS that it would determine whether or not any of the other cases identified could be similarly affected. A reconstruction of premiums and a high level audit of affected customers has now commenced.

Incorrect claim denial
A number of disputes illustrated that the FSP denied the Applicants’ claims under their Comprehensive Motor Vehicle insurance policies as a result of failure to pay a monthly premium instalment. In addition to denying the claims, the FSP purported to cancel the policies. The disputes were the subject of FOS Determinations. The Determinations identified that the FSP’s Product Disclosure Statement (PDS) makes no reference to the effect of section 39 of the Insurance Contracts Act (the Act), the FSP had not satisfied the conditions required to rely upon section 62 of the Act and in one of disputes the FSP’s notices did not comply with the Act at the relevant time.

Improper collection activity
A dispute which raised concerns that the FSP was not complying with section 83 of the National Credit Code (NCC) and clause 12 of the ACCC/ASIC Debt Collection Guidelines was reviewed as a possible systemic issue. The concern stemmed from default letters that are sent to customers who have entered into repayment arrangements with the FSP and are meeting those arrangements. The FSP advised that it sent default letters to customers who were meeting their repayment arrangements as a reminder that their accounts were still in arrears. This was despite the customer meeting the repayments. The Ombudsman was of the view that this matter did represent a definite systemic issue.

Processing error
FOS received multiple disputes about various technical issues experienced by customers following an FSP system upgrade.

The FSP confirmed multiple system defects and we sought further information about what substantive technical issues it had experienced as a result of the system upgrade; and whether it had taken appropriate steps to identify affected customers; rectify those technical issues in a timely manner; and remedied the losses of any affected customers.

Compliance with ePayments Code
A dispute illustrated that the FSP did not take the ePayments Code into account when considering complaints about unauthorised transactions.  Instead, the information provided to FOS suggested that the FSP relied on the Visa credit card scheme chargeback rules to decline liability. FOS considered that this reliance was incorrect because the transactions were performed without the debit card being present and therefore the ePayments Code was the correct instrument for deciding unauthorised transactions.

The FSP agreed that it had not properly considered a number of unauthorised transaction complaints. It had relied on the Visa credit card scheme rules rather than the ePayments Code in error.

Processing error
Information provided during the course of a FOS dispute illustrated that, during a specified period, many of an FSP’s customers using Visa debit and Visa credit card accounts had transactions duplicated on their accounts.

The FSP confirmed that the issue had been caused by a system upgrade and that it had taken action to remediate the issue.

Error in credit listings
A number of FOS disputes illustrated that the section 80 Default Notice template used by the FSP, for a specified period of time, was defective. The template did not contain any warning that if the default was not remedied, the FSP would provide the default information to a credit reporting agency. The FSP was also unable to provide any subsequent correspondence containing the required warning.

The FSP acknowledged the error and has agreed to identify any defective default listing made during the relevant period.

Intention to recover FOS costs from applicant
The FSP was notified that several disputes had been received by FOS in which it had passed on the costs of dealing with a FOS dispute to the applicants in breach of clause 13.1 of our Terms of Reference and also in breach of ASIC’s regulatory guide 165.
The FSP acknowledged that, as a result of this investigation, it had changed its invoicing practices for external legal providers and was continuing to review its policy. It is also reviewing past errors in passing on costs in order to facilitate remediation.

Recognition of Power of Attorney
Details of a FOS dispute suggested that the FSP was declining to recognise valid Powers of Attorney (POA) or Enduring Powers of Attorney (EPOA) without regard to its legal obligations.

A review of the FSPs policies and procedures for dealing with POA/EPOAs illustrated that they may not adequately reflect the legal position that the bank is under a duty to recognise these instruments and to treat the attorney as the account holder’s authorised agent. In particular, we were concerned that the FSP considers that it has the discretion to recognise or reject validly appointed attorneys.

Processing error
In relation to claims by policyholders against their income protection insurance, a FOS Determination found that the FSP had confusing annual statements for its legacy products, had applied an incorrect qualifying period for the payment of benefits and also paid benefits on a date that was inconsistent with the policy.

The FSP reviewed the annual statements and acknowledged an issue with the qualifying periods and that all customers are currently being paid benefits on dates that are not necessarily consistent with policy documentation.

Inappropriate charging of fee
A number of FOS disputes illustrated that the FSP continued to charge Collection Action Fees on Consumer Car Loan products (specifically for making collection calls) while the accounts were subject to open FOS disputes.

The FSP acknowledged that the charging of these fees should have been suspended in its accounts payable system while the dispute was open with FOS.  It identified and remediated affected customers.

Application of incorrect interest rate
The FSP contacted FOS to advise that it had identified an error in the rate of interest charged to customers holding variable rate personal loan contracts. It advised the number of affected customers and intended remediation timetable.

Possible systemic issues

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

  • Collection activity while dispute with FOS: There were no new investigations this quarter relating to instances where it appeared that collection activity had taken place while the dispute was with FOS.  We continue to be hopeful that the focus on this issue over the last year has resulted in FSP’s having more robust processes and procedures in place for ensuring that collection activity does not occur whilst a dispute is with FOS in breach of clause 13.1 of the FOS Terms of Reference.
  • 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.
  • Error in credit listing:  There continue to be new possible systemic issues relating to this matter this quarter. In addition, the ongoing investigations highlight the time it takes for an FSP to remediate this type of systemic issue.
  • Compliance with responsible lending provisions of the NCC: As noted in the last Circular, there is an emerging trend in considering whether an FSP has complied with the responsible lending provisions of the NCC and whether the issues raised are potentially systemic.
  • Improper collection activity: There are a number of new possible systemic issue investigations regarding apparent improper collection activity by the FSP.
  • Privacy processes: There are no possible or definite systemic issues relating to privacy this quarter.

A number of other codes were raised as possible systemic issues during the quarter with only one or two investigations per code so they could not be noted as representing a trend. They include issues such as:

  • Compliance with ePayments Code
  • Compliance with RG165 obligations
  • Application of Incorrect Interest Rate
  • Avoidance of Policies
  • Lending Policy
  • Policy Interpretation
  • Compliance with Customer Mandate
  • Processing Error
  • Sale of Funeral Insurance
  • Record Keeping

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:

  • FSP improving disclosure of ongoing nature of an alert service.
  • FSP provided refunds to affected policyholders, as well as instituting staff training and alerting senior personnel.
  • Creation of a formal process and procedure document outlining approach to the sale of secured goods.
  • FSP will remind staff not to ask security questions which the customer has requested not be asked
  • The FSP agreed to review default listings it has made to ensure that all correct default amounts were listed.
  • The FSP confirmed new measures to improve the claims assessment process in future.
  • The FSP confirmed amendment of the policy wording General Exclusion.
  • The FSP confirmed that refresher training will be provided for all employees involved with the complaints handling process.
  • The FSP confirmed that it was implementing an automated capability to measure and follow up all claims requests.
  • FSP confirmed that when it receives information that an Applicant is in financial difficulty, it has implemented processes to ensure that collections activity cease on corporate accounts.
  • The FSP provided improved clarity regarding its foreign transaction fee.
  • Steps taken by an FSP to re-draft ambiguous and potentially misleading terms in its PDS and website information.
  • One FSP took proactive steps to change its policy regarding mistaken internet payments from business accounts to be more consistent with the ePayments Code in line with good industry practice.

One FSP took proactive steps to update its home loan repayment online calculators to accurately reflect its methodology, preventing any potential misleading information.