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Issue 23 - October 2015

Systemic Issues update


There were a number of changes in the systemic issues space during the September 2015 quarter. Sally Davis, Systemic Issues Manager commenced her new role as Chief Executive Officer, Code Compliance Monitoring Committee and General Manager FOS Code.

Following Sally Davis’ departure, Portia Smith commenced as Acting Team Manager, Systemic Issues. The Systemic Issues team now forms part of the Quality, Knowledge and Improvement team at FOS, reporting to David Gahan, Senior Manager – Quality, Knowledge and Improvement.

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

Processing error
A dispute was referred to the systemic issues team which indicated that a processing error had taken place affecting the FSP’s online banking platform. This error resulted in collections activity taking place when accounts were in good standing, interest-free offers not being honoured and received payments not being honoured. The FSP provided information about the nature of the technical problems and confirmed that the error has been resolved. The FSP also told us that all affected customers have been restored to the position they would have been in, but for the error. The FSP has undertaken to provide us with further detail about its remediation.

Intention to recover FOS costs from applicant
During FOS’s consideration of a dispute, we became aware that an FSP had passed on the legal costs incurred through its handling of the dispute to the applicant and had not accounted for the Reduced Input Tax Credit (RITC) when recovering enforcement costs. The FSP advised that it was not aware that these costs should not be borne by applicants and also confirmed that it currently charges the entire GST amount for legal or enforcement costs to its customers (that is, it does not account for RITC entitlement). The FSP has undertaken to change its current practices. It has also been asked to review all other disputes to establish if other customers have been similarly affected.

Break cost methodology – unreasonable
We wrote to an FSP following the publication of a Determination by FOS in which the Ombudsman concluded that the break cost charged to the applicant exceeded a reasonable estimate of its loss. This was because the cost did not take into account the time value of money. The FSP’s review of the affected customers indicates that over 250 instances where its calculation has resulted in a higher charge to the customer than FOS’s preferred methodology. The FSP has proposed to contact the affected customers to arrange reimbursement. It has also undertaken to use FOS’s preferred methodology in future.

Failure to advise about FOS’s two year timeframes
A number of disputes were received by FOS which suggested that the FSP may have discouraged customers from referring their disputes to our service by providing incorrect information about our time limits for accepting complaints. We contacted the FSP about this possible failing to establish the extent of the issue.

The FSP acknowledged that it provided incorrect information to some customers about the timeframe in which they could refer their disputes to FOS. It has undertaken to contact the affected group of customers to advise them of their referral rights and to conduct staff training to ensure that the likelihood of this error occurring again is reduced.

Error in Credit Listings
We contacted an FSP to request further information about whether it has robust policies and procedures for entering default listings against its customers and whether any deficiencies in this area might represent a possible systemic issue. The FSP’s response indicated that it had listed accelerated amounts owing incorrectly without serving the appropriate notice to customers required under section 88 of the National Credit Code. We have also advised the FSP that its policy of disclosing and calculating interest on its contracts was in breach of the National Credit Code and represents a definite systemic issue.

Improper Collection Activity
A dispute considered by FOS suggested that the FSP’s account statements contained language that could constitute a breach of clause 13.1 of FOS’s Terms of Reference. This clause prohibits collections activity taking place during FOS’s consideration of a dispute.

The FSP acknowledged that the account statements contained inappropriate wording and has undertaken to make technical changes to ensure the language is removed.

Policy interpretation
Two disputes were referred to FOS from credit card customers who held complimentary travel insurance through their credit cards and had made claims that were declined. The claims related to the cancellation of overseas travel arrangements as a result of policyholders’ pregnancies. Although the policyholders’ treating practitioners’ advised that they should not travel, the FSP declined the claims. FOS’s view was that the cancellation costs were covered under the policy and that the FSP was not entitled to deny the claims. The FSP has confirmed that a number of other policyholders who have become pregnant and been forced to cancel travel have had their claims incorrectly declined. The FSP is reviewing these declined claims with a view to making payment.

Maladministration in lending
A Determination was issued in which the Ombudsman took the view that the FSP had failed to consider an applicant’s financial position when allowing him to exceed his prescribed credit limit by approximately 50% on several occasions. The FSP has explained that its usual procedure is to allow its credit card customers to exceed their prescribed limit without taking any steps to obtain information from the customer to assess suitability or verify their capacity to repay.

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

  • Failure to Advise about FOS: There have been two investigations this quarter in which FSP’s had failed to alert customers who had brought a complaint to them that they had the right to refer their concerns to FOS in breach of their obligations under ASIC’s Regulatory Guide 165 and FOS’s Terms of Reference.
  • Conduct of Employees and Authorised Representatives: We continue to monitor a number of open advice review programs and also refer concerns about Employees and Authorised Representatives to ASIC informally. In addition, during the September quarter we resolved one investigation which ascertained that the FSP’s staff had not complied with the relevant disclosure requirements when offering credit.
  • Error in Credit Listings:  There was one new possible systemic issue with this code in the September quarter which related to the FSP’s approach to credit listings subject to judgment. Another systemic issue was identified as definite during this time and involved the FSP’s failure to provide a debtor with 30 days to remedy a default. A further definite systemic issue under investigation continues to be remediated by the FSP and also involves listings made for amounts made in error that were not 60 days overdue.
  • Record Keeping: Two new possible systemic issue investigations have been raised about the FSP’s retention of documents from the time of the sale and inception of credit card repayment insurance.
  • Compliance with responsible lending provisions of the NCC: As noted in the June quarterly report, 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.
  • Failure to account for RITC: We are currently investigating two matters involving the FSP’s failure to account for Reduced Input Tax Credits (RITC) the latter which also involves passing on the cost of dealing with a FOS dispute in general.

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:

  • Calculation of Premium
  • Premium Overcollection
  • Inconsistency between sales process and underwriting guidelines
  • Disclosure of Terms and Conditions
  • Compliance with Know Your Client Obligations


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:

  • An FSP amending its terms and conditions to remove a perceived ambiguity about its policies for refunds.
  • An FSP undertaking to review its terms and conditions and amend wording which appeared to prevent customers from challenging an early repayment loss calculation
  • An FSP making improvements to its internal processes regarding its assessment of customers who are in financial difficulty, including providing further staff training about recognising hardship
  • Refresher training providing to an FSP’s staff about setting up Offset facilities for new and existing customers. Also, the FSP’s confirmation that it will conduct a review of Offset data requests to determine how many customers may not have had their Offset accounts set up in accordance with its internal processes
  • The FSP conducting a manual review of all complaints received regarding enforcement costs to ensure that costs have been applied in accordance with the FSP’s procedures
  • An FSP amending training materials which contained incorrect information about migrating banking accounts to a new platform