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Systemic Issues Update

This article summarises systemic issues that we identified during the December quarter of 2011 and reported to the Australian Securities and Investments Commission (ASIC). It also provides an update on some current and recently resolved systemic issue investigations.


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

Recovery from applicant of costs of dealing with FOS

The applicant in a dispute claimed that the Financial Services Provider (FSP) had not adequately explained the legal and enforcement fees it had asked the applicant to pay to bring his home loan up to date. During our investigation of the dispute, we noticed that the FSP had levied charges against the applicant for services performed by solicitors the FSP had engaged.


We wrote to the FSP and referred to paragraph 1.1 of our Terms of Reference. It states that the dispute resolution service provided by FOS is free of charge to applicants and is paid for by FSPs. We also referred to ASIC Regulatory Guide 165: Licensing: Internal and external dispute resolution (RG 165) and the principle that customers should not have to pay to use internal dispute resolution services.


We asked the FSP to ascertain how many, if any, of its other customers had been charged for legal and enforcement costs regarding complaints handling. We also asked it to provide further information about its complaints handling policies and procedures.


The FSP responded by acknowledging that, despite its policy providing that any costs incurred relating to accessing FOS must be borne by the FSP, it had identified other instances where legal costs had erroneously been charged to a customer’s loan account. We reviewed the information provided by the FSP and decided that the matter was definitely systemic.


In order to resolve the systemic issue, we requested that all costs erroneously charged to the affected customers be refunded in full, together with interest payable at the relevant loan rate. We also requested that the FSP remind its lawyers of its dispute management policy, with specific reference to the fact that FOS is a free service for consumers and that lawyers should produce separate invoices for legal costs relating to disputes lodged with FOS to reduce the likelihood of similar errors occurring in future.

Error in credit listing

We handled a number of disputes in which the applicant alleged that the FSP had made default listings on its  personal credit files for amounts that were not 60 days overdue. It appeared that the FSP was listing amounts equivalent to the accelerated amount of the debt, thus depriving applicants of the opportunity to remedy the default prior to listings being made.


In addition, we had concerns about the adequacy of the default notice used by the FSP. The apparent faults included the inaccuracy of the amount in arrears, the FSP’s failure to warn applicants that the remaining loan balance was payable if they failed to rectify the default within 35 days and its failure to specify the amount of the remaining loan balance as required by paragraph 89(1) (b) of the Uniform Consumer Credit Code (UCCC). Further, the notice did not mention the possibility that a report could be made to a credit reporting agency or that a default listing might follow if payment was not made within a specified time.


Lastly, we had concerns that the FSP had not complied with subsection 173 (1) of the UCCC, which sets out that a notice is taken to be given on the date it would have been delivered in the ordinary course of post and that the 30 day period runs from this date. The FSP appeared to treat the remaining loan balance as payable 30 days from the date of its notice.


The FSP responded by confirming that, while it had a policy designed to ensure that debts were not listed before they were 60 days overdue, there may have been a period when defaults may not have been accelerated correctly and, as a result, the accelerated amount of the debt was listed too early. It stated that it would conduct a full audit of its default listings since 2005 and that it would correct any found to have been made in error.


We reviewed the information provided and decided that the matter was definitely systemic due to the FSP’s acknowledgement that it had listed a number of defaults incorrectly and also because of our concerns with its credit listing policy and default notice. In order to rectify the systemic issue, the FSP was asked to correct the incorrect listings and to amend both its notice and the policy.

Failure to advise customers about FOS

We received two disputes in relation to an FSP’s accidental damage and theft protection plan product. In one dispute, the FSP issued a letter to the applicant after its initial review of the applicant’s complaint. The letter stated that if the applicant was dissatisfied with the FSP’s decision she could refer her dispute to the next step in its internal dispute resolution (IDR) process and that “you may refer this to a formal legal process such as the courts, mediation or arbitration”.


In the other dispute the IDR response letter to the applicant stated that, if still dissatisfied “you may refer your dispute to a formal legal process such as the courts, mediation or arbitration”.


These statements were raised with the FSP as a possible systemic issue because the FSP was not notifying customers of their right to refer their disputes to FOS, the timeframe for lodging a dispute with FOS and FOS’s contact details.  RG 165 requires an FSP to take these steps if a dispute has been through the IDR process but remains unresolved or is not resolved within the applicable time limits:


  • inform the customer they have a right to pursue the dispute with an external dispute resolution scheme, and
  • provide details about how to access that scheme.


The FSP reviewed the complaints about the protection plan and identified a number of customers who were not informed about their right to refer their disputes to FOS at the conclusion of the IDR process. The FSP agreed to contact those customers.

Policy interpretation – definition of ‘rent’

We received a dispute arising from a claim lodged under a residential strata insurance policy administered on behalf of the FSP by its underwriting agency.


The applicant lodged a claim for the loss of 10 weeks rent. The applicant disputed the FSP’s deduction of commission from the rental monies payment under the policy. However, the FSP maintained it was entitled to make the deduction because the applicant was only entitled to the actual rental monies received, and that he would be profiting by being paid the commission.


We considered the dispute and determined that the policy terms and conditions did not authorise the FSP to deduct a commission (or any other amounts payable to a third party) from the payment due under the claim. We determined that the matter was a definite systemic issue.


Some of the ongoing definite systemic issues investigated in the December quarter are summarised below.

Methodology and disclosure of break costs on fixed interest loans
Two investigations remain on foot but are now close to resolution. No new possible systemic issues relating to this matter were identified during the December quarter.

Errors in credit listings and inaccurate credit file enquiries
This continues to be an area that raises systemic issue enquiries, particularly in relation to serious credit infringement listings.

Recovery of costs of dealing with FOS from an applicant
This issue has been confirmed as definitely systemic in relation to at least one FSP. Other FSPs are being reviewed for possible systemic issues in relation to this matter.

Failure to advise customers about FOS
There have also been disputes which illustrate that FSPs in some instances have failed to advise customers about FOS or have failed to provide correct information about FOS. As explained above, FSPs have to provide certain information about FOS in IDR responses.