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Issue 30 - July 2017

Systemic issues update


This article summarises some notable systemic issues that were newly identified during the June quarter of 2017. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC) in accordance with our processes.

This update also provides an update on a selection of current systemic issue investigations, as well as 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
Policy interpretation

A policyholder referred a dispute to FOS about the FSP’s failure to correctly settle a total loss home building claim. Our investigation determined that demolition costs were included in the quotation obtained by the FSP to rebuild the insured residence. The demolition costs should have been paid separately under an additional policy benefit.

The matter was referred to systemic issues who requested further information to determine whether other policyholders were impacted by the FSP’s error. The FSP advised that:

The ‘demolition and removal of debris’ additional benefit was paid within the sum insured until its new product disclosure statement (PDS) was released some years ago.

Subsequent to the new PDS being released, the ‘demolition and removal of debris’ benefit has been paid in addition to the sum insured. The FSP went on to say that it has since provided training to all technical and large loss claims consultants, which ensured that demolition costs were not included within the payment of the sum insured. In addition to training, all payments were audited prior to release, through its quality assurance process.

The FSP also confirmed that the error affecting the applicant in the dispute out of which the systemic issue investigation arose occurred due to the complex nature of the applicant’s claim and a failure on the part of the consultants involved, in recognising that the demolition costs had been included in the repair quotation. This lead to the full repair quotation being settled within the sum insured and policy safety net, rather than treating the amount quoted for demolition as a separate item. This meant that the applicant was not paid their full entitlements under the policy. In the applicant’s case, the FSP said that the failure to pay the demolition costs as an additional benefit in addition to the building sum insured was human error.

FOS requested the FSP to conduct a review of claims for the previous two years to ascertain if there were any other cases where it failed to pay the relevant benefit in addition to the sum insured. The FSP was also requested to advise if it had received any complaints over the same period from policyholders about failure to pay the policy benefit. The FSP said it identified 193 potentially affected claims. Its review identified one instance where there was a failure to pay the ‘demolition and removal of debris’ benefit, and it was attempting to contact the customer to pay this benefit as well as interest.

The FSP advised that there are over 30 additional benefits that may be payable under its home and contents insurance policies, either as part of the sum insured or in addition to the sum insured. As part of its review, the FSP said it also reviewed payment of all other additional benefits and identified seven instances in which an additional benefit was not paid correctly. The FSP undertook to contact customers and compensate them appropriately. As a result of its review, the FSP said it is enhancing training, processes and controls around the application of all additional benefits to minimise future processing errors.

FOS advised the FSP that, based on the number of claims where it identified a failure to pay additional benefits correctly, our view was that the matter represents a definite systemic issue. The FSP was further requested to conduct a review of claims for a further period of four years and to confirm the amounts paid to the affected customers already identified. The investigation continues.


Incorrect interest charges
An applicant lodged a complaint about the interest which the FSP applied to purchases on their credit card account. The applicant told us in their submissions they had not made any purchases using their credit card and that the FSP was therefore not entitled to charge interest on these purchases. The applicant also said that he was making repayments to reduce the outstanding balance and had not purchased anything else. However, he was concerned that the interest charged continued to increase.

FOS was concerned that the FSP may be incorrectly calculating interest to purchases made by its customers, even after the purchases have been repaid. We also sought clarification on whether the FSP was incorrectly applying interest to fees without adequately disclosing its entitlement to do so.

FOS commenced a systemic issues investigation, seeking clarification about how the FSP calculates interest payable on purchases and cash advances for its credit card products. We also sought information about why it appeared that interest was being charged on purchases that appeared to have been repaid, what checks the FSP has in place to ensure interest is being applied correctly and the contractual terms relied on by the FSP to charge interest on fees.

The FSP provided information about how it groups similar types of transactions made using the credit cards into groups before calculating interest. It also told us that one of these categories, ‘Purchases’ includes retail sale transactions as well as bank levied fees, including annual fees, late payment reminder fees and over-limit arrangement fee). The FSP confirmed that interest is accrued on fees in the Purchase category on a daily basis.

We considered the information provided and noted that the definition of ‘Purchase’ in the terms and conditions.

The Lead Ombudsman, Banking and Finance (Lead Ombudsman) was concerned with the drafting of the definition of ‘Purchase’ and was of the view that the provision did not permit the FSP to charge interest on fees. On this basis the Lead Ombudsman was of the view that this matter represented a definite systemic issue.

The matter remains open as we discuss with the FSP making amendments to its terms and conditions.


Conduct of employees/authorised representatives
FOS received a number disputes arising from customers of the same advisor group which suggested that a particular advisor may have been providing inappropriate advice to clients. The advice provided by the advisor was similar in nature being adviced to invest into agribusiness schemes.

FOS approached the FSP seeking information about the specific advisor group. In response, FOS was advised that the advisor was a tax agent and had been subject to an internal review in 2006, where concerns were raised by the FSP that the advisor may have been inappropriately providing personal financial advice and claiming that the advice was general advice.

The FSP outlined that where advice had been provided it relied on the tax agent exemption. The outcome of the FSP’s internal review was inconclusive.

However, it appeared that further concerns were raised that after the FSP’s internal review in 2006, the advisor engaged with a third party financial service provider to prepare the relevant Statement of Advice, however the third party financial service provider did not provide the financial advice.

FOS took the view that:

  • the FSP cannot rely on the ‘tax agent’ exemption as the advice was provided by the advisor when an authorised representative of the FSP.
  • it appears that the advisor has provided personal financial advice as when advice was provided, he considered one or more personal circumstances of the clients
  • the FSP’s internal review in 2006 identified that it appeared personal financial advice was being provided and, further, that insufficient records were being maintained by the advisor to identify when advice was provided
  • that while a third party financial services licence did provide the SOA, customers did not rely on the SOA but relied on the advice provided by the FSP’s advisor.
  • FOS therefore considered that the above concerns about the financial advisor to represent definite systemic issue as other persons may have been affected by poor advice. In order to resolve the definite systemic issue, FOS has invited the FSP to:
  • identify and contact all possibly affected customers to advise them of FOS’s concerns
  • implement a process to adequately review all advice provided by the advisor and determine if customers have suffered loss as a result of inappropriate advice 
  • remediate customers who have suffered a loss as a result of inappropriate advice
  • provide customers a right to lodge a dispute with FOS if they are not happy with the outcome of the review.
     

Compliance with National Credit Code
A dispute was considered by FOS which raised concerns that the FSP:

  • may not comply with s17(8) of the National Consumer Credit Protection Act 2009 (as embodied in the National Credit Code) (NCC), which requires the credit contract to disclose ascertainable fees and charges payable under the contract; and
  • may not have correctly applied fees and charges, which further, may not represent a reasonable pre-estimate of the loss which the FSP incurs when a customer fails to make payment, or otherwise defaults under the contract

FOS approached the FSP and, in relation to the FSP’s compliance with the NCC, sought clarification as to why the fees do not appear to be disclosed in the credit contract, whether the FSP notifies its customers prior to charging the late fee and why, in some instances, the fees had been charged twice within a seven day period.

FOS also sought details of how the FSP has determined the fees to represent a reasonable pre-estimate of the loss which it incurs and if it does not believe the fees are ‘ascertainable’ to explain why.

With regards to its disclosure of fees and charges, the FSP advised that:

It relied on the credit contract’s terms and conditions to collect enforcement expenses.

  • It considered this was reflective of industry practice where enforcement expenses are inclusive of both internal and external costs.
  • It acknowledged that the general fee was not referenced in the credit contract. However, it said that customers are notified that such fees may be charged both in the terms and conditions as well as through reminder letters which are sent when a payment is late.
  • no complaints had been received about this fee
  • in order to assist customers, the fee has been added to the relevant section of the loan contract.
  • The FSP provided further comments on what was a reasonable estimate of its loss. It said that it:
  • charges a fee when a customer is 7 days in arrears and then again when a customer was 14 days in arrears
  • an internal review was undertaken in 2014,and  on completion of the review it was determined that the amount of the large charge was well below the loss that the FSP incurs from the late payment
  • the fee charged is in line with industry practice.

FOS conducted a survey of financial service providers in order to obtain information on what was reflective of current industry practice for the particular issue. A survey of twelve FOS members was undertaken by a FOS Banking Specialist. Based on the survey response, the recommendations of the Banking Specialist was that:

  • the fee is ascertainable and should be disclosed in the loan contract
  • the charging of a fee is standard, and generally reflective of the cost that FSPs incur when a loan falls into default.

The Lead Ombudsman, Banking and Finance (Lead Ombudsman) was not satisfied that the FSP’s reliance on the enforcement section of the contract was sufficient to meet the provisions of the NCC, and therefore took the view that the matter represented a definite systemic issue.

The Lead Ombudsman noted the findings of the survey of FOS members, and concluded that the specific matter of whether the FSP’s costs reflected best practice was not a definite systemic issue. In order to move towards a resolution of the remaining matter. The Lead Ombudsman has requested that the FSP provide copies of its updated loan contracts which disclose the fee.


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 FSP revised requirements for proof of identity for third party representatives who were required to complete its new Third Party Authority (TPA) form. This resulted in a change to the form and a simplification of the identity information required from representatives acting for policyholders.
  • The FSP restructured its customer relations department, resulting in additional staff being available to assist case managers. In addition, the FSP says that improvements have been made to processes and quality auditing and ongoing training and mentoring has been planned for all staff.
  • The FSP advised that the sale of loan protection insurance is now conducted over the telephone rather than in-branch. All calls are now recorded and regularly monitored for compliance and training purposes.
  • The FSP updated its terms and conditions to more clearly communicate to customers when it has a right to charge default interest under a business loan contract.
  • The FSP enhanced its guidelines to staff providing advice on retirement strategies. It also provided additional training on the enhanced guidelines to all accredited advisors providing retirement advice.
  • The FSP confirmed that it would provide additional training to life claims staff on the definition of sickness in an income protection policy to ensure that similar disputes are not referred to FOS.
  • The FSP committed to responding to FOS in a more timely manner and made improvements to its record keeping and disclosure of the relevant times to make restitution to customers
  • The FSP improved communications to customers experiencing financial hardship to better explain why a decision had been made to decline financial difficulty assistance.
  • The FSP confirmed it would remove a variation fee that had previously applied when a loan was re-written or restructured following a hardship agreement being made with a customer. The FSP also confirmed that it would reduce the default interest rate applicable for such loans moving forward and that it would review its current hardship application form to provide for greater accessibility for customers.
  • The FSP made improvements to its online banking platform to alert customers to the requirement that a new BSB for an existing payee must be complete and that if all six BSB digits were not included then the payee would not be saved.
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