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Issue 33 - May 2018

Systemic issues update


This article summarises some notable systemic issues we identified during the March quarter of 2018. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC). 
 
The article also gives an update on some other 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.
 
Our online training module provides further information about our approach to systemic issues.
 
New Definite Systemic Issues
 
Policies for dealing with customers in financial difficulty
The financial services provider (FSP) was not providing genuine consideration to requests for hardship assistance because the product is not regulated under the National Credit Code (NCC). It is FOS’s view that even for unregulated products, it is good industry practice to consider such requests.
 
The FSP’s policy outlined that it would only consider providing short term postponement of a customer’s obligation to repay the full balance. However, historical data provided by the FSP demonstrated that the majority of customers who experienced financial difficulty in maintaining this product were unable to repay the outstanding balance after short term assistance was provided. 
 
The Lead Ombudsman’s view was that this information highlighted that the FSP’s approach was not addressing the root cause of the issue. 
 
Compliance with National Credit Code
FOS raised concerns that the FSP was failing to comply with its obligations under Sections 88 and 93 of the National Credit Code (NCC), by treating its credit card facilities as ‘on demand’ facilities and issuing default notices for full account balances, rather than first accelerating the debt. 
 
While the FSP considers its contracts are excluded from the provisions of the NCC, the Lead Ombudsman rejected this argument on the basis that the FSP’s default notices contain misleading information which would not satisfy its own contractual definition of an ‘on demand’ facility. The Lead Ombudsman explained that even if this was not the case, such an approach would not be in line with community expectations about how a credit card facility should operate.
 
Compliance with RG165 EDR obligations
The FSP was not meeting its obligations under ASIC Regulatory Guide 104 Licensing: Meeting the general obligations (RG 104), to monitor and supervise its corporate authorised representatives (CAR). Several disputes had been received where the CAR had provided inappropriate advice to clients to set up self-managed superannuation funds (SMSF).
While it was recognised that the FSP took action against the CAR, the Lead Ombudsman expressed concern that this occurred two years after the initial conduct was noticed. Further, the FSP’s compliance reports confirmed that it had failed to meet its own monitoring requirements.
 
Limitation of account (third party use)
There were concerns whether the FSP, a provider of foreign exchange, had robust systems in place to ensure compliance with its obligations under the Privacy Act 1988 (the Act). A dispute had been referred to FOS where the applicant, who was an introducing broker of the FSP (third party partner), had provided instructions for trades on behalf of herself and other customers. The authority section of the introducing broker agreement had not been completed.
 
The FSP acknowledged its failure to monitor its agreements had permitted the third party partner to access and modify its customer accounts without authority, in breach of the Act. This in turn also meant that the FSP had inadvertently facilitated the provision of unlicensed financial services by its third-party partners to its customers, in breach of the Corporations Act 2001.
 
Positive outcomes from rejected systemic issues
Sometimes we investigate issues that are ultimately determined not to be systemic. The issue may involve substantial investigation and result in a change to an FSP’s process or comment from a Lead Ombudsman about relevant industry practice. Here is a selection from the March quarter:
 
  • The FSP improved its processes for calculating certain payments made to consumers, by introducing greater supervision of junior case managers and claims management by team leaders and, where possible, ensuring continuity of case managers allocated to particular claims.
  • The FSP confirmed that delays accepting warranty applications had been phased out, and the applications are now automatically accepted by its authorised representatives when they receive the application and payment.  
  • The FSP provided further training to staff in its Credit Management, Hardship and Collections teams to reiterate its position that hardship variations for its home loan products are not conditional on Lenders Mortgage Insurance (LMI) approval. 
  • The FSP wrote to all of its mercantile agents to reiterate the importance of ensuring adherence to the Debt Collection Guideline for collectors and debtors. The FSP also enhanced the way it monitors its agents.
  • The FSP identified opportunities to improve its disputed transaction process, including refresher training, a triage and control framework, and a quality review check for declined transactions. 
  • The FSP allowed greater flexibility when cancelling instalment contracts of insurance due to non-payment of premium. The FSP achieved this by allowing additional time for the payment to be made before refusing of a claim.
  • The FSP reviewed its policy to no longer permit minors under the age of 12 to solely operate an account. The policy update was communicated to all staff. 
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