FOS systemic issues update

FOS has published the systemic issues that were newly identified during the September quarter of 2017. These de-identified matters were reported to the Australian Securities and Investments Commission (ASIC) in accordance with FOS processes.

The systemic issues included:

Collection activity while a dispute is with FOS
FOS raised concerns with an FSP about whether it had appropriate processes in place to ensure it was suspending all debt recovery while a dispute is at FOS.
In response, the FSP confirmed that in 2014 it implemented a process to automatically suspend collections activities whilst disputes were being investigated. Upon notification of this issue, the FSP discovered that these processes were not working as designed and breaches were occurring. On the basis of this information, FOS considered that the matter represented a definite systemic issue.
During discussions, the FSP advised that it had yet to discover the cause of the error and how to remedy it. However, the FSP confirmed it had created an interim manual process to ensure that collections activity did not occur during the time disputes were being considered and provided assurances that this process had been successful.
The FSP agreed to provide FOS with updates on the system and process changes in order to resolve the systemic issue, including a general update on the effectiveness of its interim manual suppression process.

Incorrect cancellation of loan protection insurance policies
FOS raised concerns with an FSP about the cancellation of customers’ loan protection insurance policies (LPI) prematurely. This was inconsistent with the terms and conditions of the policy, as well as the FSP’s obligations under section 59 of the Insurance Contracts Act 1984.
The FSP had cancelled the LPI policy after the creditor of the loan received a debt agreement proposal pursuant to Part 9 of the Bankruptcy Act 1966. The applicant disputed the cancellation as he sought to lodge a claim under the policy.
The adjudicator directed the FSP to reinstate the policy
In response to FOS’s systemic issue concerns, the FSP confirmed its policy was to terminate LPI policies upon receipt of a Part 9 or Part 10 debt agreement proposal. When LPI Policies were terminated, customers received a full or partial refund of premiums which were credited to their loan accounts.
In future, the FSP confirmed that it would not terminate any LPI policies until a Part 9 or 10 debt agreement proposal had been approved or a prescribed event had occurred.
The FSP confirmed that 282 accounts received a Part 9 or 10 debt agreement proposal in the past two years and 29 of these accounts had their LPI policies terminated incorrectly.
As a result of this information, FOS concluded that the matter represented a definite systemic issue. The FSP was asked to resolve the systemic issue by offering:
If the customer elected to reinstate their LPI policy, the FSP would not recover the premiums that were previously refunded to their loan account. The FSP would also bear the cost of premiums for the remaining term of the loan so that there was no cost to the customer, or
If the customer elected not to reinstate their LPI policy or if the FSP did not receive a response from them, the FSP would credit $1,000 to the customer’s loan account to compensate them for any inconvenience.

The following were recorded as some positive outcomes from matters that FOS investigated but ultimately considered were not systemic.

  • An FSP, who had previously sold add-on insurance products through car dealerships advised it was working with a third party who is acting on its behalf under a binder to ensure distributers clearly explain that add-on insurance is not mandatory, and that it is reviewing the sales process for its products.
  • An FSP confirmed it was amending its practice to allow complaints to be lodged orally and that it was updating the wording of its standard letters to more clearly explain that complaints can be lodged in this way. The FSP also provided updated training to all staff about its amended complaints process.
  • An FSP agreed to amend its processes to ensure that hard copy account statements will be sent to retail banking customers when it receives a warning that the customer’s email accounts were full.
  • An issue was raised about an FSP charging late payment fees for non-hardship arrangements which were being maintained by customers, and in particular, how the FSP distinguished between hardship and non-hardship arrangements in such circumstances. While the FSP maintained its contractual and legal right to charge such fees, it took the commercial decision to cease from charging them to improve its standard practice. An automated change to its system will not take effect until January 2018. However the FSP has implemented a manual process in the meantime to ensure that any fees applied to maintained arrangements, would be removed at the expiry of the arrangement.
  • An 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.
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