FOS has published 4 documents setting out its Approach to Financial Difficulty by consumers.

The publications are:

• How FOS approaches financial difficulty taking into consideration legal principles, industry codes and good industry practice
• FOS’s power to vary regulated credit contracts
• Working together to find solutions
• Dealing with common financial difficulty issues

The documents contain some interesting approaches designed to resolve a dispute but which are not always in the interests of all parties including affected third parties.

For example:

• if an FSP is not a subscriber to the relevant industry code (eg Code of Banking Practice, Mutual Banking Code), FOS still expects them to follow the code’s guidelines which relate to financial difficulty because it is good industry practice.
• FOS says it has the power to vary regulated credit contracts that are regulated by the National Credit Code (NCC), but it will only use this power in circumstances where a variation will see the repayment of the loan in a reasonable period.
• In some disputes if it is clear that financial difficulty cannot be overcome with further assistance, even in the longer term, and the only realistic solution is the sale of an asset such as a home or investment property, FOS will encourage the parties to agree on a reasonable timeframe for the consumer to sell the asset voluntarily.
• FOS accepts that a credit provider is under no obligation to waive debt on the grounds of financial difficulty alone. If the parties agree to temporarily suspend repayments the FSP does not have to agree to waive interest or debt.
• When a loan is held in joint names, FOS argues that an FSP may agree to a short-term arrangement to vary a contract as requested by one joint borrower, even if the co-borrower may not be willing to agree to any variation. This may happen, for example, where there has been a marriage breakdown.
• FOS says that an FSP should not insist on getting the consent of guarantors, caveators or second mortgagees as a condition of granting a contract variation. An FSP should also not delay in assessing a hardship request, or consider itself limited in the types of assistance it can offer, just because there are guarantors, caveators or second mortgagees involved in the contract. If, however, there is a Deed of Priority in place with a second mortgagee, FOS says it may be appropriate to obtain their prior consent if required by the Deed.
• FOS says bankruptcy alone is not sufficient reason for an FSP to decline hardship assistance for a secured debt. However, FOS says the individual needs to show they would be able to repay the debt if a contract variation was granted.
• FOS says it is important that the FSP forms its own view on any repayment proposal. Although a lender may consult with its Lenders Mortgage Insurer (LMI), it is FOS’s view that the FSP should come to its own decision about the consumer’s ability to repay the loan or it may fail to give real and genuine consideration to a hardship variation.

Bright Law advises financial services providers on dispute resolution with FOS and COSL.

In its Systemic Issues update FOS identifies issues arising from its reviews of FSP’s policies and procedures relating to financial difficulty.