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Introduction to the
Financial Ombudsman Service
Banking & Finance
Bae Bastian
Legal Counsel
29 July 2009
Outline
The Financial Ombudsman Service
Who are we?
How we work
New Terms of Reference
The Banking & Finance team
What we do
How we work
Maladministration
Financial difficulty
Financial Ombudsman Service
FOS commenced operation on 1 July 2008 and brought together the
dispute resolution services provided by:
Banking and Financial Services Ombudsman
Financial Industry Complaints Service
Insurance Ombudsman Service
As of 1 January 2009, it incorporated Credit Union Disputes
Resolution Centre and Insurance Brokers Disputes Limited
Provides independent dispute resolution services for up to 80% of
banking, insurance and investment disputes in Australia
Covers complaints about financial services including banking, credit,
loans, general insurance, life insurance, financial planning, investments,
stock broking, managed funds and pooled superannuation trusts.
FOS – how it works
FOS has five teams:
Banking & Finance (BFSO)
Investments, Life Insurance & Superannuation (FICS); and
General Insurance (IOS)
Mutuals (CUDRC)
Insurance Brokers (IBD)
FOS – how it works
Colin Neave is the Chief Ombudsman of FOS
Divisions are managed by individual industry
Ombudsmen: Philip Field, Alison Maynard and
Colin Neave.
FOS Board is made up of financial services
industry and consumer representatives with an
independent chair (Prof The Honourable Michael
Lavarch)
FOS Board seeks advice from consumer and
industry specific advisory committees
New Terms of Reference by 2010
As part of ASIC’s approval of FOS, new
Terms of Reference have been developed
and submitted to ASIC for implementation
on 1 January 2010.
We will also develop a single process
across the divisions
Banking & Finance
Role of Banking & Finance
Referral service
Dispute resolution – negotiation, mediation,
conciliation, decision maker as an alternative to court.
Power to award compensation – up to $280,000;
Ombudsman’s determination is binding on financial
services providers
Educator; contributor to public policy
NOT a regulator/consumer advocate/advisor
Coverage of the Scheme
We can only consider disputes about members
Our members include
- all retail banks operating in Australia and related
entities
- some non-banks including credit providers, mortgage brokers,
financial planners and non cash payment facilitators
Full list of members on web site
If complaint relates to a member of another scheme, we will refer
them to the appropriate scheme
What we cannot consider
Amount claimed above $280,000
(under new Terms of Reference can consider complaints up to $500,000
but only award $280,000)
Commercial decisions
(altered for financial difficulty claims under new Terms of Reference)
Policy decisions
No financial service received (not a customer)
First complaint more than 6 years after the event
Legal proceedings have commenced
(under new Terms of Reference can consider dispute unless judgment
entered)
Who can lodge a dispute?
A dispute can be lodged by an individual or small
business, or a guarantor of an individual or small
business
For disputes about events arising after 11 March 2002
a small business is defined as one having:
Less than 100 employees if it is a manufacturer
Less than 20 employees if it is not
Lodging a formal dispute
Must be in writing
Can be lodged on the web, by facsimile or mail
(under new Terms of Reference, can lodge over phone as well)
Translating service is available
Can be lodged by an agent (family, friend, financial counsellor) –
agent authority required
In some cases representative must be the legal representative of
the account holder e.g. a deceased estate - executor; a bankrupt trustee; a person under a guardianship order - legal guardian
If dispute is not resolved we will require a general authority to
exchange information between parties
Dispute resolution process and outcomes
Disputes closed as OTR
or discontinued
total: 2,390
OTR/DIS: 2,007
OTR:
985
DIS:
1,022
OTR/DIS: 333
OTR:
167
DIS:
166
Total cases closed: 6,349
Outcome determined
Total: 3,959
BFSO reviews dispute
Dispute referred to
Member
Resolved by Member
3,698 (93.4%)
Finding
OTR/DIS: 50
OTR:
10
DIS:
40
Unresolved Cases
110 (2.8%)
BFSO investigation
Negotiated Settlement
90 (2.3%)
Conciliation Conference
Appeal by member or consumer
Ombudsman’s review
8 (0.2%)
Recommendation
53 (1.3%)
Appeal by member
OTR: Outside Terms of
Reference
DIS: Discontinued
Ombudsman’s review of
member’s appeal
Determination
0 (0.0%)
The Dispute Resolution Process
Terms of Reference:
The Law – 5 legal counsel, legally trained case
managers and case officers
Applicable industry codes or guidelines – Code of
Banking Practice, EFT Code, Centrelink Code
Good industry practice – seconded banking adviser
and financial services industry adviser
Fairness
Types of Disputes
Calculation errors – wrong loan repayment figure;
wrong payout figure
Delay in settlement
Decision to lend – lending when there was no capacity
to repay the loan
Conduct of bank if it sells property as mortgagee in
possession
Errors in charging fees (however, we cannot look at a
bank’s policy decision to charge fees)
Types of Disputes
Breaches of bank’s duty of confidentiality or breaches
of privacy
Funds transfer problems – telegraphic transfers,
internet banking
Debt collection – disputes about the amount
demanded; debt collection practices if conduct is by
member or agent of member; credit listings with Veda
Advantage Ltd (formerly Baycorp Advantage)
Requests for a variation in the contract due to financial
difficulty
Maladministration in Lending
What is Maladministration?
Terms of Reference Clause 5.1 (a)
cannot consider disputes solely about commercial judgment
can consider disputes about maladministration in lending
which involve:
an act or omission
contrary to or not in accordance with
a duty owed at law
or pursuant to the terms (express or implied) of the contract
Maladministration in Lending
The relevant principles are:
Common law duty to act as a diligent and prudent banker
Clause 25.1 of the Code of Banking Practice:
“Before we offer you a credit facility (or increase an existing credit
facility), we will exercise the care and skill of a diligent and prudent
banker in selecting and applying our credit assessment methods
and in forming our opinion about your ability to repay it.”
Section 70(2)(l) of the UCCC – In determining if a term of a credit
contract is unjust, the court may have regard to a number of factors
including whether the credit provider “knew, or could have
ascertained by reasonable enquiry of the debtor at the time, that
the debtor could not pay…or not without substantial hardship”
Maladministration in Secured Lending
We examine the information obtained from the borrower and the
assessment of that information. Was there proper assessment of
the capacity to repay the loan having regard to the standard of a
diligent and prudent lender?
The application stage
- What information is sought from the borrower?
- What information is verified?
The loan assessment stage
- Is all relevant information taken into account?
Maladministration in Secured lending
If maladministration is established in relation to
secured lending where a property was acquired, then
the disputants would not have entered into the loan.
In order to put them back into the position they would
have been in, they would have had no loan, but no
property.
Maladministration in Secured lending
Therefore their claim includes:
1.
The disputants’ contribution to the purchase;
2.
The purchase costs which were not included in
the loan;
3.
Payments made on the loan;
4.
Other holding costs;
5.
Sale costs.
We would add back in any benefit obtained while being an owner of the
properties, for example:
not having to pay rent or interest on alternative accommodation;
rent received from leasing the property and any tax deduction
received for an investment property.
Maladministration in Secured Lending
The net amount is the disputants’ claim.
The sale proceeds are used to repay the loan and these costs.
If the sale proceeds are insufficient to repay the loan and these
costs, then the bank must waive the balance of the loan (if any)
and then pay to the disputants an amount sufficient to cover the
costs incurred.
If the sale proceeds are sufficient to repay the loan and the above
costs, then notwithstanding any maladministration, the breach of
the bank-customer contract has not caused the disputants any
loss.
Case Study
Young couple borrowed $104,000 to purchase first home. Within
a few months they were in arrears. Bank conceded lending was
outside its guidelines.
Bank to sell property and bear cost of shortfall, if any;
Assessment of disputants’ financial loss:
Funds put towards purchase and interest lost on funds put
towards purchase; ($51,289)
Establishment costs, legal costs, rates, mortgage discharge fee;
($1,697)
Payments made; ($16,635)
Take into account rental payments that would have been paid in
the same period ($24,180)
Bank incurred shortfall on sale and paid disputants $45,441
Maladministration and Credit Cards New Applications/Increase in limit
We expect lender to obtain sufficient info about a
customers financial position to assess capacity to
repay
In most cases, lender entitled to rely on info provided
by customer
We will consider whether info was clearly incorrect or
nonsensical or ought to be regarded as questionable
because of other information held by lender
Unsolicited Offers to Increase the Credit Limit
Behavioural scoring usually based on repayment
history
Generally no enquiry made
Assumptions not necessarily accurate
Capacity to repay old limit does not mean capacity to
service new limit
In cases we see there is often maladministration in
lending
Assessment of the decision to lend – information
from the cardholder
What was the financial position of the cardholder
at the time the credit was advanced?
Retrospective statement of position: gross
income, financial commitments including
mortgage payments or rent, other expenses,
number of dependents
Supporting documents
Assessment of the decision to lend – information
from the member
Was the credit limit appropriate based on member’s
credit assessment method?
Members will be asked to apply relevant method (new
application) to information from cardholder or to
conduct a manual assessment by an experienced
credit officer
We then decide: what credit limit was appropriate at
the time?
Resolution of disputes
Try to resolve by negotiation to take account of current
circumstances, avoid hardship and to be commercially
practical taking into account the commercial
considerations of collecting a non-interest accruing
debt
In some cases resolution may be that repayments are
based on minimum monthly payment on the
appropriate credit limit payable for an agreed term – eg
5 to 7 years depending on age/circumstances of the
card holder
Our approach to cases
From the time the appropriate credit limit was
exceeded, add purchases & cash advances
and then total repayments
Apply repayments to appropriate credit limit
(including interest and annual fee)
Any balance of appropriate credit limit
repayable with interest
Our approach to cases
Sum of purchases & cash advances above
appropriate credit limit repayable without
interest (“outstanding principal debt”)
Any unused repayments (step 2 above)
applied to outstanding principal debt
Cardholder can sell or otherwise redeem
purchases to assist in repayment
Example in Bulletin 45
Mr X was a disability pensioner
Given a $12,000 credit limit on his Visa card
BFSO found: appropriate credit limit was $1,000
Purchases and cash advances over appropriate limit of $1,000 do
not accrue interest
Payments of $1,050 repaid appropriate credit limit with interest
Payments of $890 applied to reduce outstanding principal debt of
$12,210
Outstanding liability $11,300
Example in Bulletin 45
Date
Purchases over limit
of $1,000
Payments
Nov 03
$5,100
$0
Dec 03
$3,000
$150
Jan 04
$3,450
$600
Feb 04
$200
$300 sub-total $1,050
Mar 04
$200
$250
Apr 04
$260
$350
May 04
$0
$140
June 04
$0
$150 sub-total $890
Totals:
$12,210
$1,940
Example in Bulletin 45
Bank offered to reduce the debt to $8,369,
interest free, payable at $30 per month
Mr X accepted.
Further Information
Bulletin 45:
New applications
Applications by cardholders for a credit limit increase
Unsolicited offers for credit limit increases
Bulletin 50:
Maladministration and Financial Difficulty
Bulletin 60:
Secured Lending
Financial Difficulty
The Uniform Consumer Credit Code (UCCC) provides that a
debtor can request a variation to their credit contract if they are
unable to meet their repayments due to:
Illness;
Unemployment; or
Other reasonable cause
Under the UCCC, a debtor can request that the contract is:
Extended and payments are reduced
Postponed for a limited period during which no payment are due
A combination of both
The debtor must reasonably be able to expect to repay
the debt if the contract is changed in one of these
three ways
The financial institution does not have to agree to the
proposed change
If it refuses, the debtor can apply to the relevant court
or tribunal for an order varying the contract
Financial Difficulty
Code of Banking Practice – Clause 25.2
“ With your agreement, we will try to help you overcome
your financial difficulties with any credit facility you
have with us. We could, for example, work with you to
develop a repayment plan. If, at the time, the hardship
provisions of the Uniform Consumer Credit Code could
apply to your circumstances, we will inform you about
them.”
Our Expectations of Banks
We expect a bank to:
Give genuine consideration to any proposed repayment
variation and any reasonable alternatives (this would involve
an assessment of a customer’s financial position)
If a bank rejects any proposal, it should give reasons and
ensure they reflect legitimate considerations and are
referable to the customer’s circumstances
If a subscriber to Code, inform their customer if the UCCC
could apply
Comply with the ASIC/ACCC Debt Collection Guidelines
If a subscriber, to act fairly and reasonably in a consistent
and ethical manner taking into account the conduct of the
parties and the contract (clause 2.2 CBP)
Our Expectations of a Debtors
We expect that a debtor:
Be willing to work with their bank (for eg, by promptly
responding to requests for information)
Provide current and accurate details of their financial
position when requested
Propose a realistic repayment plan that will result in
eventual repayment of the debt
Make whatever payments they can while their
application is being considered and/or dispute is being
considered by FOS
Consideration of a Repayment Proposal
We review the process followed by a bank in making a
decision to accept/reject a request for assistance
We assist the parties to try and reach a negotiated
outcome; but the actual decision to agree/reject a
variation is a commercial decision we are unable to
review
This will change upon commencement of our new TOR
on 1/1/2010. FOS will have the power to vary terms of
credit contracts
Non-subscribers
Code of Banking Practice reflects good industry
practice and is relevant to our assessment of a dispute
under that criterion in our Terms of Reference
Non-subscribing banks and other lenders should
therefore consider implementing our guidelines
We will review the credit contract and any internal
policy for dealing with customers in financial difficulty
Approach to Loss
If there is a breach of clause 25.2:
The financial loss may include unnecessary default
charges or enforcement costs
Non financial loss may include some compensation for
unnecessary stress or inconvenience
If there is no loss, the disputant will be advised that
they could refer the matter to the Code Compliance
Monitoring Committee
See Bulletins on our website for more information.
Financial Difficulty
Mr and Mrs S were experiencing financial difficulty as a
result of Mr S suffering a workplace injury and Mrs S
having recently given birth to their child.
Also, a delay in settlement of the sale of their home due
to the impending approval of a subdivision and they had
fallen behind in the repayment of their 3 home loans.
Mr and Mrs S had kept the bank informed of any
possible delays with settlement
Financial Difficulty
Mr and Mrs S made a number of calls to the bank and
say they were given differing responses about how the
matter should be handled. They said the bank officer
appeared insensitive and would not consider any
alternative solutions
When the dispute was referred from FOS to the bank,
reference was made to the bank’s obligation under
section 25.2 of the Code of Banking Practice.
Financial Difficulty
To resolve the dispute, the bank offered a repayment moratorium
on each of their loans on the basis that settlement would be
finalised within two months.
This provided the disputants with an opportunity to finalise the
subdivision and sale of their property. On the sale of the property,
two of the disputants’ loans would be cleared and the arrears
position cleared on the third loan.
This offer was accepted by the disputants in resolution of their
dispute.
How to contact us
Telephone:
1300 780 808
Internet:
www.fos.org.au
Mail:
GPO Box 3
Melbourne Victoria 3001