Recent Developments with Financial Ombudsmen Service (FOS)

The FOS Summer 2011 Circular has provided an update on systemic issues identified during the September quarter of 2011, and much needed guidance in relation to the settlement provisions of its Terms of Reference.

FOS systemic issues update

FOS recently identified and reported to ASIC the following. It received a dispute which claimed that a financial services provider (FSP) had made default listings on a customer’s personal credit file for an accelerated debt amount, rather than the actual overdue amount. The complaint also alleged that the notices of demand used by the FSP were not compliant with the Uniform Commercial Code (UCC) in force at the time. FOS referred the matter as potentially systemic to the FSP.

The FSP acknowledged that it had made listings in breach of the Privacy Act 1988, which it had rectified with the credit bureau. The FSP also commenced a process review to reduce the likelihood of further similar breaches, which included introducing amendments to its credit and collections policy and processes and its notices of demand.

FOS terms of settlement update

FOS has released Operational Guidelines in relation to paragraph 8.8 of its Terms of Reference (Applicant acceptance of a Recommendation or Determination). The guidelines provide commentary on the following:

Standard form releases

FOS provides standard form releases that Applicants may use to provide an FSP with a release from liability. The standard form release used in a “Dispute where an Applicant accepts a Recommendation or Determination” meets the requirements for releases set by paragraph 8.8.

Releases that are not in a standard form

If a release that is not in a standard form is required, the FSP will have to prepare the release and bear all costs associated with preparing it. FOS will conduct a limited review of the release, and may ask the FSP to redraft the release if it is deemed unacceptable. FOS may consider a release unacceptable because, for example: 

• the release does not accord with the Recommendation, Determination or resolution agreement made in respect of the Dispute
• the requirements for releases set in paragraph 8.8 of the Term of Reference are not met
• the scope of the release is unreasonably wide, or
• the release will bind the Applicant before the FSP has complied with its obligations. 

Some general principles

FOS has provided the following principles for terms of settlement, in order to prevent disputes over form preventing the parties from reaching a resolution: 

• the terms of settlement should bring finality to the dispute
• the terms of settlement should reflect the agreement between the parties and not introduce new terms
• every endeavour should be made to draft the terms of settlement in plain English
• the terms of settlement should expressly deal with the consequences of non-compliance with the settlement.  However, it should not allow the FSP to seek to recover a sum greater than the compromised / settlement sum plus recovery costs except where the debt has not been disputed, or the Applicant is free to raise its defences to the initial claim
• the terms of settlement should, as a general rule, provide that the Applicant be given seven days notice of any default within which to remedy that default, prior to any action to enforce the terms of settlement
• the terms of settlement should not bar an Applicant from contesting whether they or the FSP complied with the terms of settlement
• the terms of settlement may provide for discontinued legal proceedings to be restored or reinstated upon default.  Where this occurs, the proceedings may need to be amended to reflect that there has been a settlement agreement which has not been complied with
• the terms of settlement should not require the Applicant to consent to judgment. 

Consequences of default

An issue that FOS considers regularly ‘derails’ a settlement is where the consequences of non-compliance are not agreed upon prior to the default. This scenario can arise, and non-compliance may have different consequences, where:

• the Applicant  disputes the debt (i.e. an Applicant  disputes liability and then compromises their dispute in consideration of paying a reduced amount to the FSP than would otherwise be payable under the contract subject to dispute), or
• the Applicant  does not dispute the debt (i.e. when the Applicant  does not dispute the debt but seeks a revised payment plan on hardship grounds). In this situation the settlement agreement can provide the full amount of the debt be paid on default
• there is an agreement that the settlement is not to remain in place (i.e. a settlement agreement is dependent on the Applicant performing its obligations under the arrangement. The failure to perform those obligations results in the settlement never being fully executed, rendering it ineffective). 

Default Judgment

Some settlement agreements may allow the FSP to obtain a judgment for breach of the terms of settlement. However, FOS considers that it is not appropriate for terms of settlement to provide that an Applicant consents to judgment. The FSP should give the Applicant at least seven days notice of any default in the terms of settlement.

Restoring Discontinued Legal Proceedings

Some of FOS’s disputes are the subject of legal proceedings that have been issued but not yet determined. The Terms of Reference require, in some circumstances, that the FSP not pursue those proceedings while the dispute is being considered by FOS.