FOS reporting of systemic issues and serious misconduct -ASIC’s perspective Delia Rickard Senior Executive Leader Consumers, Advisors and Retail Investors (and ACT Regional Commissioner) ASIC Slide 1 Thank-you Sally, for inviting me to join this panel session. For those who may not already know, I lead ASIC’s Consumers, Advisors & Retail Investors team. My team has a broad range of responsibilities to help promote confident and informed consumers and investors, including ensuring that the dispute resolution policy settings are right and the dispute resolution framework is working efficiently and effectively. In this context, FOS systemic issues and serious misconduct reporting is an important source of information for ASIC. There seems to be some misconception about the role of these reports and how ASIC uses them. I’d like to hopefully right these today, and take the mystery out of this reporting, so there is greater understanding of how these reports help inform ASIC’s work – In keeping with the theme of this conference, we can then go from ‘strength to strength’ in building a robust and responsive dispute resolution system in the financial services and credit industries. First, I’d like to take you through: (1) the nature of the FOS obligation to report systemic issues; (2) how to identify what might be a ‘systemic issue’/ ‘serious misconduct’ and (3) how these reports inform ASIC’s work.

FOS reporting of systemic issues and serious misconduct -ASIC’s perspective The FOS obligation to report ‘systemic issues’ and ‘serious misconduct’ to ASIC – an RG 139 requirement Slide 2 FOS (and its predecessor schemes) have reported ‘systemic issues’ and ‘serious misconduct’ to ASIC on a quarterly basis since each scheme’s approval under the Corporations Act (and more recently, under the National Consumer Credit Protection Act). The first of the 8 schemes ASIC has approved under this system was the then FICS in October 1999. ASIC regulatory guide 139 Approval and oversight of external dispute resolution schemes (RG 139) sets out each scheme (including FOS’) requirements to: (1) identify systemic issues and serious misconduct complaints; (2) refer (them to members for their response and action) and (3) report them to ASIC. Lets break this down – each step is important. Scheme’s are obliged to do each step (RG 139.119). Scheme’s must identify both systemic issues and serious misconduct (more about the definitions in a moment). RG 139 also helps clarify what types of complaints may raise ‘systemic issues’ or be ‘serious misconduct’.   Key text from RG 139 139.119 “A scheme must report any systemic, persistent or deliberate conduct to us.” 139.129 “It is the responsibility of a scheme to: (a) identify systemic issues and cases of serious misconduct that arise from the consideration of consumer complaints and disputes; (b) refer these matters to the relevant scheme member or members for response and action; and (c) report information about the systemic issue or serious misconduct to us, in accordance with these guidelines.”

How to spot a ‘systemic issue’ or ‘serious misconduct’? FOS reporting of systemic issues and serious misconduct -ASIC’s perspective Slide 3 The table gives a short summary of what ASIC considers to be the key features of a ‘systemic issue’ and ‘serious misconduct’. Question to audience: Does anyone think something is missing from these definitions? Should anything be added? (could be a neat way to get informal feedback on our policy) [Note: There may be some concerns raised about our examples of ‘misconduct’ as this is not expressly stated in RG 139. Possible ways to counter this – FOS’ Operational guidelines provide that if members fail to comply with the FOS TOR, FOS can consider taking appropriate action, including expelling a member. Such appropriate action could conceivably include reporting the matter as ‘serious misconduct’. We discussed this with FOS in-confidence when we negotiated FOS’ single TOR.]

Refer to the relevant member, and Report to ASIC FOS reporting of systemic issues and serious misconduct -ASIC’s perspective What do we expect FOS to do once they have identified systemic issues and serious misconduct reports? Three step process: Identify the issue, Refer to the relevant member, and Report to ASIC Slide 4 As I mentioned at the start, we envisage a three step process: 1) identify systemic issues and serious misconduct complaints; 2) refer (them to members for their response and action); and 3) report them to ASIC. The first we’ve just discussed. The second is relevant where there is a specific member that the issue relates to. This may not always be the case – it may be a sector or industry wide issue that the scheme has identified. Where there is a specific member involved, we expect the scheme to refer the matter to the member and ask them how they are resolving / will resolve the issue. We expect to be told both (a) about the issue and (b) what the licensee has done about it. In some cases, this will come to us together. In others, we will get two or more progressive reports from the scheme. Reporting is necessary, even when a member is willing and able to resolve the issue. It is important that ASIC is aware of current systemic issues and can build this into its overall surveillance and education planning. This is so even if the specific member has resolved the immediate issue facing them.

What we expect to see in FOS’ quarterly systemic issues FOS reporting of systemic issues and serious misconduct -ASIC’s perspective What we expect to see in FOS’ quarterly systemic issues and serious misconduct reports Slide 5 ASIC receives FOS quarterly systemic issues and serious misconduct reports soon after the end of each quarter. The reports are de-identified (i.e. They do not name members or complainants). If we want this information, we usually serve a s33 notice on FOS. The reports are a useful source of information, that tell us what issues are currently facing FOS members and how they are going with addressing systemic issues and serious misconduct. When we receive these reports, we expect to see the number of possible and actual systemic/serious misconduct issues identified, how they are being managed by FOS and the member and the key outcomes achieved to address the issues (e.g. the member commences a compliance program, new training of staff, the member undertakes a slight organisational restructure, monetary compensation is paid to all affected consumers, etc). ASIC also looks to these reports to see what types of issues have been identified, whether there are trends/emerging issues and how members are responding. We also look to see to what extent members are promptly resolving issues. While we recognise errors (including systemic errors) will occur from time to time, we expect members to resolve them promptly and reimburse/compensate any client losses.

What ASIC does when we get FOS reporting of systemic issues and serious misconduct -ASIC’s perspective What ASIC does when we get these reports Slide 6 FOS reports are one source of information that complements other sources of information that ASIC receives (e.g. through complaints made to ASIC, referrals from politicians, our surveillance work, our liaison work with industry associations and consumer representatives, etc). Where it appears that a systemic issue is ‘in hand’ (ie the member is taking positive and prompt action to resolve the issue, we generally just monitor the situation and obtain regular reports from FOS. This is especially where they do not raise breaches of the law and clear progress is being made with the member. With reports of serious misconduct, we will generally contact FOS and/or the member to discuss the issue directly. We have found that FOS’ identification of a potential systemic issue and referral to the member often prompt members to contact ASIC and lodge a ‘breach report’. [‘Breach reporting’ requires that licensees must report a significant breach (or likely breach) of s912A and 912B, Corporations Act (including breaches of financial services laws) within 10 business days of becoming aware of the breach or likely breach). We discuss our approach to breach reporting in detail in RG 78 Breach reporting by AFS licensees.] On receiving a breach report, (and if FOS’ systemic issues reporting indicates there may be a broader industry sector issue) ASIC may become involved or take over matter reported by FOS (in which case FOS’ investigations may cease). Most recently, through this process, ASIC did some work on term deposits (see Report 185) which found that improved advertising, disclosure and grace periods can significantly reduce the incidence of investors rolling over by default from high to low interest rate term deposits. Break fees is also another example. ASIC will be looking to these reports as we move through the Future of Financial Advice reforms to see whether there any emerging issues and what FOS members are doing to address these issues.

Work with FOS to resolve the systemic issue/serious misconduct FOS reporting of systemic issues and serious misconduct -ASIC’s perspective Key steps ASIC would encourage you to take to properly identify and address systemic issues and serious misconduct: Have a system as part of your IDR process to identify and record systemic issues (RG 165) Work with FOS to resolve the systemic issue/serious misconduct Notify ASIC of any significant or likely breach within 10 business days Slide 7 Finally, here’s some tips on things we would encourage you to do to properly identify and address systemic issues and serious misconduct . [repeat each from the slide]