In Report 308 Response to submissions on CP 172 Review of EDR jurisdiction (debt recovery legal proceedings) (REP 308) ASIC has released the findings of a review examining the jurisdiction of EDR schemes in relation to certain consumer complaints over debt recovery legal proceedings
(CP 172).

The Report reviews RG 139.77-RG 139.79 which require ASIC-approved EDR schemes to handle complaints under their Terms of Reference or Rules when members of the schemes commence legal proceedings to recover a debt from a consumer.

ASIC decided to make no changes although it will further review issues relating to small business lending.

ASIC concluded that the ASIC-approved EDR schemes and their debt recovery legal proceedings jurisdiction plays a useful role in assisting consumers and financial investors who may benefit by a hardship variation, need more time to sell their home, may have been granted loans in breach of responsible lending requirements or face debt collection issues (i.e. being pursued for statute-barred debts).

Delays
In response to industry submissions about EDR scheme delays when handling complaints under their debt recovery legal proceedings jurisdiction, ASIC decided against introducing maximum and specific timeframes within which a scheme must handle complaints involving debt recovery legal proceedings.

Types of complaints
In response to industry submissions that a stay on debt recovery legal proceedings under RG 139.77–RG 139.79 should only be permitted when a complaint at the EDR stage relates to hardship or enforcement action, not separate complaints about direct debit fees, penalty fees, interest or enforcement fees that have no direct correlation with hardship or enforcement action, ASIC decided against limiting the scope of RG 139.77– RG 139.79 to exclude those types of complaints from an EDR scheme’s debt recovery legal proceedings jurisdiction.

Small business lending complaints
In response to concerns that there has been unintended ‘jurisdictional creep’ as FOS’s and COSL’s debt recovery legal proceedings jurisdiction extends to non-National Credit Code regulated commercial loans, ASIC believes there is merit in considering further whether an EDR scheme’s jurisdiction should exclude certain types of small business lending complaints because they would be more appropriately dealt with in another forum (i.e. court). Hoowever ASIC believes that all small business borrowers should not be totally excluded from accessing this jurisdiction. This is because:
• Phase II credit reforms may extend the credit laws to cover small business lending; and
• it would be inconsistent with current banking practice—for example, the ABACUS Mutuals Banking Code of Practice (clause 24) and ABA’s Code of Banking Practice (clause 25.2) currently commit to assisting small business complainants in hardship.

ASIC is consulting in Consultation Paper 190 Small business lending complaints: Update to RG 139 (CP 190) on how small business lending complaints may be legitimately excluded. ASIC does not consider that excluding small business lending complaints based on the value of the security would be practically workable, given that the value of the security may change during the life of the loan and this may create disputes about whether the EDR scheme has jurisdiction to handle the complaint. ASIC suggests it may be more practically workable to exclude small business lending complaints based on the value of the loan granted.

Currently FOS accepts claims from a Small Business, which is defined in FOS’s Terms of Reference as:
“a business that, at the time of the act or omission by the Financial Services Provider that gave rise to the Dispute:
(a) if the business is or includes the manufacture of goods: had less than 100 employees; or
(b) otherwise: had less than 20 employees.”

FOS may consider a dispute where the value of the applicant’s claim does not exceed $500,000, and can award compensation up to $280,000.

Improving IDR
ASIC is encouraging AFS licensees and credit licensees to:
• consider ways to more proactively assist consumers to recognise that they are in financial hardship at earlier stages when they experience hardship;
• better resource and train their frontline and collections staff to properly identify and consider hardship issues; and
• better resource their complaints handling teams so they can respond to complaints at EDR in a timely manner (and, in FOS’s case, so that a complaint under its debt recovery legal proceedings jurisdiction can continue to be expedited).

FOS has published its systemic issues update for April-June 2012 as reported to ASIC.

The credit related issues included:

• Several disputes were referred for systemic issue review that involved a financial service provider’s (FSP’s) practices for making default listings and serious credit infringement listings. FOS was concerned that applicants may have been deprived of their opportunity to remedy defaults before they were listed and that the listings may have breached the Privacy Act 1988 (Cth) as they dealt with amounts less than 60 days overdue.
• Another dispute relating to listings and serious credit infringement listings, revealed that the FSP’s standard default notices were not compliant with the relevant legislation.
• FSP procedures which did not ensure collections and enforcement action were suspended after FOS notified the FSP of the disputes. A review of these disputes indicated that in a number of cases, default notices were dispatched to customers after FOS had notified the FSP of the disputes. In another case, security property was repossessed after FOS notified the FSP of the dispute.
• In another case , legal proceedings against an applicant were initiated one week following FOS’s notification of the dispute. Similarly, the circumstances of a similar dispute showed that the FSP appeared unable to ensure that telephone contact from its collections team ceased during FOS’s investigation of the dispute.