Financial Difficulty – Bridging the Divide

Joanna Harris and Philip Field - June 2011

The dry stuff:– The last 2 years– Our jurisdiction

Early resolution in financial difficulty:– Timeliness in resolution – Information that we need– Telephone conciliation conferences– Settlement agreements– Tips for resolving and relevant publications

Financial Difficulty in practice

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2

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Discussion points

The last 2 years

Jul-0

9

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

0

100

200

300

400

500

600

Financial Difficulty disputes received by FOS

Financial Difficulty team established New Terms

of Reference

- Power to vary a credit contract

- Power to consider where debt recovery legal proceedings issued

National Credit Code introduced

Averaging 470 disputes per month

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Types of disputes 94% raised by consumers

– 36% home loans– 36% credit cards– 20% personal loans

6% raised by small business– 70% business loans– 11% hire purchase / lease– 10% overdraft

41% from NSW 24% from VIC 19% from QLD

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94%

6%

Consumers

Small Business

Paragraph 5.1(c) of the Terms of Reference preserves the ability to consider:– maladministration in lending, loan management or

security matters; and– financial difficulty disputes

Ombudsman’s power to vary a credit contract– Paragraph 9.1(f)

Preservation of assets– Paragraph 13.1.b(ii)

Jurisdiction1

Ombudsman's power to vary Paragraph 9.1(f) - FOS may vary a credit contract

(UCCC or NCC) Not limited to variations within NCC:

– Extending the term– Postponing repayments– Establishing short or long term arrangements

Does not extend to interest or debt waiver If Applicant can service loan in future Used as last resort

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Preservation of Assets No collection activity once dispute lodged 13.1b(ii) of the Terms of Reference

– Recognises it may be necessary for FSP to preserve assets the subject of the dispute

– Assets at risk of loss, damage or disposal (not erosion) FSP request in writing explaining:

– What action it wants to take– Why necessary to take such action

Examples:– Possession of motor vehicle by 3rd party– Stock theft by owner after Receiver appointed

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Preservation of Assets: vehicles Predominately for motor vehicle disputes Eroding security not a consideration May be granted if:

– Vehicle cannot be located– Is going to be removed– Is uninsured or unregistered

Discuss with FOS Will be considered on urgent basis

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Responsible lending and financial difficulty

Responsible lending provisions of NCC apply if new credit contract– See ASIC Information Sheet 105

Re-negotiation may:– Vary existing credit contract (capitalisation of arrears)– Form new credit contract (consolidation of debt)

Capitalisation of arrears does not form new contract– Responsible lending provisions do not apply– Repayments should be affordable

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Resolving at an early stage

Registration

$

Acceptance

$$

Case Management

$$$

Outcome

$$$$

• Recommendation

• Determination

• Review

• Negotiation

• Conciliation

• Investigation

• Internal Dispute

Resolution

A focus on resolution before decision

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Days disputes closed

< 30 days

30 - 59 days

60 - 89 days

90 - 119 days

120 - 150 days

150 - 180 days

> 180 days0

200

400

600

800

1000

1200

1400

1600

1800

Closed

Still open

The majority of disputes are resolved by FSP’s within 60 days

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Disputes

Information from you The information you provide contributes to how

effective we can be at an early stage:– Account details– Efforts to date to consider applicant’s circumstances– Internal hardship process information– Acceptable repayment arrangements– Other options

Holistic approach to financial difficulty – What other accounts are affected?

Incomplete responses create delays

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Be creative Endeavour to resolve Resolutions:

– Close matter with FOS at lower cost– Protect FSP position– Allow FSP to regain control

May require a commercial approach An offer will put the ball in the Applicant’s court

– Applicant will have to say why offer is unsuitable

Best practice first response2

What we seek from Applicants:– Current Statement of Financial Position– Supporting documentation– Realistic repayment proposal– Information may differ for small business

We may continue without a completed SOFP– Use information available– What options available without information?– Make decision outlining assumptions

FSPs should not seek excessive documentation

Information from Applicants2

Effective process to attempt to resolve 75% disputes resolve at conciliation

– Authority to resolve needed in the room– Be prepared– Be flexible

Outcomes owned by participants Provide certainty to FSPs Minimises dispute costs to FSPs

Telephone conciliation conferences

25%

75%

Not resolved

Resolved

2

Telephone conciliation conferences

January

February

Marc

hApril

May

June

July

August

Septem

ber

Oct

ober

Novem

ber

Decem

ber

TOTAL

0%

20%

40%

60%

80%

100%

Resolved Not resolved

2010

2

Repayment arrangement with variation

Timeframe for sale / re-finance of

asset

Repayment arrangement

with debt waiver

Repayment arrangement

and time-frame

Timeframe for sale or re-finance with

partial waiver

APRA re-lease

Debt waiver Other com-mercial de-

cision

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Majority of outcomes relate to repayment arrangements

Telephone conciliation conferences2

Agreed timeframes– Sale of asset– Refinance of debt

Provide finality– See Bendigo and Adelaide Bank Limited v Tombs and

Anor [2010] NSWSC 1427 at 40 Must reflect agreement between parties without

addition Deal with consequences of non-compliance Deal with legal proceedings:

– Discontinue– Should not require consent to judgment

Reflect in full and final settlement of FOS dispute

Settlement agreements2

Robust repayment arrangements

Conciliatory approach – take a fresh look

Flexible debt collection

Use plain language

Our tips on early resolution2

Options = outcomes

Information provides answers

Keep things simple

An offer shifts the onus

Avoid misguided jurisdictional concerns

Our tips on early resolution2

Resolutions reached which were tabled months before

FOS not needed:– Dispute resolved at conciliation without FOS

present due to fire evacuation Why will FOS not accept offer:

– FSPs address settlement offers to FOS to accept– Resolution needs to be with Applicant

Bullying in TCC’s Parties agreeing to disagree – but resolving

Some stories we have seen2

Relevant information A library of relevant information available Old Terms of Reference publications:

– Bulletin 46 UCCC vs CoBP Approach, Decisions and Loss

– Bulletin 53 Information requests Multiple debts and reduced repayment requests Repeat requests for assistance Dealing with one debtor about a joint debt

– Bulletin 60

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New Terms of Reference publications– The Circular 2

Small business financial difficulty Debt collection and social security recipients Secured debts and shortfall issues Lender’s mortgage insurance and financial difficulty

– The Circular 3 Debt recovery legal proceedings and financial difficulty

– The Circular 5 Information, varying a contract and responsible lending Preserving assets Repayment arrangements

Relevant information 2

Fact sheets– Information for consumer and representatives– Small business financial difficulty– Natural Disasters

Other tools – Statement of financial position– Guide to conciliation conferences

All available at www.fos.org.au

Relevant information 2

Financial Difficulty in practice

Bill versus Mother Nature Challenge 1: C Challenge 2: B Challenge 3: D Challenge 4: A Challenge 5: E Challenge 6: C Challenge 7: E Challenge 8: D

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