Financial Difficulty – Bridging the Divide

Joanna Harris and Philip Field - June 2011

Discussion points

2 3 1  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

600 1 500

The last 2 years

Averaging 470 disputes per month National Credit Code introduced

400

Financial Difficulty team established

300

New Terms of Reference

200 100 0 - Power to vary a credit contract - Power to consider where debt recovery legal proceedings issued

Financial Difficulty disputes received by FOS

1

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 94% Consumers Small Business 6%

1

Jurisdiction

 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)

1

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

1

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 3 rd party – Stock theft by owner after Receiver appointed

1

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

1

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

1

Resolving at an early stage

A focus on resolution before decision Registration $ • Internal Dispute Resolution Acceptance $$ Case Management $$$ • Review • Negotiation • Conciliation • Investigation Outcome $$$$ • Recommendation • Determination

1 Disputes 1800

Days disputes closed

1600 1400 1200 1000 800 600 400 200 0 The majority of disputes are resolved by FSP’s within 60 days Closed Still open

1

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

2

Best practice first response

 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

2

Information from Applicants

 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

2

Telephone conciliation conferences

 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 75% 25% Not resolved Resolved

2

Telephone conciliation conferences

2010 100% 80% 60% 40% 20% 0% Resolved Not resolved

45% 40% 35% 2

Telephone conciliation conferences

 Majority of outcomes relate to repayment arrangements 30% 25% 20% 15% 10% 5% 0% Repayment arrangement with variation Timeframe for sale / refinance of asset Repayment arrangement with debt waiver Repayment arrangement and timeframe Timeframe for sale or refinance with partial waiver  Agreed timeframes – Sale of asset – Refinance of debt APRA release Debt waiver Other commercial decision

2

Settlement agreements

 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

2

Our tips on early resolution

 Robust repayment arrangements  Conciliatory approach – take a fresh look  Flexible debt collection  Use plain language

2

Our tips on early resolution

 Options = outcomes  Information provides answers  Keep things simple  An offer shifts the onus  Avoid misguided jurisdictional concerns

2

Some stories we have seen

 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

2

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

2

Relevant information

 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

2

Relevant information

 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

3

Financial Difficulty in practice

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