Case studies

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Click below to read case studies written by the Financial Ombudsman Service to highlight trends
that appear to be affecting consumers and financial service participants. Whilst the details of
these case studies are taken from actual disputes, any particular case study does not reflect the
exact circumstances of any one dispute.

Banking & Finance

1. Chargebacks
2. Financial Planning and the Aged Pension
3. Break Costs
4. Financial Difficulty
5. Merchant’s EFTPOS Facility
6. Property Purchase by Bank Officer
7. Inadequate Insurance Policy
8. Disputed ATM Withdrawals
9. Disability - Protective Measure Fails
10. Maladministration in Granting Loan
11. A Hasty Return
12. A Frozen Account
13. Progress Payment to Builder
14. Reports to Credit Reporting Agency
15. Unauthorised Credit Card Transaction
16. Unsolicited Credit Limit Increase

Chargebacks – Effect of consumer delay in providing evidence of withdrawn authorisation

Mr A, a credit card holder disputed a charge to his account on the basis that he had paid by other
means (cash). Mr A had purchased jewellery in Asia, offering his credit card for payment. He
was told by the merchant, who had taken the card out of Mr A’s sight, that the card would not
swipe. Mr A said he then paid in cash.

The bank requested evidence of the payment by other means and he provided a document headed
“Estimate” that he believed would suffice. The bank asked if he had any documentation to show
actual payment and he said that the document that he provided was all that he had. The bank
attempted a chargeback using the Estimate, but this was rejected by the merchant’s bank as not
being sufficient to show payment by cash. The merchant’s bank also provided a signed voucher
for the transaction and the transaction was represented. The bank advised Mr A that its attempt to
charge back the transaction was unsuccessful.

After his dispute was lodged with us, Mr A provided a receipt for the purchase, showing
payment in cash. He said that he had not been able to provide the document earlier, as it was in
Asia. Our Case Manager accepted that this receipt would have been sufficient to support the
chargeback, had it been provided to the bank when the dispute was raised. On reviewing the
signed voucher, the Case Manager was satisfied that the signature bore no resemblance to Mr
A’s own signature and concluded that it had likely been forged.

The Case Manager found that the reason for the unsuccessful attempt to charge back the
transaction was Mr A’s failure to provide the necessary supporting documentation within the
time limits set by the card scheme. However, Mr A’s explanation, the receipt and the evident
forging of his signature pointed to a conclusion that the disputant had not authorised the debiting
of his account.

The Case Manager concluded that, while Mr A had a valid chargeback reason and the bank had
tried to reverse the transaction, the reason that it this had been unsuccessful was Mr A’s own
delay. Therefore, the Case Manager found that the bank was not liable to make good Mr A’s
loss, in terms of the transaction amount. However, as he had not authorised the debiting of his
account, the bank was not entitled to charge interest or other fees and charges in relation to the
transaction.

Both parties rejected the Case Manager’s Finding and the matter was then considered by the
Ombudsman. The bank argued that Mr A, by presenting his card for payment, had authorised the
charge to his account and so interest, fees and charges should apply.

The Ombudsman rejected this argument, determining that where a card has been tendered for
payment, but the cardholder has been informed by the merchant that the attempt to use it had
failed and payment requested by other means, authorisation is effectively withdrawn. The
Ombudsman did not accept that Mr A had authorised payment to be made twice. Additionally,
the fact that the voucher bore a signature which was not the cardholder’s, the signed voucher
could not be said to demonstrate authorisation for a charge to his account.

The Ombudsman confirmed the Case Manager’s Finding that Mr A was liable for the amount of
the transaction, but that interest, fees and charges could not be imposed by the bank.

Both parties accepted the Ombudsman’s Recommendation.

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Financial Planning and the Aged Pension

Mr and Mrs A had financial assets comprising a term deposit held with the bank for a number of
years and Mr A’s company superannuation fund. Their other assets comprised their family home,
contents and a car. Mr A was employed on a wage of $35,000 per annum but was due to retire in
the following year. Mrs A earned income only from the term deposit investment which was held
in her name and was shortly to qualify for the aged pension.

Mr and Mrs A approached their bank to seek the advice of a financial planner about how they
could arrange their financial arrangements to allow Mrs A to qualify for the maximum aged
pension and maximise their income. After a meeting with the bank’s planner, he provided advice
that Mrs A would qualify for the full pension if her term deposit monies were invested in a
superannuation fund in her name and recommended investment in a bank balanced
superannuation fund.

Mr and Mrs A accepted the advice and transferred the funds to the recommended fund. Mrs A
subsequently reached retirement age and applied for the aged pension. However, she was
subsequently advised by Centrelink that her pension entitlement was approximately half the full
pension. A review of the financial planner’s advice showed he had erred in his calculation. The
lower pension entitlement therefore meant Mr and Mrs A’s overall already modest income fell
after implementing the planner’s recommendation.

The value of Mrs A’s superannuation investment subsequently fell significantly.

Following an investigation, the Financial Ombudsman Service reached the view that it was
reasonable to conclude that the error in the planner’s calculations had significantly impacted both
the recommendations he had made and Mr and Mrs A’s acceptance of the advice. The Financial
Ombudsman Service’s view was that the error made by the planner was not so obvious as to
have been detectable by Mr and Mrs A and they therefore reasonably relied on the information
supplied.

Furthermore, the Financial Ombudsman Service’s view was that the recommendation made by
the planner was inappropriate given Mr and Mrs A’s financial position, their historical
investment profile and the resultant reduction in their income. Had the correct pension
information been stated, and the appropriate recommendation supplied, it was more likely than
not, in the circumstances of this case, that Mr and Mrs A would have retained their existing
investment arrangements together with a part pension.

On that basis, the Financial Ombudsman Service determined that the disputants were entitled to
be put back in the position they would have been had the term deposit remained in place and the
bank was liable to compensate them on that basis.

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Break Costs
Mr and Mrs N decided to sell their home. They contacted the financial services provider (FSP) to
obtain a loan payout figure and were quoted a figure which included a break cost of
approximately $20,000.

Mr and Mrs N said that they were not aware that there would be any penalty applying to the loan
if they repaid it early. They said that, when entering into the loan, they were already considering
selling their home possibly before the fixed interest rate period had expired. Mr and Mrs N said
they would never have fixed the interest rate on their loan for 3 years if they had they known of
the potential for such a substantial break cost.

Relevantly Mr and Mrs N did not discuss their plans to sell their home with the FSP at the time
they entered into the fixed interest rate loan.

In assessing the dispute, it was necessary for FOS to establish:

 Whether the break cost was properly disclosed to Mr and Mrs N

 whether it was calculated in accordance with the loan contract
 whether it was correctly applied, and
 as the loan in this case was regulated by the National Consumer Credit Protection Act
(NCCP), whether the charge exceeded a reasonable estimate of the FSP’s loss as a result
of the early termination of the fixed rate loan (Refer Schedule1 Section 78(4)).

The loan contract signed by Mr and Mrs N when they entered into their loan contained a clause
setting out the potential for a break cost in the event Mr and Mrs N repaid their loan before the
fixed interest rate term had expired. The clause also set out the calculation method.

FOS concluded in favour of the FSP.  It was not evident that the FSP misled Mr and Mrs N about
the potential for a break cost because that information was adequately disclosed in the loan
documentation they had signed and accepted.  And no additional obligation had arisen to further
discuss the cost because the FSP was not made aware of Mr and Mrs N’s plans to sell their home
at the time they entered into the fixed interest rate.

FOS also reviewed the FSP’s calculations and method, and made its own estimate of the break
cost based on published data.  Its estimate correlated with that of the FSP and FOS, therefore,
concluded that the FSP was entitled to pass on its break cost as it did not exceed a reasonable
estimate of the FSP’s loss.

References:
Financial Ombudsman Service Banking & Finance Bulletin 60
National Consumer Credit Protection Act Section 78 (4)
Financial Ombudsman Service Factsheet Breaking a Fixed Rate Loan

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Financial Difficulty

Mr and Mrs S were experiencing financial hardship as a result of Mr S suffering a workplace

injury and Mrs S having recently given birth to their child.

There had been a delay in settlement of the sale of their home due to the impending approval of a
subdivision and they had fallen behind in the repayment of their home loans.

Mr and Mrs S had kept the bank informed of any possible delays with settlement and were
mindful of not having a default listed against their names.

Mr and Mrs S made a number of calls to the bank regarding their predicament and they say they
were given differing responses about how the matter should be handled. Mr and Mrs S say that
the bank officer who ultimately dealt with their concerns appeared insensitive to their financial
predicament and would not consider any alternative solutions to their problem.

When the dispute was referred from FOS to the relevant bank for review, reference was made to
the bank’s obligation under section 28.2 of the Code of Banking Practice, which applied in this
case as the bank was a subscriber.

In resolving the dispute, the bank offered assistance to the disputants in the form of a repayment
moratorium to each of their loans on the basis that settlement would be finalised within two
months. This provided the disputants with an opportunity to finalise the subdivision and sale of
their property. On the sale of the property, two of the disputants’ loans would be cleared and the
arrears position cleared on the third loan.

This offer was accepted by the disputants in resolution of their dispute.

Points to note

 Code of Banking Practice ("code")

Section 28.2 of the code says:

“With your agreement, we will try to help you overcome your financial difficulties with any
credit facility you have with us. We could, for example, work with you to develop a repayment
plan. If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code
could apply to your circumstances, we will inform you about them.”

 Uniform Consumer Credit Code

Section 66: Changes on grounds of hardship

 Financial Ombudsman Service Banking & Finance Bulletin 46, Bulletin 50 and Bulletin
53
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Merchant’s EFTPOS Facility

The disputants ran a small business as a partnership selling giftware. One partner had been in
business since it started and the other had bought her share about a year before the dispute arose,
after one partner retired. All of the documentation relating to the EFTPOS facility used by the
business had been signed by the partner who had retired.

A customer of the business frequently telephoned the store over a period of five weeks to order
gift hampers. To process the telephone orders, the disputants keyed the customer’s card number
into their EFTPOS terminal. At no time did they swipe the card or obtain a signature, nor did the
customer ever come into the shop. By keying in the card using the “off-line” system, the
disputants were by-passing the electronic system which prevented transactions over the $100
floor limit from being accepted when the cardholder’s account did not have sufficient funds.

The cardholder’s bank subsequently sought to reverse the transactions, which amounted to
approximately $16,000. The chargeback request was made on the basis that the transactions were
not authorised.

The case manager reviewed the merchant agreement and noted that the disputants’ bank was
entitled to charge back transactions which were not valid, including transactions not processed in
accordance with the relevant procedures. It was found that the disputants had contravened the
procedures by:

 Processing the transactions “off-line” at times when the electronic system was
functioning. (The process should only have been used when the electronic system was
down);

 Failing to seek authorisation for transactions above the floor limit; and

 Failing to take reasonable care to detect unauthorised use of the card. (The case manager
considered that the size, frequency and nature of the transactions should have given rise
to a suspicion of fraud).

The disputants argued that they were not bound by the merchant agreement because neither had
signed it personally. However, a review of the partnership agreements and partnership legislation
led the case manager to conclude that the original partner who had signed the agreement bound
the continuing partner, that on dissolution of that partnership the continuing partner assumed
liability under the merchant agreement, that the new partner had agreed to assume equal liability
for debts of the business and had adopted by conduct the terms and conditions of the merchant
agreement.

The case was closed after a Finding was issued which stated that the bank could rely on its
merchant agreement and charge back all of the transactions.

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Property Purchase by Bank Officer

Mrs A was selling her home through a real estate agent. A loans manager (J) employed by Mrs
A’s bank was, however, interested in buying the property without the involvement of the estate
agent.

J contacted Mrs A on four occasions and made offers by telephone, all of which were rejected.
He eventually bought the property at auction.

Mrs A said that the approaches from J were unwelcome and amounted to harassment. She said
that he had accessed her loan file and used the information to try to persuade her to accept a
lower figure than she was asking. She said that she was traumatised and intimidated by J’s
actions, and that she had sold the property for a lower figure than she wanted due to the actions
of J. She sought compensation of $35,000.

Investigation

J admitted that he had contacted Mrs A to discuss buying her house. Whilst he denied obtaining
Mrs A’s telephone number from her account details, the case manager found that this was the
most likely explanation for his knowledge of her telephone number. He admitted accessing her
loan file but said that Mrs A had given him permission to do so.

The case manager found that J’s use of the account was inappropriate because it did not arise
from the banker/customer relationship, but was rather, for J’s private purposes.

It was also found that J may have used the information about Mrs A’s home loan as a private
bargaining tool. However, the lapse in time between the access and the auction, and the fact that
the property was sold at auction meant that it could not be concluded that J obtained a financial
advantage by his actions.

Resolution

In light of the distress caused, and the inappropriateness of J’s actions, compensation of $1,500
was viewed as appropriate.

A Finding was issued, but was rejected by Mrs A. The Ombudsman then issued a
Recommendation stating that $1,500 was an appropriate amount of compensation. Mrs A
rejected the Recommendation also, and therefore, the Financial Ombudsman Service was unable
to assist further.
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Inadequate Insurance Policy

Mr and Mrs C had operated a home loan with the bank for many years. The bank suggested to
them that they should change the loan to a newer product that offered more benefits. Mr and Mrs
C agreed to change the loan over provided that the same death and disability insurance was
available with the new product. The bank officer indicated that this could be arranged and
accordingly, Mr and Mrs C entered into a new loan contract.

When the new loan was drawn down Mr and Mrs C received a refund for an insurance premium.
When they questioned this they were advised that their old insurance policy could not be
transferred to the new loan because it was no longer offered by the bank. The new insurance
policy did not offer cover for temporary disability.

Mr and Mrs C wrote to the Financial Ombudsman Service stating that they would never have
taken out the new loan if they had known that their insurance policy could not be transferred.

Resolution

After discussions were held between the parties, the bank agreed to establish an insurance policy
under the same terms as the original policy. The bank agreed to underwrite the insurance policy
itself, as the insurance arm of the bank no longer offered the product. The bank also refunded the
$600 application fee.

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Disputed ATM Withdrawals

Mr L and Ms W disputed a large number of ATM withdrawals, totalling $27,000, made from
their line-of-credit account over a three-year period with their debit cards. They acknowledged
receiving monthly statements, but said they were only concerned with the closing balance. They
only made a detailed check when they noticed that their home loan was not reducing as quickly
as they had expected. They provided a detailed list of disputed transactions to the bank, but
conceded that some of the withdrawals would have been their own. They claimed that access to
their account could have been gained internally by the bank, or via a hacker on the internet.

The bank declined to make any refund. It said it was not clear why some transactions were
disputed and others were not. It also noted that Mr L and Ms W had not disputed any
transactions on their credit card account, yet on some days, valid credit card purchases occurred
in the same suburb as disputed debit card withdrawals.
Facts that came up during the investigation included that: both debit cards were used, but most of
the disputed withdrawals were made with Mr L’s card; both cards had bank-generated PINs; on
two occasions it seemed that disputed ATM withdrawals had been used to make payments to the
credit card account; on one occasion a disputed withdrawal was followed by a valid withdrawal
only one minute later; and on at least one occasion there was a disputed cash withdrawal using a
debit card on the same day that one of the disputants used a credit card to purchase goods in the
same shopping centre.

The case manager found that there was nothing to support the contention that account access was
gained internally by the bank or via a hacker on the internet. There was also no information to
support a possibility that an unauthorised third party had gained access to the cards and PINs. On
the weight of information, the case manager concluded that the most probable explanation for the
disputed transactions was that they had been made by the applicants themselves. The bank was
not asked to compensate the applicants.

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Disability – Protective Measure Fails

Mrs D’s son suffered from schizophrenia. To help him save and to protect him from the effects
of a gambling problem, she and her son opened a passbook account and a term deposit account.
The accounts required both to sign for any withdrawals.

Mrs D contributed about a third of the funds in the savings account and her son contributed the
rest from income from his part time job. As funds built up in the savings account, they were
transferred into the term deposit.

In 2000, the bank allowed Mrs D’s son to withdraw all the funds in both accounts, about
$20,000, via telephone banking. Mrs D believed that the funds were spent in gambling venues.
The error occurred because the operating authority information from the original applications
was not transferred when the accounts were converted to a new format. Although telephone
banking is generally not available for accounts which must be jointly operated, the accounts did
not have the required restriction placed on the system.

After the Financial Ombudsman Service commenced an investigation, the bank made an offer to
resolve the dispute by making a payment of $10,000 in full and final settlement. The offer was
accepted and Mrs D requested that the funds be placed in a trust account in her name to be held
on her son’s behalf.

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Maladministration in Granting Loan

Mr G was a self employed builder. In July 1999 he approached the bank about an organic fruit
and vegetable business he was considering purchasing.

Mr G was provided with a loan of $125,000 which he used to purchase the business for
$120,000, with the additional $5,000 being for working capital. The bank also provided lease
finance of $39,000 for a new van for deliveries and a bank guarantee for $7,950 in relation to the
rental of the business premises. Security was provided by a mortgage over Mr G’s investment
property which was vacant at the time with a renovation about 75% completed.

At the time, Mr G’s existing debts included a loan in relation to the investment property, a loan
in relation to a property he had purchased jointly with his girlfriend and a credit card debt.

It soon became apparent that Mr G could not meet his monthly commitments from the returns of
the new business. In December 1999 he placed the business (including the van) on the market for
$125,000. The business was ultimately sold over twelve months later for $35,000.

Mr G subsequently complained to this office claiming that the bank should not have granted him
the loans because he did not have the capacity to meet the repayments.

Investigation

The Financial Ombudsman Service obtained the bank’s lending file for Mr G which included
loan applications and supporting documents, internal notes about the applications, and
assessment documentation. After reviewing this information, the case manager formed the view
that the bank had not acted prudently, and its decision to lend to Mr G constituted
maladministration because:

 The bank provided 100% finance plus working capital and a lease for a business in which
Mr G had no prior experience. According to the bank’s internal lending guidelines, Mr G
ought to have had at least 2 years’ experience in the industry to demonstrate “satisfactory
management experience”.

 Assessment of capacity to service the loans was based on incomplete and out of date
financials. The bank relied entirely on vendor financial statements and did not request
accountant prepared cash flow forecasts. The vendor’s financial statements apparently
indicated that the net profit of the business increased by 300% from 1996/97 to 1997/98.
Given this significant and unexplained improvement, the bank ought to have undertaken
further analysis to satisfy itself about the sustainability of the 1998 results.

 Serviceability relied on rental income from Mr G’s investment property. That property
was, however, undergoing renovation and was not in a habitable state. Therefore, rental
income should not have been taken into account.

Resolution
A conference was held with the parties and the Ombudsman, and further negotiations took place
over subsequent weeks. The dispute was settled with the bank reducing Mr G’s outstanding debt
by $90,000. This represented a 75% reduction in the debt.

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A Hasty Return

Mr and Mrs W went to Europe for their honeymoon. They intended to stay for one month, but
after two days, their credit card stopped working and they decided to cut short their holiday and
return to Australia.

Mr and Mrs W lodged a dispute with the Financial Ombudsman Service, claiming that the bank
should compensate them for their loss of enjoyment of their holiday.

When the Financial Ombudsman Service referred the dispute to the bank for its consideration, it
offered an ex-gratia payment of $3,000. Mr and Mrs W did not accept this offer, and it was
subsequently withdrawn by the bank.

Investigation

The information provided by the bank did not establish why the credit card had stopped working.
However, it was the case manager’s view that as the bank represents to customers that the
particular type of card can be used in most countries, the bank would be potentially liable for
losses resulting from the failure of the card to work.

The case manager then investigated whether, according to the Ombudsman’s guidelines for
assessing non-financial loss, Mr and Mrs W were entitled to any compensation from the bank.

The case manager noted that:

 Mr and Mrs W did not contact the bank to try to rectify the problem with the credit card;
and

 Whilst the credit card did not work, they could still have accessed alternative funds by
using Mr W’s Keycard. This would have allowed them to make EFTPOS purchases and
ATM withdrawals of up to $A800 per day, which appeared to be more than adequate for
their travelling needs.

Resolution

The case manager concluded that Mr and Mrs W acted with extreme haste in deciding to return
to Australia. As they had not given the bank an opportunity to resolve the matter, and did not
take any reasonable steps to minimise the inconvenience they were suffering, the case manager
found that it was not reasonable for Mr and Mrs W to expect to be compensated by the bank.

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A Frozen AccountMs H and Ms P operated a pet supplies business as a partnership. The

partnership had several facilities with the bank including an EFTPOS machine, a business credit
card and a business trading account. Either proprietor was authorised to operate the accounts.

The partners became involved in a financial dispute and ceased to operate the business together.
Ms P continued to trade as a sole proprietor, and the relevant change of ownership forms for the
registered business name were lodged.

Ms P’s dispute with the bank arose when she deposited funds she had earned as a sole proprietor
into the partnership account, and drew cheques against these funds. As soon as the bank became
aware of the partnership dispute, it froze the account and dishonoured the cheques Ms P had
issued. Ms P said that she was unable to continue to trade and was forced to close the business.

Ms P argued that the bank should not have frozen the account when it had been a bank officer
who had advised her to continue to use the partnership account. The bank officer concerned
denied giving Ms P this advice.

Issue

The main issue for the case manager’s consideration was whether the bank officer had advised
Ms P that she could continue to operate the partnership account. It was difficult to determine this
issue because there was no documentation recording the nature of the discussion between Ms P
and the bank officer.

Resolution

The Ombudsman considered that a conciliation conference was an appropriate method of trying
to resolve the matter. The dispute was resolved at the conference, with the bank agreeing to pay
Ms P $9,000. The early conciliation conference avoided the need for a long and difficult
investigation.

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Progress Payment to Builder

Mr and Mrs T engaged a building firm to construct their home. They entered into a loan contract
with the bank to finance the construction whereby progress payments to the builder were made at
five defined stages. Mid-way through the construction the builders went into liquidation. Mr and
Mrs T disputed the payment made by the bank to the provisional liquidators at the “lock-up”
stage because they said the construction was not at that stage and in fact, the house had to be
demolished due to defective workmanship.

Mr and Mrs T acknowledged signing the authorisation to pay the provisional liquidators at “lock-
up” stage but argued that the bank owed a duty to them and should not have paid the invoice
without inspecting the property.

The case manager issued a Finding on the merits of the dispute after considering the bank’s
policy for progress payment inspections, the bank’s building payment practice and the
Ombudsman’s legal counsel’s review of the relevant terms and conditions of the loan contract.

The Finding concluded that the bank’s policy did not require it to make inspections of the
building of a residential home where the contract price was less than $1 million and that it was
not the bank’s practice to inspect constructions prior to releasing a payment authorised by the
owner. In this case the first two progress payments had been released without a bank inspection
of the construction.

There had been no allegation that the bank represented to the disputants that it would inspect the
property at each of the stages before releasing the payment to the builder. Furthermore, the loan
contract specifically absolved the bank for any contractual liability to the borrowers to inspect
before releasing a payment. The case manager also considered that Mr and Mrs T’s written
authorisation meant that the bank was entitled to release the payment and was a representation to
the bank that they were satisfied that the payment could be made. Taking all these factors into
consideration, the case was closed after the Finding confirmed that the bank had acted
appropriately in releasing the payment to the provisional liquidators.

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Reports to Credit Reporting Agency

Mr R’s dispute related to two default listings that had been reported to a credit reporting agency
by the bank.

Mr R conducted two business related cheque accounts with the bank. Both accounts were in
overdraft. One account had an approved temporary overdraft limit, the other operated in
overdraft from time to time without the specific approval of the bank. Mr R failed to reach an
agreement with the bank to regularise the overdraft and also exceeded the temporary limit on the
other account. After appropriate warnings, the bank listed the defaults to repay the overdrafts
with a credit reporting agency. The default listings were made to Mr R’s consumer (individual)
file.

Mr R argued that the default listings should not have been made to his consumer file when the
accounts had been used for business purposes.

Legal Advice

The file was referred to the Ombudsman’s legal counsel for advice. It was legal counsel’s view
that a default on a business cheque account should not be listed on an individual’s consumer
credit file because “credit”, as defined in the Privacy Act, has not been extended to that
individual. However, a business default listing could be made to a person’s commercial file.

Resolution

A Finding was made that as the listings to Mr R’s consumer file had been made in error, they
ought to be removed. The Finding also dealt with Mr R’s claim that the wrongful listing had
prevented him from obtaining credit elsewhere, and that he should be compensated.

It was found that Mr R was in default of his obligations to repay the overdrawn funds and, as a
result, suffered no loss because of the listings to the consumer file. This was because the default
listings could have been made to Mr R’s commercial file. Mr R required further credit to fund
the business and had the listings been made to the commercial file, this would have prevented Mr
R from obtaining such credit. Therefore the listing to the consumer file, although in breach of the
Privacy Act, left Mr R in the same financial position he would have been in had the default
listing been made to the commercial file.

The bank accepted the Finding and removed the default listing on the consumer file. As the debts
had been repaid, no listing was made to the commercial file.

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Unauthorised Credit Card Transaction

Ms K applied for a credit card but says the application was declined and she never received the
card. Some time later, Ms K was contacted to make payments on a debt of $1,000 owing on the
credit card account. Although Ms K did not believe she was responsible for the debt, she became
nervous when the bank threatened to list the default with a credit reporting agency. She
reluctantly agreed to repay $50 per month towards the debt.

Ms K then received a letter from a collection agency demanding repayment of the full amount of
the debt. Ms K contacted the bank to ask how the account could have been opened in her name
when her application was declined. She requested copies of the identification that had been
shown when the account was opened, but she was advised that she would have to pay a fee for
the information.

A default listing was subsequently entered against Ms K’s name and when this was discovered,
Ms K wrote to the Financial Ombudsman Service requesting assistance.
The dispute was referred to the bank for its consideration. The bank conducted an investigation
into the matter and advised that its records showed that the credit card application had, in fact,
been approved but that it was not able to confirm that Ms K had received the card. The bank
accepted that the card may have been used fraudulently by a third party, and the dispute was
promptly resolved with the bank agreeing to extinguish Ms K’s liability for the debt and
removing the default listing.

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Unsolicited Credit Limit Increase

Ms E complained about a $7,211 unauthorised transaction made with her credit card without her
knowledge or consent.

The issue for the case manager’s consideration was whether Ms E had disputed the transaction
within the timeframe set out in the bank’s Conditions of Use for Credit Cards.

After the case manager issued a Finding stating that Ms E was liable for the transaction because
she had not disputed the transaction within the required time frame, Ms E appealed and
introduced a new argument: that she should not be liable for the unauthorised transaction because
the bank did not assess her ability to repay the amount of credit when it offered her extensions of
credit.

Investigation

The case manager investigated this new aspect of the claim and noted that:

 Ms E had been employed by the bank in 1994 when it approved a credit card with a limit
of $2,000. She had, however, ceased working 13 months later to look after her children.
She never returned to work and the only income she received was approximately $6,000
per year in government benefits;

 Despite this, over the next six years, the bank offered Ms E six unsolicited increases in
her credit limit which were accepted. This saw her credit limit rise from the original
$2,000 to $10,000; and
  At no stage was Ms E required to advise the bank of her financial details. (The bank said
that offers for increases in the credit limit were based on the bank’s assessment of the
good conduct of the account.)

The view of the Ombudsman’s Banking Adviser was that a limit of $2,000 was the maximum
that could be justified based on Ms E’s financial position.

Resolution

The case manager summarised the banking advice in a letter to the bank and the matter was
subsequently resolved by negotiation between the parties, facilitated by the case manager. The
bank agreed to refund the amount of the disputed transaction and interest, and Ms E agreed to
have her credit card cancelled.

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General Insurance

1    Maximum demerit points

2    Travel insurance and exclusion for “insurrection”
3    Accident Insurance

Maximum demerit points – you cannot disclose what you do not know 

The financial services provider refused to pay the claim of Mr B for damage to a motor car
following an accident, on the basis that he, as policyholder, had not made disclosure that he had
reached the maximum 12 penalty points. Mr B claimed he was unaware he had reached the
maximum number of allowable demerit points . Mr B said he did not receive the warning letter
and the law of non-disclosure is clear that you cannot be obliged to disclose what you do not
know.

At relevant times, Mr B held both a Queensland and New South Wales licence.

During the course of the dispute, financial services provider wrote to Mr B offering to “welcome
him back” as a policyholder. The issue arose as to whether this was a marketing tool or a direct
invitation to Mr B. Whilst this was not central to the decision making, it demonstrated the risk a
financial services provider runs when on the one hand it says it would not insure an individual
because of their particular driving history, and on the other hand sends them marketing material,
with an invitation to re-insure.

In this determination, the Financial Ombudsman Service panel found accepted that a person
cannot disclose what they do not know. After considering all the material provided by the
parties, the Panel was not satisfied that the financial services provider had discharged the burden
of proof that Mr B failed in his disclosure obligations to disclose he had received the maximum
allowable demerit points at policy renewal.

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Travel insurance and exclusion for “insurrection”

Mr B was stranded in Thailand in September of last year when the Phuket airport was closed due
to an anti-government protest. As a result, Mr B had to purchase new flight tickets, and incurred
additional costs. The member denied his claim on the basis that the proximate cause for the loss
arose from an excluded clause in the policy that is “a loss that arises from any act of war, or from
a rebellion, revolution, insurrection or taking power by the military”.

The policy however provided cover if Mr B could establish the incurred additional travelling
expenses as a result of cancellation of public transport services caused by riot, strike or civil
commotion.

The critical issue for determination was to whether the events giving rise to the claim should be
categorised as a riot or civil commotion, or whether they should be categorised as an
insurrection.

In order to support its case that the events giving rise to the claim should be categorised as an
insurrection, the member provided the Financial Ombudsman Service with press reports from the
New York Times, the Washington Post and other international newspapers, using terms like
‘protest’ and the ‘demonstrators’.

In determining this dispute, the Financial Ombudsman Service considered it was important to
examine the exclusion as a whole and to apply what is called the “ejusdem generis rule of
interpretation” which requires the court or decision maker to interpret words in their context. In
this regard, it was noted that other words used in the policy exclusion included “war, rebellion,
revolution, or taking of power by the military”.

The Financial Ombudsman Service felt the term “insurrection” needed to be construed in that
context i.e. a significant element of violence needs to be established. It was concluded from the
press report that there was little evidence of violent revolution, at least as of 1 September which
was the critical date in terms of the determination. It was decided that the events might more
comfortably be described as a “riot” or “civil commotion” rather than an “insurrection”.

The Financial Ombudsman Service upheld Mr B’s claim.

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Accident Insurance

The dispute arose from a claim made on behalf of the applicant, a 17 year old school boy, who
allegedly suffered a severe asthmatic attack as a result of exposure to chemicals during the
school’s musical production following the operation of a ‘fog machine’ and exposure to other
allergens. As the applicant had previously been diagnosed as an asthmatic, the issue arose as to
whether he sustained an injury as covered by the policy.

In applying relevant case law, the Panel found that the injury was indeed suffered by violent
external and visible means. The Panel decided that the inhalation of fumes from the fog machine
and other fumes, satisfies that definition of injury in the same way as exposure to dust and other
pollutants. In this regard, the Panel applied a High Court decision where the Court held that the
addition of these words to the definition of injury means "no more than to draw attention to the
distinction between the injury suffered and the means by which it was caused”.

The next critical element considered by the Panel was whether the injury had been suffered
independently of any other cause. This was a difficult issue for the Panel because the applicant
had previously suffered from asthma, although the condition was under control with the use of
medication. In other words, the evidence was that the applicant functioned without difficulty in
terms of leading an active life, prior to the incident giving rise to the claim, albeit with the use of
medication when required.

Whilst the Panel was satisfied that the applicant had an increased propensity to suffer an
asthmatic attack than other persons, this of itself was not a separate cause of the injury. The
Panel stated that if the applicant had been actively suffering from asthma at the time of the
exposure to the allergens, a different result may have ensued. However, the Panel was satisfied
that in the particular circumstances of this case, there was only one cause of the injury which had
been described above. The Panel therefore determined the dispute in favour of the applicant.

The Panel has also had to deal with disputes requiring determination as to whether the
policyholder’s claim was excluded by virtue of a pre-existing medical condition. In several cases
recently determined by the Panel, the member alleged that as the individual had an increased
propensity to suffer from an illness, they suffered from a pre-existing medical condition. In one
case, the person had undergone surgery for a small bowel obstruction in 2003 and required
similar treatment in 2008 causing cancellation of a journey. As the member’s medical advisor
said the applicant was at a much higher risk of the condition reoccurring than other members of
the community, she in effect suffered from a pre-existing medical condition.

However, the Panel rejected this argument on the basis that simply because a person was at
greater risk of developing a condition (e.g. a bowel obstruction) than other members of the
community, the increased risk factor could not be translated into diagnosis that the person was
actively suffering from a pre-existing medical condition, in the same way that the student was
entitled to compensation following the severe asthmatic attack notwithstanding his vulnerability
in this regard.

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Investments, Life Insurance & Superannuation

Investments, Life Insurance & Superannuation Case Studies Index

1    Superannuation
2    Stockbroking
3    Life Insurance

Superannuation and how far the obligation to advise extends

Overview

Mr and Mrs D made contributions to a superannuation fund on the recommendation of the

member’s employee, a superannuation consultant. Mr and Mrs D were both in their early forties
and still working, so the fund was in its accumulation phase. The superannuation rules at the time
permitted them to withdraw their contributions without taxation provided they met a condition of
release. For this reason, Mr and Mrs D were treating the fund as a short term investment vehicle
rather than strictly for retirement income purposes.

Eight years later, changes to superannuation rules meant that a component of Mr and Mrs D’s
superannuation contributions would be taxed substantially if it were withdrawn.

Mr and Mrs D complained that the member breached its contractual obligation to warn them of
such changes ahead of their operation, and claimed compensation.

The issue in dispute

Mr D alleged that the consultant agreed to advise the consumers into the future and for an
indefinite period of changes to the superannuation rules which would prevent them withdrawing
their contributions without incurring tax or other penalties. He alleged that the agreement arose
by reason of his facsimile to the consultant containing a request to that effect and the consultant’s
email reply the same day.

Key findings

The consultant’s reply addressed Mr D’s individual queries of which the request was one and yet
was silent as to the undertaking sought. Mr D also alleged that the member’s consultant provided
the requested undertaking verbally during a telephone conversation around the time Mr D’s
facsimile was sent. However, there was no written confirmation by the member.
The Financial Ombudsman Service found that no agreement to advise arose as a result of the
exchange of facsimiles and or the alleged verbal undertaking. It observed that the member’s
silence in its email reply was neither indicative of its acceptance or rejection of Mr and Mrs D’s
request, and that no legal obligation will be attributed to a person who has not clearly given their
assent.

The Financial Ombudsman Service found that there was no ongoing retainer to provide financial
advice, Mr and Mrs had not paid any fees for advice, and that there had been no contact between
Mr and Mrs and the member during the eight.

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Stockbroking

Overview

This dispute arose when a retired husband and wife alleged that a stockbroking firm
inappropriately advised them to invest a disproportionately large amount of their assets in
options trades without disclosing to them the risk associated with such trades. The options
trading subsequently resulted in losses to the couple.

At the time of the advice, the Applicants were retirees in their eighties. They had previously dealt
with the adviser when he was acting as a representative of a different stockbroker. Prior to
becoming clients of the financial services provider, the adviser had recommended the Applicants
sell two investment properties and obtain a $125,000 bank loan in order to fund the investments,
and that the investments would generate an income of $20,000 per year.

Key findings

The Panel found that the financial services provider had engaged in risky options trades on the
Applicants’ behalf, including the use of high risk uncovered calls.

The Panel found that although the financial services provider had provided requisite documents
to the consumers explaining the risks of options, such as an ASX explanatory booklet and a
Product Disclosure Statement, in the circumstances the financial services provider’s duty of care
meant it was required to do more to explain the risks to the Applicants. These circumstances
included the inexperience of the Applicants; the relatively complicated nature of options and the
fact the trades extended to writing options and the use of uncovered calls; the fact that the
financial services provider was engaged in discretionary trading; and the fact that the consumers
were funding the trades through a loan.

In addition, the Panel found that the options trades were inappropriate for the Applicants’ needs
and circumstances.
The Panel also found that the financial services provider had failed to provide the Applicants
with a Statement of Advice. Further, the financial services provider had failed to seek the
Applicants’ instructions prior to each trade.

The Panel awarded the Applicants approximately $37,000, being the amount of their losses from
the options trading, plus interest. In the circumstances of the case, the Panel did not consider it
appropriate to compensate the Applicants for interest paid on their bank loan or brokerage
charges.

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Life Insurance

Overview

The Applicant’s husband held an Accidental Death Plan Policy for $80,000. He had a heart
condition. In 2005, he lost consciousness while driving his truck. The truck left the road and
drove into a dam, and he died.

The coroner’s report stated that his cause of death was consistent with drowning in a man with a
heart condition. There were no witnesses to the event.

The issue in dispute

The Applicant made a claim on the policy.  The claim was denied by the insurer on the basis that
the he had suffered a heart attack while driving, and this was the effective cause of death.

Heart attack was not covered under the policy as an accidental external event. The Applicant said
that the actual cause of death was the drowning.

Key findings

The Panel found that the medical evidence and findings of the Coroner and Forensic Pathologist
indicated that the death was as a result of drowning, and not as a result of a heart attack. The
medical evidence did not show that the husband had suffered a heart attack prior to driving into
the dam and the proximate cause of death was the drowning.

The complaint was upheld and the Member directed to pay the insurance benefit plus interest.

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Lodge a dispute