The Financial Ombudsman Scheme (FOS) has published an article outlining its views on a financial service provider’s obligations in dealing with a customer in financial difficulty when the FSP has made a lender’s mortgage insurance claim or may potentially do so after the sale of the customer’s property.

Making a claim on LMI
FOS argues that a FSP may not make an LMI policy claim while FOS is considering a dispute. It considers that entering into an LMI policy with an insurer does not override the duties or obligations that a FSP has to its customer, including the obligation to give genuine consideration to a customer experiencing financial difficulty.

Following directions from the mortgage insurer
FOS says that if a FSP merely follows the direction of its insurer and does not form its own view on the customer’s ability to repay the residual debt under a repayment arrangement, it may be unable to demonstrate that it has met its obligation to genuinely consider a hardship variation. If FOS concludes the FSP has not met its obligations, it can require the FSP to vary the credit contract in order to better address the applicant’s financial difficulty.

FOS can also make an award for non-financial loss if an FSP is found to have breached its obligations to assist borrowers in financial difficulty under 25.2 of the Code of Banking Practice or under the Mutual Banking Code of Practice (Codes) or good industry practice.

Resolving the dispute
How FOS handles a dispute will depend on where the debt resides:

• If the debt is currently with the FSP, then in most cases FOS will raise the dispute against the FSP and it will expect the FSP to take no further steps in making an LMI policy claim until the dispute has been finalised.
• If the FSP has made an LMI policy claim before the applicant lodges the dispute with FOS but the claim is yet to be paid by the insurer, FOS will not prevent the insurer from continuing to assess and process the claim. However, FOS will require documentation from the FSP to show that the claim was raised with the insurer before the dispute and FOS will still continue to consider the dispute against the FSP.
• If the claim is approved, the dispute against the FSP will come to an end. The applicant can lodge a new dispute against the insurer with the relevant EDR scheme. If the applicant did lodge a new dispute, the insurer would have to cease all collection activity or recovery action while the EDR scheme is considering the dispute.
• Alternatively, if the insurer declines the claim then the FSP must continue to respond to the dispute.

In FOS’s view, “it is therefore not appropriate for terms of settlement to provide that the shortfall debt, when known, be immediately referred to the insurer. This is because the passage of time between the date the terms of settlement are agreed and the settlement date of the sale of the security property may result in a change to the applicant’s financial circumstances. The FSP should genuinely consider the customer’s ability to pay the shortfall debt when it becomes due. A repayment arrangement may be more appropriate than any claim on the LMI policy at the relevant time.”