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Enhancing hardship support for Australians

The Australian financial system has been resilient and well positioned to support the economy through economic fluctuations. Indeed, Australia has been largely fortunate to experience little distress outside of the COVID-19 pandemic. We are now seeing high inflation and a fast rising interest rate environment resulting in cost of living pressures, and as a result, an increasing number of Australians experiencing prolonged financial distress.

Hardship, and the obligations of lenders to support customers, is set out in the National Consumer Credit Protection Act 2009. Specific obligations apply when making changes to credit contracts as a result of hardship, as well as other industry codes of practice that are widely adopted. 

In August 2023, ASIC wrote in an open letter to the CEOs of all lenders reinforcing their expectations of how customers experiencing financial hardship are supported. ASIC then conducted a data collection exercise involving 30 large lenders and 10 large home lenders, publishing the outcomes of the review in May 2024 in Report 782 Hardship, hard to get help: Findings and actions to support customers in financial hardship (REP 782). Whilst ASIC’s report focuses on mortgage lenders, they are clear that their findings and expectations apply across other lines of credit – not purely to home lending.

ASIC identified that lenders were taking positive steps to improve their approach to financial hardship with the majority of the organisations reviewed having in place significant programs of work to improve their approach to hardship and approximately 71% of hardship notices approved, resulting in the provision of assistance. A number of organisations reviewed had also recently introduced more flexible means of applying for hardship assistance and improvements to communications to customers around the hardship process. 

ASIC’s review identified five key findings:

ASIC reviewed whether lenders focused on customer experience and outcomes and if they had the systems, training and resourcing in place to support their hardship function. It found lenders tended to focus more on financial risk and operational efficiency, rather than on customer experience and outcomes. This appeared to be the root cause for some of the practices identified.

ASIC reviewed what steps lenders took to ensure that customers knew that financial hardship assistance was available, and when and how to request that assistance. ASIC found some lenders weren’t proactive in informing customers about hardship assistance. Of particular concern, some lenders failed to identify when a customer was giving a hardship notice. This meant that customers did not receive timely assistance, or assistance at all.

ASIC found that around 35% of customers withdrew or were declined hardship due to non-response after giving a hardship notice, but that the assessment and approval processes were often stressful, inefficient and inflexible. This resulted in customers not getting the tailored assistance they needed.

ASIC assessed how lenders communicated approval and declined decisions. ASIC found that outcomes of hardship assessments were poorly communicated to customers and communications during and at the end of the assistance period were inconsistent. Quite often, lenders didn’t clearly explain the impact of hardship assistance and what was required from the customer. This resulted in some customers not being aware that they would have arrears at the end of the assistance period that would need to be cleared.

ASIC identified multiple examples where lenders failed to identify, and provide appropriate support to, customers experiencing vulnerability. This resulted in increased distress and confusion for customers, and certain vulnerable groups such as indigenous communities and individuals with disabilities facing additional barriers in accessing and navigating hardship assistance programs.

What do we see?

In Deloitte’s experience, we have observed instances where focus on meeting legislative obligations has unintentionally resulted in a compliance-based, rather than customer-centric approach, particularly when considering the mandated timeframes within which a decision should be made. 

In many instances, hardship processes have been adapted to respond to external events such as the onset of COVID-19, where lenders were unprepared for the extent of hardship enquiries. Processes were often established for dealing with volumes of enquiries rather than bespoke customer-tailored solutions and largely remain manual, inefficient and reactive in nature. As hardships affect a relatively small number of borrowers, investment in automation, technology and data for customer hardship teams has not yet been prioritised for most organisations. However, there is significant opportunity to enhance the customer and agent experience through automation, more effectively predict those who may need assistance and the outcomes needed through use of data and to integrate hardship communications into existing technology and apps.

Taking a customer-centric approach to hardship applications requires lenders to consider the flexibility of their existing processes to meet the needs of their customers whilst also managing the risk associated with unserviceable debt and their legal obligations. For example, where lenders ask for further information from a customer, they should be careful that these processes do not take a ‘one size fits all’ approach to the information requested, or that customers who do not provide the ‘right’ information have their individual circumstances appropriately considered before an application is declined.

Likewise, a customer may not appreciate the nuances and implications of temporary hardship arrangements versus variations to a credit contract and care should be taken to ensure teams offering assistance can clearly articulate this in a way customers can understand. The inclusion of case study examples in ASIC’s report, highlights the regulator’s steer that customers should be dealt with as individuals with individual needs. As such, when thinking how to respond to the report, a shift to a principles-based mindset is required. Deloitte anticipate that ASIC will look to other jurisdictions such as the UK when setting its expectations for lenders. The UK regulator, the Financial Conduct Authority (FCA), has a strong focus on customer outcomes and fair treatment embedded within its regulatory framework. In particular, the introduction of the Consumer Duty in the UK harnessed existing principles of fair treatment and introduced a requirement for lenders to both measure and deliver on good customer outcomes. Lenders in Australia should consider how they can adopt such principles to transform the way support is provided to customers when they need it the most.

The FCA considers that determining customer circumstances is fundamental to the proper application of hardship measures. It has outlined that lenders should also adopt a degree of proactivity, via early identification of financial difficulty within borrower groups, and adaptation of collections strategies according to market conditions. In the UK, we have seen the FCA impose multi-million pound penalties on organisations where they have not appropriately supported customers in financial difficulty, and organisations have spent hundreds of millions of pounds thereafter to rectify issues and compensate customers. 

The similarities between the FCA’s expectations and ASIC’s current recommendations are not surprising given both regulators are seeking to address the risks of consumer harm in challenging economic environments that have resulted in increasing levels of applications for hardship assistance. Taking a customer-centric approach has been a long journey for UK lenders, and this is likely to continue with closed products and services also falling under the Consumer Duty requirements from 31 July 2024.

Where to from here?

ASIC has signalled that where there is evidence of consumer harm, it is prepared to use its broad enforcement toolkit in response. It is important for lenders to demonstrably challenge and uplift the way in which they navigate the careful balance between compliance and customer centricity within their processes, systems, and controls to deliver adequate support to customers who need it most. 

ASIC expects that all lenders self-assess against the findings from this review and take steps to improve their practices.  In working through the practical actions suggested by ASIC, we encourage organisations to:

  1. Undertake a review of the operating model and underlying processes within the hardship function to identify the pain points, strategic choices and quick wins that will enhance hardship support offered to customers. This should include explicit consideration of customer journeys, and the approach to customer interactions, system capabilities, flexibility of procedures and how these arrangements are regularly reviewed.
  2. Consider the opportunities for your organisation to leverage its data and technologies to deliver better customer and agent experience and outcomes.
    • Leveraging existing data sets to predict customers that may be in need of assistance, and the outcomes needed
    • Leveraging automation capability deployed in other parts of the organisation to simplify agent processes (for example, innovations that address the necessity to navigate multiple information sources and systems during customer interactions)
    • Enhancing existing mobile banking customer applications and platforms for customers to make or monitor hardship applications.
  3. Consider how your organisation will meaningfully assess the uplift of your customer hardship arrangements and report on customer hardship outcomes. Embedding strong governance is a key step to achieving the cultural changes often needed in a customer centric approach.