ASIC calls out lenders for poor financial hardship practices | Gilbert + Tobin Lawyers: Law Firm in Sydney, Melbourne & Perth

16/07/2024

As an increasing number of Australians struggle with cost-of-living pressures, the Australian Securities and Investments Commission (ASIC) has increased its focus on how lenders support customers experiencing financial hardship.

ASIC previously announced that one of its strategic priorities for 2024 is compliance with financial hardship obligations and has been actively monitoring lenders' conduct in this area over the past 12 months.

ASIC’s recent supervisory activity relating to hardship

August 2023: ASIC issued an open letter to the CEOs of major lenders outlining 12 expectations for lenders to focus on so that they meet their obligations to customers experiencing financial hardship.
Late 2023: ASIC commenced an end-to-end review of the hardship policies, processes, and practices of 10 large home loan lenders to understand how they support customers experiencing financial hardship.
20 May 2024: ASIC released its findings of its end-to-end review of hardship arrangements in ASIC Report 782 Hardship, hard to get help: Findings and actions to support customers in financial hardship (the Report). ASIC also published ASIC Report 783 Hardship, hard to get help which summarises the Report. The regulator set out its expectations for the industry when dealing with customers experiencing financial difficulty. ASIC has identified nine key focus areas and best practice recommendations for lenders to adopt.
3 June 2024: ASIC announced its new awareness campaign for Australians, Just Ask! Hardship Help is available, encouraging customers to contact their lender if they are having trouble making repayments.
27 June 2024: ASIC approved a new version of the Australian Banking Association’s (ABA) Banking Code of Practice, which includes enhancements to key protections. The new Banking Code, which will commence on 28 February 2025, broadens the definition of ‘financial difficulty’ to:
- refer to situations where customers expect to be unable to pay upcoming repayments; and
- specifically include impacts from illness or injury, loss of employment, a pandemic or natural disasters.

What you need to know

Lenders should review their financial hardship practices, including assessing whether they reflect a truly customer-centric approach.

ASIC found in its end-to-end review that there was an inadequate focus on the customer in financial hardship policies, processes, and practices. ASIC identified numerous examples of where customers were not treated with sufficient care. This led to poorer outcomes for those customers as well as unnecessary confusion, stress, and anxiety. Key issues observed were that:

Lenders did not make it easy for customers to give a hardship notice: Lenders did not provide adequate information about hardship assistance. Lenders also did not consistently identify and act on hardship notices.
Assessment processes were often difficult for customers: ASIC found that assessment processes were often stressful and frustrating for customers. Assistance was not always tailored to the customer’s circumstances. Around 33% of customers withdrew or were declined due to non-response (often because of unnecessary barriers to customers obtaining assistance).
Lenders did not communicate effectively with customers: In particular, outcomes of hardship assessments (to decline or approve assistance) were poorly communicated and communications during and at the end of the assistance period were inconsistent.
Vulnerable customers often were not well supported: ASIC observed multiple examples of where lenders failed to identify, and provide appropriate support to, customers experiencing vulnerability.

ASIC expects lenders to assess their practices against the findings in the Report and to make improvements where necessary. A summary of ASIC’s findings and recommendations is provided in the table at the end of this article.

While the focus of ASIC’s review was on home lending, ASIC’s findings from the review are instructive for all credit providers and other financial institutions that deal with customers experiencing financial hardship.

ASIC has indicated it will take enforcement action where it identifies non-compliance with financial hardship obligations.

Consumer centricity throughout the product lifecycle

When publishing the Report, ASIC Commissioner Alan Kirkland stated “lenders were not putting customers front and centre in their approach to financial hardship”.

Under the design and distribution obligations (DDO), issuers and distributors are already required to place consumer outcomes front and centre at the product design, distribution, monitoring and review stages of the product life cycle.

Taking a consumer-centric approach means:

being outcomes focused - financial institutions must develop product governance arrangements across the life cycle of financial products to ensure consumers are receiving products that are likely to be consistent with their likely objectives, financial situation, and needs; and
considering consumer vulnerabilities – consumer vulnerabilities increase the risk that consumers are sold products that do not meet their objectives, financial situation, and needs, and will lead to poor consumer outcomes.

Issuers and distributors must take reasonable steps that are reasonably likely to result in a financial product reaching consumers in the target market designed by the issuer (the Target Market).

Reasonable steps may involve collecting information (including vulnerability indicators) at appropriate intervals to alert an issuer or distributor to whether a product is being distributed to a consumer outside the Target Market.

Consumer vulnerability is a broad term. While consumer vulnerability may relate to personal or social characteristics (e.g. speaking a language other than English) it may also relate to experiencing temporary or ongoing difficulties such as financial hardship resulting from cost-of-living pressures or lost and/or reduced income. Consumers may fall outside the Target Market due to financial hardship and then subsequently re-enter the Target Market as pressures ease.

How complaints are handled by financial institutions

Financial institutions are required to deal with and respond to credit-related complaints involving hardship notices in a certain manner (as stated in ASIC Regulatory Guide 271 Internal dispute resolution (RG 271)). Financial institutions are required to:

treat complaints involving hardship notices as urgent matters;
provide a written response to the customer regarding the outcome of their complaint; and
resolve complaints involving a hardship notice within 21 days (unless further information is required).

In the Report, ASIC noted most lenders used exception reports or dashboards to monitor open complaints that were nearing the 21-day response timeframe to ensure they could be actioned by the due date. In better cases, lenders would use exception reporting in conjunction with system-based controls. The controls would send automatic reminders about the upcoming due date of a hardship-related complaint and stop the complaint from being closed if a written response detailing the complaint outcome had not been provided to the customer.

ASIC observed in the Report that lenders had varying approaches to resolving hardship complaints. ASIC found there was clear value in having a separate complaints team that specialised in escalated complaints (which may include complaints relating to hardship) as this team could bring a different perspective, skills, and experience to support the resolution of these complaints.

Ultimately, whether complaints are hardship-specific or hardship-related, financial institutions should take a customer-centric approach to resolving them. This includes handling the complaints consistently with the requirements in RG 271, fairly and objectively and without actual or perceived bias.

Your next steps

Lenders should consider the following:

Current state assessment and uplift program: Lenders should conduct a current state assessment of their hardship policies, procedures, and practices against the findings in REP 272 and REP 273 to identify any areas for uplift. Bank lenders should also review their hardship arrangements against the February 2025 Banking Code, including the broader definition of ‘financial difficulty’. This may include uplifting internal documentation for identifying and escalating hardship notices and providing more flexibility to tailor hardship arrangements to customers with diverse needs.
Hardship function: Lenders should review the operating model, quality assurance, and internal reporting arrangements of their hardship functions. This may involve assessing whether customer centricity is truly embedded in the hardship function.
Training: Lenders should review their hardship training programs for staff and ensure there is sufficient coverage of hardship obligations including assessing and managing hardship notices. Training programs should include input from staff in customer-facing roles who refer hardship notices to the specialised hardship team for consideration.
General licensee obligations and breach reporting: When reviewing their existing hardship obligations, lenders should also consider whether they are satisfying their general licensee obligations under the National Credit Act, including doing all things necessary to ensure the lender’s credit activities are engaged in efficiently, honestly, and fairly. Lenders should also consider whether any deficiencies in hardship practices give rise to a reportable situation under the ASIC breach reporting regime.
Accountability under the Financial Accountability Regime (FAR): ‘Hardship processes’ is a key function under FAR and is required to be allocated to one or more accountable persons. Robust hardship arrangements will assist entities and accountable persons to meet their accountability obligations under the regime.

UK action on financial hardship

By way of comparison, the UK Financial Conduct Authority (FCA) has introduced new rules for strengthening protections for borrowers in financial difficulty.

In May 2023, the FCA launched a consultation via Consultation Paper 23/13 (CP 23/13) proposing:

broadening the scope of consumer credit and mortgage rulebooks to make it clear that firms should support customers in or at risk of payment difficulty;
enhancing regulatory expectations around customer engagement and providing information on money guidance and debt advice;
expecting firms to consider a range of forbearance options and take reasonable steps to ensure arrangements remain appropriate; and
for consumer credit, expecting firms to consider the customer’s individual circumstances when providing forbearance.

In April 2024, the FCA published the final rules in Policy Statement 24/2 (PS 24/2). Most of the final rules and guidance being introduced are largely consulted in CP 23/13. These new rules come into force on 4 November 2024.

During the coronavirus pandemic, the FCA introduced a Tailored Support Guidance (TSG) to make clear how firms could support customers in financial difficulty. In PS 24/2, the FCA confirmed it would be retaining the TSG and incorporating relevant aspects into existing rulebooks. In addition, the FCA published updated guidance for firms supporting existing mortgage borrowers impacted by the rising cost of living. This guidance also comes into effect from 4 November 2024.

The UK position is more prescriptive than the Australian position. For example, the new rules require firms to consider customers who may have payment difficulties, not just those who do have difficulties. The FCA has acknowledged that assessing whether a customer is at risk of financial hardship can be challenging in some cases.

The FCA has introduced a rule that requires firms to take all reasonable steps to ensure that any measure agreed with the customer is sustainable. According to FCA guidance, a measure is unlikely to be considered sustainable if it prevents the customer from being able to cover their priority debts and ‘essential’ (inserted by PS 24/2) living expenses. Priority debts and essential living expenses include but are not limited to, payments for mortgage, rent, council tax, food, and utility bills. All income and expenditure assessments undertaken by a firm must be undertaken on an objective basis, for example via information collected by third parties.

How we can help

We routinely advise clients on the current state of their risk and compliance arrangements, including assessing the adequacy of their frameworks, policies and procedures for compliance with a range of financial regulatory obligations, and better industry practice. We assist clients in making uplifts, where required.

Our experience extends to advising on potential breaches of financial services laws, assessing the impact of a breach, and supporting clients with regulatory reporting and interactions under the ASIC breach reporting regime, APRA Prudential Framework, and various Codes of Practices.

Key findings and practical actions

We have summarised the key findings in the Report below.

Findings	Practical actions
The hardship function had an inadequate focus on customer experience and outcomes Too much focus was put on collections-related objectives rather than supporting customers with sustainable solutions. Oversight and quality assurance programs were not effective.	Manage the hardship function in a customer-centric way Lenders should: ensure key performance indicators for relevant staff have a sufficient focus on customer experience and outcomes; have someone with responsibility for the end-to-end hardship process under the Financial Accountability Regime; ensure there is oversight of the hardship function by senior management, including customer experience and outcomes; have arrangements in place to assess whether the hardship function is operating effectively; and implement quality assurance arrangements that look at the end-to-end hardship (and, if applicable, collections) process from a customer perspective.
There were issues with the information lenders provided to customers about hardship assistance Some lenders did not communicate in a timely manner and did not make it clear to customers when and how to give a hardship notice.	Ensure customers know hardship assistance is available Lenders should: make information available through a range of channels about the availability of hardship assistance and how customers can request that assistance; ensure the information correctly explains when a customer can give a financial hardship notice and encourages them to do so early; where practicable and in accordance with privacy principles, use data to identify customers who may be at risk of experiencing financial hardship and send them targeted communications; and communicate with customers promptly after a missed payment with information about the availability of hardship assistance.
There were issues with how lenders identified and acted on hardship notices from customers Hardship notices were not effectively identified and gaps in the referral process between different teams led to some customers not receiving assistance.	Identify and respond to hardship notices Lenders should: identify all the potential channels through which a hardship notice may be given and ensure there are adequate systems, processes and training in place to properly identify and manage those notices; ensure staff understand the breadth of circumstances in which a customer can give a hardship notice; have in place arrangements to record and transfer hardship notices between teams; ensure collections staff make reasonable inquiries about why the customer has failed to make a payment when carrying out collections activities. If the customer advises that they are unable to meet their obligations, then this must be treated as a hardship notice; and monitor whether staff are correctly identifying, recording and referring hardship notices.
Lender assessment processes were often stressful and frustrating for customers Customers were required to repeat the same information in the application process and were not kept up to date on their notice. Lenders were not flexible in how and what information was collected, sometimes required excessive information, did not use information effectively, and did not tailor their processes to the individual customer. Approximately 35% of customers dropped out of the hardship process after giving notice.	Make the assessment process efficient and easy Lenders should: manage hardship notices so customers are dealt with empathetically, do not need to repeat their circumstances and are kept updated on the progress of their hardship notice; collect information to enable the identification of assistance options that will help the customer with their financial difficulty; ensure there is sufficient flexibility in policies and processes to deal with customers with diverse needs; scale requests for information and supporting documentation, taking into account the customer’s individual circumstances; only request information that is relevant to assessing a customer’s ability to meet their financial obligations, tailor requests to the customer and ensure they are clear; ensure all information provided by customers is assessed and used to determine what assistance (if any) to provide the customer; and have arrangements in place to follow up requests for information and/or supporting documentation.
Lenders often didn’t tailor assistance to customers’ individual circumstances Lenders adopted overly standardised approaches.	Work with customers to develop solutions that match their circumstances Lenders should: ensure available solutions are sufficiently broad and flexible to suit a wide range of customer circumstances; determine what assistance is appropriate for the customer’s circumstances and educate customers about other options that may be available; ensure arrangements are affordable for the customer and not likely to cause them significant financial stress; consider longer-term assistance options when a customer’s change in situation will last for an extended amount of time or be permanent; take into account a customer’s individual circumstances in determining how to deal with arrears; and provide customers the details of, or referrals to, financial counselling or other support where appropriate.
Lenders did not always communicate the outcomes of hardship notices well to customers Lenders were sometimes unclear about the effect of hardship assistance and did not always articulate next steps. When declining a notice, lenders did not provide adequate reasons, did not provide consistent information about the customer’s right to complain to the Australian Financial Complaints Authority (AFCA), and did not appropriately tailor the correspondence to the individual customer.	Clearly communicate the outcome of a request for assistance Lenders should: where possible, speak with customers before approving or declining a hardship notice to ensure they understand the decision; ensure approval letters to customers include details of how the hardship assistance will affect the customer’s loan and repayments over the short and long term, and signpost to the customer what they need to do and what they can expect going forward; and ensure decline letters to customers include reasons that allow the customer to understand why they have been declined, provide clear and accurate information about the customer’s rights to make a complaint to AFCA and make the customer aware of their options.
Approaches to communicating with customers during and at the end of a hardship assistance period varied Some lenders did not have an adequate approach to communicating with customers who failed to meet the terms of hardship arrangements or who were at the end of a hardship assistance period. Approximately 40% of customers provided with hardship assistance fell into arrears immediately after the assistance period.	Communicate during and at the end of the assistance period Lenders should: have in place arrangements to determine when to communicate with customers during the assistance period; and have a structured approach to communicating with customers who are approaching the end of or a break in the terms of the hardship assistance, including considering whether further assistance is required and ensuring the customer knows what will happen next.
Lenders did not consistently support customers experiencing vulnerability In some cases, lenders failed to identify vulnerabilities or did not provide adequate additional support to customers with vulnerabilities.	Identify and support customers experiencing vulnerability Lenders should: have in place arrangements and training to ensure that staff identify whether a customer giving a hardship notice may also be experiencing vulnerability; and take extra care and/or provide additional support to customers giving hardship notices who may be experiencing vulnerability. This may include adopting a case-management approach, handling by specialist or more experienced staff, providing flexibility in the process for giving a hardship notice, or providing referrals to external services.
There were weaknesses in the arrangements supporting the hardship function There were limitations in data capture, training, complaints mechanisms and resourcing as well as significant weaknesses in the risk and control environment for some lenders.	Have sufficient supporting arrangements Lenders should: ensure there are adequate systems and technology to manage the end-to-end hardship process, including adequate data capture of key fields to support compliance, resourcing, and monitoring customer experience and outcomes; have in place a plan for responding to increased volumes of hardship notices; ensure the hardship team receives regular training on hardship obligations and how to assess and manage hardship notices; have in place processes to handle and respond to hardship-related complaints; and have in place arrangements to ensure compliance with the hardship obligations, including regular reviews of compliance with those obligations.

Findings

Practical actions

The hardship function had an inadequate focus on customer experience and outcomes

Too much focus was put on collections-related objectives rather than supporting customers with sustainable solutions. Oversight and quality assurance programs were not effective.

Manage the hardship function in a customer-centric way

Lenders should:

ensure key performance indicators for relevant staff have a sufficient focus on customer experience and outcomes;
have someone with responsibility for the end-to-end hardship process under the Financial Accountability Regime;
ensure there is oversight of the hardship function by senior management, including customer experience and outcomes;
have arrangements in place to assess whether the hardship function is operating effectively; and
implement quality assurance arrangements that look at the end-to-end hardship (and, if applicable, collections) process from a customer perspective.

There were issues with the information lenders provided to customers about hardship assistance

Some lenders did not communicate in a timely manner and did not make it clear to customers when and how to give a hardship notice.

Ensure customers know hardship assistance is available

Lenders should:

make information available through a range of channels about the availability of hardship assistance and how customers can request that assistance;
ensure the information correctly explains when a customer can give a financial hardship notice and encourages them to do so early;
where practicable and in accordance with privacy principles, use data to identify customers who may be at risk of experiencing financial hardship and send them targeted communications; and
communicate with customers promptly after a missed payment with information about the availability of hardship assistance.

There were issues with how lenders identified and acted on hardship notices from customers

Hardship notices were not effectively identified and gaps in the referral process between different teams led to some customers not receiving assistance.

Identify and respond to hardship notices

Lenders should:

identify all the potential channels through which a hardship notice may be given and ensure there are adequate systems, processes and training in place to properly identify and manage those notices;
ensure staff understand the breadth of circumstances in which a customer can give a hardship notice;
have in place arrangements to record and transfer hardship notices between teams;
ensure collections staff make reasonable inquiries about why the customer has failed to make a payment when carrying out collections activities. If the customer advises that they are unable to meet their obligations, then this must be treated as a hardship notice; and
monitor whether staff are correctly identifying, recording and referring hardship notices.

Lender assessment processes were often stressful and frustrating for customers

Customers were required to repeat the same information in the application process and were not kept up to date on their notice. Lenders were not flexible in how and what information was collected, sometimes required excessive information, did not use information effectively, and did not tailor their processes to the individual customer. Approximately 35% of customers dropped out of the hardship process after giving notice.

Make the assessment process efficient and easy

Lenders should:

manage hardship notices so customers are dealt with empathetically, do not need to repeat their circumstances and are kept updated on the progress of their hardship notice;
collect information to enable the identification of assistance options that will help the customer with their financial difficulty;
ensure there is sufficient flexibility in policies and processes to deal with customers with diverse needs;
scale requests for information and supporting documentation, taking into account the customer’s individual circumstances;
only request information that is relevant to assessing a customer’s ability to meet their financial obligations, tailor requests to the customer and ensure they are clear;
ensure all information provided by customers is assessed and used to determine what assistance (if any) to provide the customer; and
have arrangements in place to follow up requests for information and/or supporting documentation.

Lenders often didn’t tailor assistance to customers’ individual circumstances

Lenders adopted overly standardised approaches.

Work with customers to develop solutions that match their circumstances

Lenders should:

ensure available solutions are sufficiently broad and flexible to suit a wide range of customer circumstances;
determine what assistance is appropriate for the customer’s circumstances and educate customers about other options that may be available;
ensure arrangements are affordable for the customer and not likely to cause them significant financial stress;
consider longer-term assistance options when a customer’s change in situation will last for an extended amount of time or be permanent;
take into account a customer’s individual circumstances in determining how to deal with arrears; and
provide customers the details of, or referrals to, financial counselling or other support where appropriate.

Lenders did not always communicate the outcomes of hardship notices well to customers

Lenders were sometimes unclear about the effect of hardship assistance and did not always articulate next steps. When declining a notice, lenders did not provide adequate reasons, did not provide consistent information about the customer’s right to complain to the Australian Financial Complaints Authority (AFCA), and did not appropriately tailor the correspondence to the individual customer.

Clearly communicate the outcome of a request for assistance

Lenders should:

where possible, speak with customers before approving or declining a hardship notice to ensure they understand the decision;
ensure approval letters to customers include details of how the hardship assistance will affect the customer’s loan and repayments over the short and long term, and signpost to the customer what they need to do and what they can expect going forward; and
ensure decline letters to customers include reasons that allow the customer to understand why they have been declined, provide clear and accurate information about the customer’s rights to make a complaint to AFCA and make the customer aware of their options.

Approaches to communicating with customers during and at the end of a hardship assistance period varied

Some lenders did not have an adequate approach to communicating with customers who failed to meet the terms of hardship arrangements or who were at the end of a hardship assistance period. Approximately 40% of customers provided with hardship assistance fell into arrears immediately after the assistance period.

Communicate during and at the end of the assistance period

Lenders should:

have in place arrangements to determine when to communicate with customers during the assistance period; and
have a structured approach to communicating with customers who are approaching the end of or a break in the terms of the hardship assistance, including considering whether further assistance is required and ensuring the customer knows what will happen next.

Lenders did not consistently support customers experiencing vulnerability

In some cases, lenders failed to identify vulnerabilities or did not provide adequate additional support to customers with vulnerabilities.

Identify and support customers experiencing vulnerability

Lenders should:

have in place arrangements and training to ensure that staff identify whether a customer giving a hardship notice may also be experiencing vulnerability; and
take extra care and/or provide additional support to customers giving hardship notices who may be experiencing vulnerability. This may include adopting a case-management approach, handling by specialist or more experienced staff, providing flexibility in the process for giving a hardship notice, or providing referrals to external services.

There were weaknesses in the arrangements supporting the hardship function

There were limitations in data capture, training, complaints mechanisms and resourcing as well as significant weaknesses in the risk and control environment for some lenders.

Have sufficient supporting arrangements

Lenders should:

ensure there are adequate systems and technology to manage the end-to-end hardship process, including adequate data capture of key fields to support compliance, resourcing, and monitoring customer experience and outcomes;
have in place a plan for responding to increased volumes of hardship notices;
ensure the hardship team receives regular training on hardship obligations and how to assess and manage hardship notices;
have in place processes to handle and respond to hardship-related complaints; and
have in place arrangements to ensure compliance with the hardship obligations, including regular reviews of compliance with those obligations.