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.
- refer to situations where customers expect to be unable to pay upcoming repayments; and
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:
|
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:
|
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:
|
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:
|
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:
|
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:
|
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:
|
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:
|
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:
|
Visit Smart Counsel
