ASIC continues to prioritise compliance with financial hardship obligations

Lenders need to respond effectively to hardship notices 8 min read

In late 2023, ASIC reviewed ten large home loan lenders to understand how they are supporting customers experiencing financial hardship. This was in the context of an increasing number of customers experiencing difficulties in meeting repayments on their home loans in the heightened-cost-of-living environment.

In this Insight, we explain Report 783's key findings, and how they might be linked back to the hardship obligations in the National Credit Code (as set out in Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth)).

Key takeaways

• On 20 May 2024, ASIC released Report 783 (Hardship, hard to get help: Lenders fall short in financial hardship support) (the Report), highlighting the key findings from its review. The full report is available here.
• ASIC's findings included that:
  • reviewed lenders didn't make it easy for customers to give a hardship notice and didn't communicate effectively with them; and
  • vulnerable customers often weren't well supported.
• Improvement requires increased focus on customer experience and outcomes, and ensuring there are robust systems supporting the hardship function, including training, procedures and adequate resourcing.
• The hardship process is a critical protection for consumers and provides lenders with an opportunity to restore a loan's performance and avoid the costs of debt collection and enforcement.

The report's chief findings

At a high level, ASIC's findings were that:

• reviewed lenders didn't make it easy for customers to give a hardship notice – there wasn't enough information being provided to them, and processes weren't consistent;
• assessment processes for hardship notices were often difficult for customers;
• reviewed lenders didn't communicate effectively with customers; and
• vulnerable customers often weren't well supported.

ASIC's findings were based on its review of banks and non-banks, and it noted that practices varied significantly, with examples of good and poor ones. The findings focus on areas where there's room for improvement. For the most part, this requires increased focus on the customer experience and outcomes; and on ensuring there are robust systems supporting the hardship function, including clear training, procedures for on-the-ground staff and adequate resourcing.

Making sure hardship processes meet ASIC's standards is critical to ensuring compliance with the National Credit Code and providing customers with longer-term financial security. As ASIC notes, this also gives lenders an opportunity to restore the loan's performance without resorting to debt collection and enforcement activities.

Make it easy for customers to give a hardship notice

In ASIC's view, customers are more likely to recover from financial difficulties if lenders make it easy for them to give a hardship notice. Key to this is the provision of clear and timely information, backed by consistent processes.

It found that lenders didn't provide adequate information about hardship assistance:

• The quality of some hardship information was poor. For example, some lenders' information suggested that hardship assistance is only available after a specific life event, such as an illness. ASIC is concerned that this could result in customers incorrectly believing that they aren't eligible to request hardship assistance for other reasons. The National Credit Code is neutral and broadly drafted, so that an inability to meet repayment obligations – for any reason – should form the basis of a hardship notice.
• Some lenders didn't tell customers quickly enough when they missed a payment. This could mean they weren't aware that hardship assistance might be available before their credit report was affected.
• Lenders didn't tell customers through all possible channels that hardship assistance was available. For example, hardship information was not included on statements about interest rate increases.

ASIC also found that the reviewed lenders did not follow a set process when identifying hardship notices:

• There were inconsistencies around when collection teams would identify a hardship notice. For example, sometimes collections staff didn't query why a customer had missed a payment and whether they were in financial hardship. Instead, they would prioritise the immediate payment of arrears and not focus on whether the customer could meet their obligations in the future.
• Policies and training material often misguided employees regarding what constitutes a hardship notice – eg by policies narrowing the scope of financial hardship to being short term or being the result of a specific life event. As noted above, the National Credit Code is broad and allows a customer to access hardship assistance any time they are unable to make their repayments. Although there is now some relief of less than 90 days for hardship arrangements in section 72(4A) of the National Credit Code, this does not prevent a lender from agreeing to a longer-term arrangement where that is more appropriate.
• There were inconsistencies in the process of customer-facing staff referring customers to the hardship team. They often tried to resolve a hardship situation themselves, instead of referring the customers to the hardship team straight away. Where a customer was referred, they were often left to contact the hardship team themselves instead of being transferred directly. This emphasises the importance of ensuring processes are clear in policies and training materials.

Make the assessment process efficient and appropriate, and ensure it is tailored

The National Credit Code does not mandate a strict approach to hardship assistance, but is designed to allow lenders to provide a solution that meets the customer's needs. Standardised processes are unlikely to meet ASIC's expectations and may put lenders at risk of breaching the National Credit Code requirements.

ASIC looked at how lenders assessed hardship notices and determined the type of assistance they would provide. Its findings reiterate the importance of adopting a flexible and easy-to-follow process – one size doesn't fit all. Processes are likely to be inadequate where customers are asked to: 

• complete detailed application forms;
• explain their situation to different people or teams, several times;
• give information that is not relevant to the lender's consideration of the hardship notice;
• give information as part of a 'tick-a-box' exercise that is not tailored to the customer; or
• stay on top of all these requests without reminders from the lender.

Processes should instead be designed with the customer experience front of mind, the ultimate goal being to ensure they get the hardship assistance they need, as quickly as possible. This, of course, must be balanced against the need to make reasonable inquiries throughout the assessment process.

Communication is key

ASIC examined lenders' communications with customers to advise on the outcome of a hardship notice, as well as other contact that lenders had during and at the end of the hardship assistance period. The National Credit Code prescribes a number of contact points with customers, designed to ensure they understand what their obligations are and can make decisions about how to proceed.

ASIC found as part of this review that:

• sometimes, lenders did not give sufficient written reasons for declining hardship notices – instead, they were often broad and generic;
• lenders usually didn't explain the impact of hardship assistance and what was required from the customer, or what would come next; and
• provided inconsistent and inaccurate information about how hardship assistance would impact customers' credit reports.

Additionally, some lenders didn't have a structured approach to communicating with customers outside the approve/decline letters – eg in relation to broken arrangements or options at the end of the hardship assistance period. In ASIC's view, this creates an increased risk that customers don't understand what is required of them to avoid falling back into arrears.

Supporting vulnerable customers

Customers who give a hardship notice are typically at an increased risk of harm. ASIC has stressed that identifying vulnerability and providing appropriate care and support should be embedded in hardship processes. Overall, it was concerned that this support was not consistent or sufficiently tailored to the hardship setting, with lenders instead relying on organisation-wide vulnerable customer policies. Lenders should consider what additional work should be done to ensure ASIC's expectations are met in this regard.

Next steps

Following a 54% increase in the number of hardship notices related to home loans lodged in the last quarter of 2023, compared with the same period in 2022, effectively identifying and responding to them remains a vital function for credit providers.

Lenders should continue to review their policies and procedures regarding hardship obligations. Hardship will stay a priority for ASIC throughout 2024.