ASIC continues focus on financial hardship processes

Lenders should prepare for both an increase in financial hardship applications and heightened scrutiny from the regulator on how these hardship applications are managed. The Australian Securities & Investments Commission (ASIC) has found that lenders are not complying with their obligations in the cases of customers who are facing financial difficulty. As the cost of living crisis continues, the number of customers who are seeking to access financial hardship is increasing. According to ASIC’s recent research, 5.8 million Australians have struggled to make repayments in the last 12 months.[1]

ASIC’s chair Joe Longo has not shied away from threats of legal action, saying in May 2024 that “ASIC has made this a priority focus area, and where appropriate, we will not hesitate to take enforcement action to protect consumers”.[2]

What is financial hardship?

A customer experiences financial hardship when they are unable to meet their obligations under a credit contract. The National Credit Code sets out obligations on lenders to vary credit contracts in circumstances where customers are experiencing financial difficulties. This could include a reduction in payments, deferrals of payments or an extension in the term of the loan.

Likely increase in hardship applications

In June 2024, ASIC’s Moneysmart website launched Just Ask! Hardship Help is available, a campaign which is aimed at encouraging Australians who are experiencing financial difficulty to contact their lenders if they are having trouble making repayments.

This awareness campaign, coupled with the rising cost of living, is likely to increase the number of hardship applications that lenders receive. According to the Australian Financial Complaints Authority (AFCA), disputes over hardship assistance rose 25 per cent in 2023.[3] Like ASIC, AFCA has expressed concerns about the increase in complaints regarding financial hardship and the practice of some lenders.

Heightened regulatory scrutiny

Over the past 12 months, ASIC has made it clear that it is hyper-focused on lender’s financial hardship processes, which is one of its 2024 enforcement priorities. ASIC’s actions to date have highlighted that current financial hardship processes are not up to standard, and that lenders are failing to live up to community expectations. ASIC’s activity in this area is outlined below.

ASIC’s open letter to lenders

On 30 August 2023, ASIC released an open letter to the CEOs of 30 lenders and lending groups, which called on lenders to support customers in financial hardship.

In its letter, ASIC reminded lenders of their obligations under the National Credit Code and identified 12 financial hardship expectations for lenders. This included:

• proactive communication about seeking assistance;
• making it easy for customers to seek hardship assistance;
• adequate and appropriate training so that staff can identify consumers experiencing hardship and how best to support and respond to those customers;
• genuine consideration of customer circumstances;
• regular communication throughout and after the assistance period;
• systems that allow lenders to respond to a hardship notice within the required timeframes under the National Credit Code; and
• having appropriate governance and oversight arrangements in place to ensure that lenders are meeting its obligations.

ASIC’s enforcement action

In September 2023, ASIC commenced civil penalty proceedings in the Federal Court of Australia against Westpac Banking Corporation (Westpac) for failing to respond to customers’ hardship notices within the time required under legislation, being 21 days.

The proceedings against Westpac arose following self-reporting of the issue by Westpac to ASIC and in commencing these proceedings, ASIC has alleged that between 2015 and 2022, there were deficiencies in Westpac’s hardship notice processes and practices, which resulted in customers not receiving a response to their hardship notice within 21 days.

This is ASIC’s second action against a credit provider for failing to comply with section 72(4) of the National Credit Code and is a clear sign of its intention to focus and prioritise lenders’ compliance with hardship obligations. Notably, its first action, which was against ClearLoans in 2021, led to a
$6 million penalty for financial hardship misconduct.

ASIC’s recent review

In late 2023, ASIC commenced a large-scale review, which involved:

• collecting data from 30 lenders about the hardship notices they received between July 2022 and December 2023; and
• reviewing the hardship practices of 10 large home loan lenders.

In May this year, ASIC released its findings of this review in its Report 782 ‘Hardship, hard to get help: Findings and actions to support customers in financial hardship’.

In summary, ASIC found that:

• hardship practices often lacked focus on customer experience and outcomes, including issues with the information provided to customers, receipt and identification of hardship notices, and management of the hardship process;
• assessment processes were often stressful and frustrating for customers with more than a third of customers dropping out of the process after providing a hardship notice;
• lenders often did not adjust their assistance to suit customers’ individual circumstances;
• lenders did not always communicate the outcomes of hardship notices to customers well, and had varying approaches to communicating with customers during and following a hardship assistance period;
• there was inconsistent support for customers experiencing vulnerability; and
• the arrangements in place to support hardship processes could often be improved.

Takeaways

ASIC has warned lenders that it is watching the hardship space closely. It is important that lenders ensure that their systems, processes and practices are fit for purpose in responding to hardship notices.

In particular, lenders should ensure that:

• they have sufficient resources to accommodate the predicted increase in the numbers of hardship applications;
• there is adequate information available to customers to enable them to clearly understand the options available in making a hardship notice;
• their hardship process is customer-focussed and allows for a tailored outcome for each customer;
• they are communicating well and in a timely manner with each customer; and
• their systems operate smoothly and in a way which ensures that staff are appropriately equipped to engage with customers who are providing hardship notices.

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Authored by:

Phoebe Brosnan, Special Counsel
Gabrielle Shina, Associate

[1] 24-118MR 5 million+ Australians have struggled to make loan and debt repayments, yet many not asking for help | ASIC

[2] 24-104MR ASIC report: Australians need better hardship support from their lenders | ASIC

[3] AFCA worried by rising complaints over handling of hardship | Australian Financial Complaints Authority (AFCA)