From Policy to Practice: How Lenders Can Ensure Compliance with Hardship Obligations

In late September, ASIC released its Report 815 ‘Hardship, not as hard to get help’, highlighting progress by home loan lenders in meeting customer hardship obligations since their 2023 review. While improvements are evident, ASIC has warned that compliance remains a priority and lenders may face significant penalties if they don’t measure up.

What has improved?

ASIC’s report was, overall, positive. Some of its key findings in relation to what lenders have done to improve their customer hardship processes are:

1. Improved identification of customers in need of hardship

   There has been a 58% increase in the number of hardship notices between the reports, meaning that lenders are able to identify when clients are in need of assistance more efficiently. Customers appear to be more aware that hardship assistance is available, and lenders have made improvements to identification policies.

2. More customer-friendly process to obtain hardship assistance

   ASIC found that the process to assess whether a customer is eligible for hardship assistance has become more streamlined and accessible, resulting in a 40% decrease in customer dropout rate for some lenders. On average, notices were also approved by lenders more quickly than before.

3. Better results for customers after hardship assistance ends

   For some lenders, the number of customers who fell into arrears immediately after their hardship assistance ended reduced by over 28% - indicating more proactive and effective lines of communication between lenders and hardship customers before the hardship assistance expires.

Our Recommendations – What steps can lenders take to ensure continued compliance?

The report made clear that there is still room for improvement in the way that lenders engage with their hardship customers. For more effective compliance, lenders should uplift their hardship procedures at each point of their 3 Lines of Defence (3LOD) Model:

First Line of Defence: Operational Management

The First Line are the people on the floor; staff and operational managers who deal with customers facing hardship as a part of their day-to-day. Lenders should ensure that:

1. Training is effective and specialised. Customer-facing staff should ask tailored, individualised questions and effectively understand their customer’s position. This will make the hardship assessment process far more efficient. 

2. The hardship application process isn’t too burdensome. Some lenders no longer require customers to complete detailed and difficult application forms and instead take the required information over the phone. This allows for greater efficiency and more flexibility for customers.

3. Staff are proactive in dealing with customers. Ongoing customer engagement and support should be a priority for staff, including scheduled check-in calls to determine a customer’s individual need.

4. A list of hardship notices is kept and reviewed. Staff should periodically look to monitor the timeframe between the hardship notice being received and any response from the lender to ensure that a response does get sent out within the 21-day period.

   
   

Second Line of Defence: Risk Management and Compliance Functions

The Second Line is the lender’s internal risk & compliance management team; they create and broadly oversee policy and procedure implementation. The Second Line should ensure that:

1. Policies are updated and correct at all times. For example, removing incorrect statements in policies and training materials about hardship obligations being short-term or resulting from specified events. These policies and procedures should also be periodically reviewed with updates being made as necessary.

2. Policies and procedures are able to be adapted to each customer’s needs. ASIC found that many lenders used a default, ‘cookie-cutter’ approach in assessing a customer’s suitability for hardship assistance, as opposed to being tailored to specific customers. To ensure consistency and fairness and assisting customers to stay engaged with the assessment process, the process for individualising questions should be part of a Second Line policy.

3. Reporting systems between the First and Second lines are established. There should be a system in place so that the Second Line becomes aware of any cases where hardship notices are not responded to within 14 days, to ensure that they are responded to before the 21-day time limit has elapsed.

   
   

Third Line of Defence: Independent Internal Audit Function

The Third Line independently assesses the adequacy and effectiveness of the First and Second Lines, generally reporting straight to management. The Third Line should provide:

1. Oversight and assurance on process changes and policy updates. Frequent internal audits should review the effectiveness of new processes, staff training and policy corrections. The Third Line should look to whether the changes are being carried out as intended and whether they are having the desired effect.

2. Walkthroughs on control effectiveness. The Third Line should regularly test the design and operating effectiveness of controls at critical points. This might involve inspecting cases for timelines, effectiveness of responses and staff training, and the impact of hardship assistance on the customer.

In August, NAB was ordered to pay $15.5 million for failing to respond to customer hardship notices, and in September ASIC asked the Federal Court to impose a $40 million penalty on ANZ, who allegedly failed to respond for, in some cases, up to two years. Proceedings are also currently underway against Resimac for not taking appropriate care in responding to hardship notices and taking a ‘one size fits all’ approach to dealing with them.

To have a conversation about your hardship compliance, or learn more, please contact Tim Bednall, Director Owl Advisory by KWM or Himashi Cameron, General Manager, Compliance Advisory, Owl Advisory by KWM.

This publication is a joint publication from King & Wood Mallesons, and KWM Compliance Pty Ltd (ACN 672 547 027) trading as Owl Advisory by KWM.   KWM Compliance Pty Ltd is a company wholly owned by the King & Wood Mallesons Australian partnership.  KWM Compliance Pty Ltd provides non-legal compliance and governance risk advisory services for businesses.  KWM Compliance Pty Ltd is not an incorporated legal practice and does not provide legal services. Laws concerning the provision of legal services do not apply to KWM Compliance Pty Ltd.