As banks’ latest results come in, we are seeing increasing impairments or stressed assets couched as ‘modest’ or ‘below long term averages’. Despite this, there is acknowledgment that with the confluence of substantial rate rises and cost of living increases, some customers are facing major challenges meeting their obligations.
ASIC’s recently announced activity focusing on hardship, including its action against Westpac and letter to CEOs, is a stark reminder that behind these modest increases in stressed assets are real people in difficult situations. And given we are only at the beginning of this period of the economic cycle, we can only expect things to get worse. Regulators will be closely scrutinising how financial firms respond to customers facing difficulty – whether in hardship applications or collections activities; whether conduct towards the customer, forecasting and modeling or in their analysis and systems for predicting and reporting for non-performing loans.
Getting it wrong is not only a compliance risk, but an enormous reputational risk.
With that in mind, based on our experiences below we pose a series of questions we think all leaders should consider now and on an ongoing basis.
Do you know what is coming?
Do you have an effective way of identifying customers who have potential to need assistance? Are your models for predicting default up to date and effective? Do you have a strategy in place to scale up your staffing levels if necessary? ASIC’s Dear CEO letter includes 12 points of guidance regarding customers facing hardship, point 10 of which is forecasting applications, ongoing arrangements and the staffing needed to support those volumes. We would add to this the need to perform similar forecasting over collections volumes and staffing.
Do you know what works?
According to its Corporate Plan, ASIC’s hardship data collection project will be looking at effectiveness and suitability of arrangements and will report on better practices. Although there is still some time before this guidance will be available, it is worthwhile considering now whether your arrangements actually work – what is most effective in returning customers to a position where they can service their loans? Looking at past arrangements can offer some insight, but it is essential to also ensure that you have the right data and information to analyse arrangements going forward. Moving forward from financial hardship is good for the customer and good for the bank.
Do you appreciate the risks where customers are vulnerable?
A small financial loss, or a modest number of customers might not have a major impact on the capital position, but if customers are vulnerable, it may be a major conduct issue. We know that the regulator has a particular concern for vulnerable customers, and customers who are facing delinquency or hardship arrangements often fall into that category. In its recently released Corporate Plan, ASIC highlighted a focus on ‘misconduct involving a high risk of significant consumer harm, particularly conduct that targets financially vulnerable consumers’. Is your risk management framework in this area appropriately calibrated to highlight impact on vulnerable customers?
Have you looked at staffing?
We raised staffing forecasting above, but it is important to be clear that failing to have sufficient staff in place will also mean that it is not easy for customers to access hardship support – for example if they need to wait on hold for several hours or use an online contact form multiple times. In addition, it puts pressure on existing staff, with a corresponding higher propensity for mistakes to be made. Consider:
- Are your incentives right?
- Are your staff sufficiently trained and onboarded?
- Given the nature of the job, do you have adequate wellbeing support in place?
Are your systems up to the task?
The Westpac action highlights the critical role of systems, and importantly, systems interaction when it comes to hardship and collections. In our experience, there’s almost always a more pressing or exciting project to fund than collections systems or hardship training. However, with the increased regulatory scrutiny, and an expectation of increased volumes, the cost-benefit equation may have shifted in favour of funding for upgrades. If not, are you confident that your systems can handle increased volumes and complexity? Do the systems interact properly to ensure customers with hardship arrangements are not subject to collections activity? If you do update/shift, have you ensured that there are no customers lost in the gaps between the new and the old?
Have you addressed known issues?
Too often we have seen issues roll from one leader to the next without proper rectification, because fixes are expensive or difficult to implement and are deprioritised. Have you rectified audit issues and regulator-raised issues? Are you analysing complaints to ensure that you aren’t missing customer issues? Are you waiting for a new IT solution or delivery of a broader structural change? If this is the case, there also needs to be tactical fixes now to ensure that your systems and processes are working as pressure begins to increase.
Are you relying on manual processes to ensure compliance?
When volumes are small, relying on staff knowledge and manual recording is practical, even preferable, especially when your business is known for its human touch. But as volumes increase, manual processing creates a major risk. Systems should be in place to ensure that statutory obligations including privacy requirements, the 21 day period for responding to hardship notices and the number of contacts to prevent undue harassment are being met.
What about third parties?
While outsourcing may be the best solution, especially to meet increased demand, your obligations to customers becomes more challenging when a third party is performing some or all of your collections activity. Adequately supervising third parties requires different strategies compared to in-house activity, and this can become more complex when you have both in-house and outsourced activity. Critical is ensuring integrity of data and ensuring that customers in hardship arrangements are not subjected to collections activity. This also applies where debt is on sold. Are you confident that files you have sold contain all the correct information?
Do you have data and management reporting that can be used to monitor and manage the effectiveness, capability and capacity of your hardship and collections functions?
One of the biggest issues facing these functions is the availability of timely and accurate data that can be used to monitor and also manage the effectiveness, capability and capacity of the function. This includes monitoring the performance of collections strategies, designing and implementing of pre-delinquency and early-stage strategies, use of collection scorecards to determine propensity of a customer to repay, cure and roll rates through the various collection buckets, complaints and incidents.
Don’t forget small business borrowers
A bonus reminder. Typically as economic conditions weaken, small businesses are the first to feel the pinch. Although ASIC’s hardship work will be focused on consumers to whom the National Consumer Credit Protection Act applies, it has also noted a separate focus on small businesses including on unfair contracts. It may well be timely to review contract terms for small business borrowers.
In addition, both the Banking Code of Practice and the Customer Owned Code cover consumers and small businesses in their promises to help with financial difficulty. Beyond that, the ACCC and ASIC Debt Collection Guideline applies to small businesses as well as consumers, as do the ASIC Act prohibitions against undue harassment.
The time to act is now
Managing customer hardship and collections will become increasingly important as the economic cycle puts pressure on household balance sheets, increasing volume and regulatory attention. This is a too often overlooked and underfunded area of banking operations and yet one that can harbour a high degree of risk. Identifying and rectifying the gaps in your operations should be done now before the volume increases put pressure on systems, staff and policy.
This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Rhizome Advisory Group Pty Ltd shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss of damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).