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Four actions lenders can take to support customers experiencing financial hardship

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Idea In Brief

Worrying finding

Financial watchdog ASIC released a report on how lenders are supporting customers experiencing financial hardship. It found lenders are not doing enough and need to get better – and the regulator is watching.

Need for balance

Hardship processes need to balance financial risk, commercial outcomes, customer needs and regulatory obligations. But these need not be in conflict. Other challenging circumstances also need to be considered.

Real action

We have identified four actions lenders can use to support customers experiencing hardship: improve customer awareness; identify customers at risk; invest in trauma informed processes; support front-line staff.

In late May financial watchdog ASIC released a significant report on how banks and other lenders are supporting customers experiencing financial hardship. The bottom line? Lenders are not doing enough and need to get better – and the regulator is watching.

To prepare its report, “Hardship, hard to get help”, ASIC reviewed 10 large home loan lenders to understand what they did (and what they failed to do) when their customers indicated they were experiencing hardship.

The report indicated the scale of the issue: between July 2022 and December 2023, the number of hardship notices nearly doubled (from 30,562 to 52,826) across the 10 lenders. The increase in hardship is being driven largely by a cost-of-living crisis. For example, compared to 2020, mortgage holders have an average $21,300 less in discretionary spending, according to the Household Report.

In releasing its report, ASIC noted lenders were not doing enough. “In short, lenders need to do more to ensure that customers are consistently and appropriately supported,” ASIC said.

The report nods to the efforts lenders have made to improve supports, but then identifies problems along the chain of identification of, and responding to, customers experiencing hardship. The root cause, the report notes, is an inadequate focus on customers.

The report identifies specific poor practices in need of improvement:

  • lenders didn’t make it easy for customers to give a hardship notice
  • assessment processes were often difficult for customers
  • lenders didn’t communicate effectively with customers
  • vulnerable customers often weren’t well supported.

Notably, ASIC said compliance with obligations is an enforcement priority for 2024.

ASIC is not alone in its growing concern. In April the Australian Financial Complaints Authority reported a 25 per cent increase in complaints about financial difficulty in 2023, with the most common complaint being that the financial firm failed to respond to a request for assistance.

So how can lenders improve their performance? At Nous, we have been thinking deeply about how lenders can support customers experiencing vulnerability, a topic we wrote about last year. From this thinking, we have identified the key considerations and also the actions lenders can take.

Supporting customers through hardship makes good business sense

Hardship processes need to balance financial risk, commercial outcomes, customer needs and regulatory obligations. But these considerations need not be in conflict.

Through our work with regulators and lenders, we have found that the most effective hardship processes bring customers and lenders together quickly and efficiently to understand problems and develop tailored solutions before issues become intractable. This reduces the risk of defaults and debt collection actions, and also alleviates impacts on customers including cost-of-living pressures and mental health issues associated with financial stress.

Many people experiencing financial hardship may also be undergoing other challenging life circumstances, including domestic and family violence, financial abuse, disability, job loss and illness. Some also face other barriers to seeking help, including culture, religion and language. Responding to these needs requires a sensitive, trauma-informed and customer-centric approach.

A trauma-informed approach acknowledges trauma’s impact on people’s experience, and ensures that processes, interactions and supports respond to these needs. Taking a trauma-informed approach requires interpersonal and process-level transformation to identify potential vulnerabilities and support people efficiently and sensitively.

How can lenders respond to a growing need for support?

We have identified four actions lenders can use to support customers experiencing hardship:

  1. Improve customer awareness of supports available. Seek to improve awareness with customers throughout their journey with you, including within product information, through ongoing communications, and making information accessible across the channels customers engage with when looking for help.
  2. Use a range of methods to identify customers at risk of financial hardship and pro-actively engage with them. Methods to improve processes for identifying hardship include using staff-assisted channels and investing in data and insights capabilities. Early identification should seek to limit the number of people who end up in a critical situation and be accompanied by sensitively delivered pro-active support.
  3. Invest in trauma informed, flexible processes and applications. These processes for customers experiencing hardship must consider the emotional toll that financial hardship takes (including stress, guilt and shame) and flexibly cater to customers’ unique needs and situations. These processes need to be scalable and efficient to meet increasing demand and work within your operating model.
  4. Train and support front-line staff. Front-line staff play a critical role in responding to customer hardship. It is essential to ensure they can recognise and respond to customer needs appropriately, and to ensure they have the tools they need to manage their own wellbeing.

The time to act is now

As the cost-of-living crisis continues, the number of customers experiencing hardship is expected to increase. Without due consideration of this issue now, lenders risk failing to meet growing demand, hurting their customers, public reputation and bottom line, as well as facing intervention from regulators.

Is your organisation ready to respond to this growing customer need?

Get in touch to explore how we can help you establish trauma-informed supports for customers experiencing hardship.

Connect with Tony Fiddes and Ed Verbeek-Martin on LinkedIn.

Prepared with support from Brenden Carriker, Hanin Shaharuddin and Roger Samuel.