Outdated mortgage products contributing to hardship

The Banking Code Compliance Monitoring Committee (CCMC) conducted an analysis of bank data and issues raised by consumer advocates, finding that banks’ financial difficulty programs “for the most part” meet the requirements of the 2013 Code of Banking Practice.

According to the CCMC’s inquiry, Assisting Customers in Financial Difficulty (Part 1), the banking industry as a whole has granted the majority (between 69.5 per cent and 72.7 per cent) of financial assistance requests every financial year since 2011–12, excluding the drop in 2013–14 (62.9 per cent).

The report notes that acceptance rates differ significantly between banks, with one bank approving almost 90 per cent of assistance requests and two banks approving just over 50 per cent of requests received.

However, the CCMC’s inquiry also found that “more needs to be done” by the banks to ensure compliance with the Australian Banking Association’s new banking code, set to come into effect on 1 July 2019.

The chief executive of the committee, Sally Davis, said that the new code requires the banks to take a “broader, more forward-thinking approach to ensure that all customers get the assistance they need in times of difficulty”.

“With the number of Australians requesting financial difficulty assistance increasing significantly since 2011–12, it is more important than ever for banks to be ready and able to assist their customers,” Ms Davis said.

The CCMC’s analysis found that 17.5 per cent of financial hardship assistance applications “come from customers who are overcommitted”, and that postponed or deferred payments are the most common financial assistance measure, accounting for more than 40 per cent of all assistance.

The write-off or settlement of customer debts is a rare outcome, accounting for just 2 per cent of cases, according to the committee’s report.

Consumer advocates attributed the growing cases of financial difficulty to “low levels of financial literacy and irresponsible lending — the provision of financial products or services, typically credit cards, that are not affordable”, the report stated.

Mortgage products could be outdated

Such advocates also expressed their concern that financial products “do not appear to be keeping pace with customer needs”.

They told the CCMC that a typical mortgage assumes the customer is continuously employed for 10 to 20 years and that this is no longer realistic for many Australians.

“In light of this, one advocate suggested that mortgage documents should discuss a customer’s right to apply for assistance during the course of the loan and that this right ought to be brought to the customers’ attention during the application process,” the CCMC report stated.

Recommendations

The inquiry made these 14 recommendations to improve the way banks assist customers experiencing financial hardship:

1. “Ensure that financial difficulty assistance information is prominently presented and readily accessible on bank websites and other digital platforms”.
2. “Adopt an effective training program that ensures customer facing staff receive appropriate financial difficulty training relevant to their work [and] ensure that such training is provided at induction with regular refreshers”.
3. “Develop and incorporate criteria for the credit assessment process to identify indicators of financial difficulty having regard to applications for new credit, top-up credit and refinancing”.
4. “Ensure that the reasons for a customer’s financial difficulty are captured and recorded in a manner that can be monitored and reported”.
5. “Adopt or revise written policy on supporting documentation to ensure it is not needlessly inflexible or burdensome, and that supporting documentation is limited to what the bank reasonably needs in order to understand the customer’s circumstances”.
6. “Ensure that the written policy on supporting documentation expressly contemplates circumstances under which documentation requirements may be limited or waived, especially for customers who are particularly vulnerable”.
7. “Adopt or revise written policy on third party authorisations to ensure it requires only such information necessary to satisfy privacy obligations and is not needlessly inflexible or burdensome”.
8. “Ensure that written policies on financial difficulty contain sufficient detail to reflect the end-to-end process followed by staff, including identifying where staff discretion is appropriate”.
9. “Promote a culture that reflects the values of non-judgment, flexibility and compassion to support tailored, customer-centric decisions and out-of-the-box thinking. Incorporate targets and measures in performance review processes and reward programs that encourage creative, flexible decision making”.
10. “Ensure that the financial difficulty assistance decisions achieved by self-represented customers and customers represented by authorised third parties are recorded and monitored to promote decisions that are consistent, regardless of representation”.
11. “Ensure that the case-by-case assessment of a customer’s circumstances expressly considers whether the customer would benefit from a longer-term solution”.
12. “Adopt a written policy on early access to superannuation that expressly requires staff members recommend a customer seek independent financial advice… The number of customer requests for the early release of superannuation benefits, together with the outcome of such requests, [should be] recorded in a manner that can be monitored and reported”.
13. “Review and amend decision letter templates to ensure the content is suitable for the intended purpose and is presented in plain language”.
14. “Develop and implement metrics to assess the effectiveness of customer financial difficulty arrangements. Where possible, monitor the performance of the loan and the customer’s financial position for at least 12 months after the end of financial difficulty assistance to assess sustainability.”

The second part of the CCMC report is slated to be released in the first half of 2019.

[Related: Mandatory CCR is about ‘financial inclusion’: Equifax]