Financial Difficulty 2013

Philip Field Ombudsman – Banking & Finance

ABIO Members Conference Topic “Fairness in

Debt Collection

“If, taking the relevant facts into account, it appeared

that the bank’s legal entitlement and overall

commercial position would not be materially prejudiced

by allowing a reasonable amount of time to the

complainant to sell the property, this office may

conclude that it is appropriate for the bank to delay

legal action and to do otherwise would be unfair.”

The Journey - 2002

ABA Code of Banking Practice

“With your agreement, we will try to help you

overcome your financial difficulties with any credit

facility you have with us. We could, for example, work

with you to develop a repayment plan. If, at the

time, the hardship provisions of the Uniform Consumer

Credit Code could apply to your circumstances, we will

inform you about them.”

The Journey - 2003

BFSO Bulletin 46

Acting fairly and reasonably, in our view, requires that credit providers:

– give genuine consideration to a repayment proposal or hardship variation

application and any reasonable alternatives that will help the customer overcome

their financial difficulties;

– give reasons for any rejection of the proposal, preferably in writing;

– ensure that those reasons reflect legitimate considerations and are referable to

the particular customer’s circumstances;

– not start or conclude enforcement action before a decision is made and

communicated; and

– respect the customer’s appointment of an advisor and, if one is appointed, not deal

directly with the customer.

The Journey - 2005

BFSO Bulletin 46 Acting consistently and ethically, in our view, requires that credit

providers:

– have clear and reasonable internal processes for assessing hardship variation or

enforcement postponement requests and other repayment proposals;

– be able to demonstrate that their staff have followed those processes;

– record and keep any promises made, for example, about suspending enforcement

action, and record and keep to any agreement reached. If that includes that the

arrangement be reviewed at a certain date, credit providers should not seek to

review the arrangement earlier if the customer is keeping to it. Any review should

be based on a genuine consideration of the customer’s position at that time;

– ensure that any collection related correspondence is consistent with what has

been promised or agreed; and

– confirm in writing any agreement reached and ensure that collection agents and/or

later assignees have a copy.

The Journey - 2005

Permanent Custodians v Upston

– The UCCC refers to the reason for hardship as being

“illness, unemployment or other good reason”

– Under the UCCC, a “good reason” is not confined to

people who experience hardship for reasons that are

involuntary

The Journey - 2006

The Court said:

“the words “other reasonable cause” are to be read

with a wide application in accordance with their

ordinary meaning. Their effect is that the court looks at

what was the cause for the debtor being unable

reasonably to meet his or her obligations and then

determines, on the facts of a particular case, whether

the cause was reasonable.”

The Journey - 2006

BFSO Bulletin 53

We expressed the following concerns

– staff appearing not to respond when a customer indicates that he or she is in

financial difficulty and so information about how to obtain assistance with

their financial difficulty is not given. In some cases it seemed that the bank

member did not respond at all unless and until the words “financial difficulty”

or “hardship” were used by the customer and then the response was driven by

the UCCC rather than the broader CBP obligations;

– Requiring customers to show that there is a “reasonable cause” for their

financial difficulty which indicates a UCCC focus rather than looking at what

the financial position of the customer is, separate from the cause;

The Journey - 2007

– Customers being told that, if specified information was not returned within

comparatively short time frames, the account would automatically be referred

back to collections meaning that the application would also be automatically

rejected.

– Procedures which limit available responses to short term solutions of three

months duration rather than looking at longer term solutions which may be

more appropriate.

– Requiring the customer to apply to access their superannuation before an

application for assistance will be accepted; and

– Not applying clause 25.2 processes to small business or investment loans or if

the loan value is over the UCCC threshold,

The Journey - 2007

We also dealt with the issue of repeat requests for

assistance and expressed the following views:

– If it is apparent that the bank gave genuine consideration to the

initial request for assistance and that the disputant’s financial

position has not changed since that assessment, there may be

little this office can do.

– This is because we cannot require the bank to agree to extend an

arrangement or enter into another arrangement where we are

satisfied that the initial arrangement was reached after an

appropriate consideration of the disputant’s financial position.

– If, however, there has been a change in the disputant’s financial

situation, it would be appropriate for the Scheme member to again

undertake an assessment of the disputant’s financial position in

order to comply with clause 25.2 and/or section 66.

The Journey - 2007

FOS Bulletin 60

– We expressed the view that the COBP represented

good industry practice and encouraged non-

subscribers to implement our guidelines

– We also said that we expected customers to: be willing to work with their financial services provider, for example

respond promptly to reasonable requests for information;

provide current and accurate details of their financial position when

requested;

propose a realistic repayment plan that will result in the eventual

repayment of the debt;

make whatever payments they can while their application is being

considered and/or while we are considering any subsequent dispute.

The Journey - 2008

FOS Circular 2 – Financial Difficulty and Small

Business

FOS Circular 5 – Financial Difficulty Hot Topics – Requesting customers to provide excessive documentation, such as:

rental agreements

specialist certificates where a doctor’s certificate has already been provided

utility bills, or

rates notices

can be a barrier to dealing with hardship assistance.

– Our view is that an FSP should make an assessment based on the information it

has available. Where assumptions have been made (for example, that the monthly

wages relied upon have not been verified) the FSP should identify any

assumptions made and what, if any, additional documentation will be required from

the customer before a repayment arrangement can be entered into.

The Journey 2010-11

Apply only to contracts entered into on or after 1 March 2013

No longer limited to loans under $500,000

Consumer can now give FSP a “hardship notice” either orally or

in writing if they believe they will not be able to meet their

obligations

FSP has specific timeframes to comply with when responding to

hardship requests depending on whether it requires further

relevant information to help it assess the application. The

request can be oral or in writing

Within the specified period, the FSP must advise if they agree to

the variation or reasons why they have not. The notice must

include EDR scheme details

Changes from 1 March 2013

Timeframes for FSP to provide

response If:

The period is:

1

The credit provider does not require

information

21 days after the day

of receiving the

hardship notice

2

The credit provider requires information but

does not receive any information in

compliance with the requirement

28 days after the

stated date of the

notice

3

The credit provider requires information

and receives information in compliance

with the requirement

21 days after the day

of receiving the

information

Changes from 1 March 2013

The FSP need not agree to change the credit contract,

especially if the FSP:

a) does not believe there is a reasonable cause (such as illness or

unemployment) for the debtor’s inability to meet his or her obligations; or

b) reasonably believes the debtor would not be able to meet his or her

obligations under the contract even if it were changed.

Applications to vary a credit contract are no longer limited to

extending the period or postponing payments. A new s 72(2)

provides:

The court may, after allowing the applicant, the credit provider and any guarantor

a reasonable opportunity to be heard:

a) by order change the credit contract (but not so as to reduce the amount

ultimately payable by the debtor to the credit provider under the contract),

and make such other orders as it thinks fit; or

b) refuse to change the credit contract.

Changes from 1 March 2013

An FSP cannot begin enforcement proceedings until 14 days

after it has responded to a hardship notice if:

– No hardship notice has been given in the previous four months; or

– If one has been given in the previous four months, the FSP

reasonably believes it is not a materially different event of hardship

An FSP can commence proceedings if it reasonably believes it

is necessary to protect mortgaged goods

If the FSP has served a section 88 notice, and App requests a

postponement of enforcement action, the FSP must give a

written response within 21 days

FSP cannot begin enforcement proceedings until 14 days after it

has responded to a postponement request (new s 94(3))

Commencing enforcement proceedings in breach of these

provisions is a strict liability offence

Changes from 1 March 2013

Until 1 March 2014, credit providers and lessors are

exempt from having to confirm in writing for all credit

contracts and leases:

– Where there has been an agreement to a change under the

contract, until 30 days after the agreement has been made;

and

– Where the change is a "simple arrangement", of the

particulars of the change to the contract. A simple

arrangement is an agreement that defers or reduces the

obligations of a debtor or lessee for a period of no more than

90 days.

Relief until 1 March 2014

Consumer can now give FSP a “hardship

notice” either orally or in writing if they believe

they will not be able to meet their obligations

FOS considers that the “trigger” for the hardship provisions is any expression by

a debtor that they are unable to make payments under their credit contract as

and when due, but not a “simple arrangement” (ie one that is a realistic variation

of less than 90 days).

It does not include where a debtor disputes their liability to pay, as they are

displaying an unwillingness, rather than an inability, to do so. In that event, the

debtor’s response should be treated as a complaint and dealt with in accordance

with the FSP’s internal dispute resolution process.

ASIC is in the process of consulting on this and other aspects of

the changes

What is a Hardship Notice

For those who have been applying our Bulletins and Circulars

over the years, there should be no significant problems

implementing the changes

Our general approach is that common sense prevails

If an FSP is doing their best to engage with the customer to

identify hardship, obtain relevant information and reach a

hardship agreement, then FOS will not be too concerned about

technical breaches.

We believe that the changes merely reflect what we first said in

2005

FOS Approach to the 1 March 2013 Changes

Acting fairly and reasonably, in our view, requires that credit providers:

– give genuine consideration to a repayment proposal or hardship variation

application and any reasonable alternatives that will help the customer

overcome their financial difficulties;

– give reasons for any rejection of the proposal, preferably in writing;

– ensure that those reasons reflect legitimate considerations and are referable

to the particular customer’s circumstances;

– not start or conclude enforcement action before a decision is made and

communicated; and

– respect the customer’s appointment of an advisor and, if one is appointed,

not deal directly with the customer.

BFSO Bulletin 46

ASIC has updated its Information Sheet 105

and also takes a common sense approach ... there may be circumstances where it is appropriate to allow for

flexibility in meeting the obligations – for example, where the debtor

experiences a delay in getting medical reports from doctors, or certain

financial information from an employer. The debtor’s circumstances

may also make it difficult for them to respond to the information request

in a timely way.

For these reasons, where a debtor has shown a willingness to comply

with the request but is not able to provide all the information in the

timeframe required, we are of the view that a credit provider may

exercise their discretion to wait until all the requested information is

received. This means that the final 21-day period to respond to the

hardship notice will not commence until that information is received.

ASIC’s view

ABA releases industry guideline on financial

hardship, saying that banks should – Respond to a hardship notice, requests for hardship assistance

and/or information about their hardship policies and programs in a

timely, efficient and fair manner without unnecessary delay.

– Only request information from customers that is reasonably

necessary to assess their situation and determine an appropriate

response. Banks will endeavour to minimise the amount of

information requested from customers in order to ensure prompt

assessment of a hardship notice.

– Ensure policies regarding the assessment of a hardship notice

involving joint borrowers are clear and appropriate. For example, as

a joint account is set up to allow joint borrowers to operate with

several and joint liability, banks should not always require both

borrowers to make a hardship notice, especially in circumstances

where there is a relationship breakdown.

The Journey continues - 2013

ABA Members agree to implement a direct link on

the front page of their websites to their financial

difficulty information

ABA and FCA implement a common statement of

financial position and agent authority

FCA launches debt help website

– www.debtselfhelp.org.au

The Journey continues - 2013

Financial Difficulty disputes from 2010

0

100

200

300

400

500

600

700

Jun-1

0

Jul-1

0

Aug-1

0

Sep-1

0

Oct-

10

No

v-1

0

De

c-1

0

Jan-1

1

Feb

-11

Ma

r-1

1

Apr-

11

Ma

y-1

1

Jun-1

1

Jul-1

1

Aug-1

1

Sep-1

1

Oct-

11

No

v-1

1

De

c-1

1

Jan-1

2

Feb

-12

Ma

r-1

2

Apr-

12

Ma

y-1

2

Jun-1

2

Jul-1

2

Aug-1

2

Sep-1

2

Oct-

12

No

v-1

2

De

c-1

2

Jan-1

3

Feb

-13

Ma

r-1

3

Apr-

13

Ma

y-1

3

Jun-1

3

Jul-1

3

Less than 30 days 19%

31 to 60 days 22%

61 to 90 days 18%

91-180 days 20%

Total less than 180 days 79%

Financial Difficulty Average Resolution Timeframes Jan – Aug 2013

All prior Bulletins in relation to Financial Difficulty have

now been consolidated into a series of plain English

articles – the FOS Approach.

Circular 13 provides a link to the FOS Approach to

Financial Difficulty disputes

Relevant information

Telephone: 1300 78 08 08

Website: www.fos.org.au

Mail: GPO Box 3

Melbourne Victoria 3001

FOS contact details