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The “alarming” surge in banks failing to support customers facing financial difficulties erodes trust and confidence in the banking industry, it says.
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Bank watchdog slams 40% rise in hardship safeguard breaches
18 December 2023
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The banking industry’s watchdog has slammed an “alarming” 40 per cent rise in breaches of the Code of Practice’s financial hardship protections and says banks are failing to support customers during a cost-of-living crisis.
The Banking Code Compliance Committee said 2,583 breaches of financial hardship protections took place between January and June and warned this figure would likely be higher due to underreporting.
BCCC chair Ian Govey said the results were “alarming”, breached the banks’ obligations under the code and contributed to a “decline in trust and confidence in the industry”.
He said, “more effort must be put into supporting customers facing financial difficulty”.
“Banks reported failing to respond to financial hardship requests, persisting with debt collection activities despite hardship arrangements being in place, and neglecting to follow through on agreed-upon hardship arrangements.”
“The current state of increased living costs makes these obligations more important than ever.”
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The BCCC, an independent body established under the code in 2019, monitors compliance with the Banking Code of Practice that outlines protections for bank customers.
A biannual compliance statement released yesterday said the country’s four major banks accounted for 82 per cent (11,660) of the breaches reported.
The top three causes of reported breaches were human error, deficiency in process or procedure and system error or failure, accounting for 94 per cent of all breaches.
The BCCC said the greatest increases in breaches to the code came from part nine with safeguards for “when things go wrong”.
Banks reported a total of 326 breaches of their obligations for banks to assist customers under chapter 39, a 22 per cent increase from the last reporting period.
According to chapter 39, “a bank must explore available options and provide the customer with information about the ways the bank can help” when contacted by customers facing financial difficulty.
One major bank accounted for 82 per cent of all total breaches, with 317 customers affected.
“The bank attributed the cause of these breaches to the complex and technical nature of managing financial difficulty and a reliance on manual processes. The bank also cited an increase in financial hardship applications as a contributing factor,” the report said.
Breaches of the obligation to inform customers when reporting their default activity to a credit reporting body in chapter 42 more than doubled in the reporting period, up 104 per cent to 55 total breaches.
“We are concerned about the rapid increase in breaches of this nature in a short time,” the report said.
BCCC also found obligations contained in chapter 43, requiring banks to treat customers fairly during debt recovery, increased for the first time in five reporting periods, up 26 per cent to 269 breaches.
It said banks breached these obligations by carrying out debt collection activity when a hardship arrangement was already in place, selling debt when the bank was considering a customer’s financial situation and providing incorrect or unclear information about their debt recovery process to customers.
Mr Govey said there was no excuse for failing to support customers in financial difficulty in a time marked by escalating inflation and living costs.
“Part nine of the code contains the crucial obligations to support customers facing financial difficulty. The almost 40 per cent increase of these breaches is alarming,” he said.
“Banks have had ample time to anticipate the surge in financial hardship requests and implement measures to manage them effectively.”
Total breaches to the Code of Practice were down by 9 per cent to 14,165, but the BCCC warned this figure would likely be higher than reported.
It said some banks “consistently reported no breaches or very few breaches”, raising concerns that they “did not take reporting seriously or do not have adequate systems in place to be able to identify breaches”.
Mr Govey said: “Underreporting of breaches signals risks with inadequate processes and systems or lack of commitment to code obligations.”
“As we move into the next reporting period, we expect the industry to prioritise improvements in staff training, systems and procedures to better support people in need during these challenging times.”
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