Reflections on 2021: How regulators and industry responded to COVID-19
Speech by ASIC Commissioner Sean Hughes at the ARCA Credit Summit 2021, Friday 12 November 2021.
Check against delivery
Thank you, Narelle and good morning, everyone. I’d like to acknowledge the Traditional Owners of the lands upon which we meet; and pay my respects to Elders past, present and emerging.
It’s not a stretch to say that 2020 was marked by two – well worn – terms: unprecedented and uncertain.
2021 – reflected the community’s and economy’s response: adapting to constant change is now commonplace and has marked an inflection point in the way we face into black swan events.
Amid the disruption, it is vital to have a goal – something to strive towards, through any challenge. For ASIC, our aspiration remains unchanged – to ensure confidence in a financial system that – even under stress – can remain fair, strong and efficient. And ahead of 2022, ASIC is in pursuit of two strategic priorities that impact all participating in this important Summit today.
The first is economic recovery built on confidence. A confidence that relies and depends on consumers being treated fairly. The second is to support industry readiness for and compliance with standards set by Parliament’s recent law reforms.
Fortunately, we have not had to tackle these priorities alone. For these past two years, ASIC and the industry have collaborated extensively on how best to respond to COVID-19. In this address, I intend to outline the work ASIC – and the industry – have been doing to:
- incorporate consumer-centric reforms, and
- facilitate hardship relief – including where we have seen good practices.
I will close with a – cautiously optimistic – view of things to come.
1. Law reform
As an example of this period of ‘constant change’, this year has seen numerous law reforms commence. I will take a little time to go over six of these. They include:
- Product design and distribution obligations
- Breach reporting
- Debt management reforms
- Enhanced internal dispute resolution standards
- New identification requirements for directors, and
- Hawking prohibition.
These laws will strengthen long term protections for consumers and close some regulatory gaps. At their core, these reforms share a common purpose: improved consumer outcomes. Together these new obligations will bring about a number of benefits by establishing:
- a consumer focussed product design at the centre of business models
- a reduction in consumers being subjected to pressure selling
- improvements in monitoring and responding to consumer outcomes
- greater transparency about the number of complaints and breaches as well as
- more timely and consumer-centric complaints handling.
These laws are not ‘set and forget’, but reflect changing consumer and community expectations, as transmitted through the Parliament. Instead, with ongoing experience and engagement, the benefits will accrue over time. We hope this consumer-first mentality will become second nature for all participants in the financial markets.
Design and distribution obligations
One of the biggest and most innovative shifts in financial services law was the introduction of the design and distribution obligations. Their introduction recognises the limitations (and potential high-risk assumptions) of a consumer protection framework based heavily on disclosure.
The obligations are intended to reduce harms seen from past mis-selling conduct and poor product design. They assist industry in delivering better outcomes for consumers while also managing non-financial risks.
Under these obligations, industry must design fit-for purpose products that meet consumer needs and then reach the appropriate consumers. As part of this process, financial product firms need to consider how products are marketed as well as the sales practices they’ve adopted. Accurately defining target markets will be critical in getting the right products to the right consumers – and ensuring that assessment remains accurate. Target market determinations are vital because they set the product governance controls that ultimately flow through to distribution. It is important that issuers ensure their target markets are sufficiently granular, having regard to the key features and attributes of their products.
Further, the obligations require firms to monitor consumer outcomes, review that information, and improve upon it. Where problems are identified, businesses need to consider whether changes are required to how their products are designed and distributed.
As part of complying with these obligations, firms need to ensure they are collecting the right data – both from within their organisation, and outside of them. There is a need to have effective arrangements in place to ensure all of the available information is being properly analysed.
Industry has had a period of two and a half years to implement these reforms, which included a period to take account of the interruptions caused by COVID-19. However, we understand the significance of these changes and the ongoing challenges faced by industry. We recognise there will be a period of transition as you continue to implement these and other reforms that commenced just over a month ago.
ASIC will be taking a reasonable approach in the early stages of these reforms, provided industry participants are making genuine and demonstrable endeavours to comply.
We have similar expectations regarding the new Breach Reporting obligations which, from October, applied to credit licensees for the first time. Credit licensees will have a relatively gradual implementation. They will only have to report breaches occurring after 1 October, and not report breaches that occurred before 1 October, even if they were identified after that date.
These legislative reforms flowed from the Financial Services Royal Commission, and findings of Treasury’s Enforcement Review Taskforce. They were designed to bring greater certainty and clarity to industry on what to report to ASIC, as well as ensuring ASIC receives reports in a timely way. This will allow ASIC to not only detect significant non-compliant behaviours earlier – and act sooner – but also assist us to identify and address trends of non-compliance across the industry as they emerge.
Early identification and reporting of breaches could, we think, ultimately help the credit industry to avoid the significant delays and complex and costly remediation programs the rest of the financial services sector has encountered under the pre-existing regime. So one purpose of these new breach reporting obligations is to help firms identify and act swiftly on breaches, making sure incidents get the attention they deserve. In turn, licensees and boards will have greater confidence they are doing the right thing not only for consumers, but for the firm, its shareholders and its brand value as well.
In addition, this reform will provide greater transparency with ASIC’s obligation to publish breach reporting data commencing late 2022, which we will consult on in the new year. ASIC’s revised RG 78 (published in September 2021) provides guidance on:
- what needs to be reported
- when and how to lodge a report, and
- our expectations regarding licensees’ compliance systems for identifying, recording, and reporting breaches.
The guidance includes a range of examples to illustrate the requirements and make it clearer for licensees of various sizes and types. We have also provided additional information on our website regarding how to lodge reports through ASIC’s Regulatory Portal.
In developing the new lodgement process we consulted with industry and, in light of industry feedback, are working on an API (Application programming Interface) to enable breach reports to be submitted using a machine-to-machine solution. This will reduce manual input for licensees and hopefully minimise the risk of inadvertent data errors.
Debt management reforms
The protection of vulnerable consumers remains an ongoing priority for ASIC. In 2016, ASIC published research into Australian debt management firms and the risks they present to consumers. We welcomed the announcement by the Treasurer last year to require debt management firms to hold an Australian Credit Licence when they are paid to represent consumers in disputes with financial firms.
As of 30 June 2021, we had received a total of 82 applications for authorisations that covered debt management services. From 1 July 2021, subject to transitional arrangements, providers of debt management services must hold a credit licence with an authorisation that covers debt management services.
The reforms require debt management firms to meet the ongoing obligations imposed on credit licensees. These obligations include a requirement to meet the ‘fit and proper person’ test, and to undertake their activities ‘efficiently, honestly and fairly’.
Critically, debt management firms will also have to be members of the Australian Financial Complaints Authority. This will enable consumers to access affordable and alternative forms of redress through AFCA, if issues arise around service provision.
If debt management firms do not comply with the requirements of the transitional arrangements and continue to provide debt management services from 1 July 2021, they will likely be engaging in credit activities while unlicensed and attract ASIC’s enforcement attention.
Internal dispute resolution
On the subject of complaints: After a 15-month transition period to account for disruptions from the pandemic, Regulatory Guide 271 on internal dispute resolution is now in force.
RG 271 was developed with evidence from:
- ASIC consumer research about the barriers and difficulties people face in approaching and navigating complaints process
- ASIC’s in-depth review of complaints handling at major financial institutions, and
- a comprehensive consultation process with stakeholders.
It applies to all complaints received from 5 October 2021 and includes enforceable requirements, which are subject to civil penalties. The regulatory guide requires firms to record all complaints, gives guidance on the content of IDR written responses, and introduces reduced timeframes for responding to complaints.
The updated standards and requirements in RG 271 will hopefully drive fair and timely complaint outcomes and establish a rich dataset for continuous improvement.
New director ID requirements
As digital certifications and check-ins become ubiquitous, company directors will now also need to verify their identity as part of a new director identification number requirement.
A director ID is a unique identifier that a director will apply for once and keep forever. This is to help prevent the use of false and fraudulent director identities. All directors of a company, registered Australian body, registered foreign company, or Aboriginal and Torres Strait Islander corporation will need a director ID.
The Australian Business Registry Services (ABRS) is responsible for administering the director ID initiative and applications can be made through the ABRS website. ASIC is responsible for enforcing director ID offences set out in the Corporations Act – it is a criminal offence if you do not apply on time. Dates for application vary depending on when a person becomes a director – more details can be found on both the ASIC and ABRS websites. ABRS will provide support and guidance to directors to help them understand and meet their director ID obligation.
We have been encouraged by the early take up of applications from newly appointed directors.
And I’d like to end this part of my address with a brief final push for a consumer centric approach across industry: October saw the release of new hawking prohibitions. These reforms strengthen and consolidate the three existing hawking prohibitions into a single prohibition covering all financial products.
It addresses long held concerns about poor consumer outcomes from unsolicited sales of financial products. These reforms will give consumers greater control over the circumstances in which they are offered products, as well as prevent consumers being approached via cold-calls or through other unsolicited forms of contact.
2. COVID-19 response
I do acknowledge these reforms come at a time where the pandemic has presented unique challenges to both industry and regulators.
ASIC has been working closely with the credit sector to determine how best to address both industry challenges and consumer concerns during these adverse times. We wanted to understand how lenders are assisting consumers experiencing financial difficulties due to COVID.
While most consumers who deferred repayments on their mortgages last year have returned to making normal repayments, some portion continue to struggle. We encourage lenders to continue working with these consumers to find appropriate solutions – as many lenders have done so over the past 18 months.
ASIC also continues to advocate for consumers to engage with their lenders about the challenges they face. If customers feel overwhelmed, they should reach out for help sooner rather than later. Consumers can get free and confidential advice from a financial counsellor by calling the National Debt Helpline.
COVID-19 industry response and improvement
Many lenders have used this pandemic period to closely scrutinise their processes for responding to consumers experiencing financial difficulties, which in many cases has led to improvements across various lenders. Some lenders have sought to make hardship assistance more accessible for consumers and increased the ways by which consumers can request assistance. This includes online forms and lender apps as well as over the phone.
Other providers have simplified their communications with consumers, by ensuring the information available to consumers regarding financial hardship is clear and concise. Positively, feedback we have received often mentioned that this type of review was tied with a closer examination of complaints to identify problem areas that could be addressed through better disclosure.
Together with increased touch points, a small number of lenders took it a step further by streamlining assistance entry paths and no longer requiring a statement of the customer’s financial position.
Lenders were also seen taking steps to better identify and respond to vulnerable consumers. Some lenders told us that the pandemic prompted them to incorporate an assessment of whether their responses to consumers had been ‘fair’, as part of their assurance reviews.
Other lenders focussed on upskilling their staff so that they could have better conversations with consumers. Strategies for this included new tools and training, with input from financial counselling agencies, or organisations specialising in vulnerability.
The final improvement I will relay was lenders providing consumers greater insights from the data they had on hand, for example: identifying customers that may be at greater risk of experiencing financial difficulties. Granted, this is an evolving space, but I am encouraged and heartened to see lenders giving more thought about how they could improve outcomes for consumers through the application of data.
It has been pleasing to see lenders make improvements to their financial hardship processes, as a response to the pandemic. However, we don’t think that this type of response should be limited to a pandemic, economic crisis or natural disasters. Where new or modified processes are generating better outcomes for consumers, we strongly encourage lenders to embed them into their ‘BAU’ activities. And we are excited to hear that this shift towards ‘BAU’ is beginning to occur across industry players.
Looking ahead to 2022
Optimism should be at the forefront as we look ahead to 2022. There are challenges for the industry and the regulator to face, but we are better equipped, more empathetic and have greater stores of resilience after the last few years.
Although we are right to be wary of making predictions, there are some things we know will be happening in 2022, beginning with an issue that you are all closely involved with.
Comprehensive credit reporting reforms
Some significant changes are already happening regarding credit reporting and further changes will be introduced next year. I know that a lot of work has been done by ARCA and its members regarding comprehensive credit reporting (CCR).
The Act which introduced the mandatory CCR regime gives ASIC a new role, although it is relatively narrow. Under the new regime the major banks must supply comprehensive credit reporting information for 100% of their consumer credit accounts by 28 September 2022.
ASIC has been undertaking a range of work in administering this new framework. During 2021 we issued two instruments to support the operation of the new regime.
We have also been engaging with affected stakeholders about their new obligations, including the requirement to provide audited statements to the Treasurer to confirm that the supply requirements are being met.
Financial hardship information
Relevantly, comprehensive credit information will include financial hardship information from 1 July 2022. I understand you had a session yesterday on implementing the new hardship reporting reforms, and so I won’t spend too much time on this.
Noting the reform commences from 1 July next year, I am sure many of you are already working to prepare for implementation. We expect that the introduction of financial hardship information into credit reports will present a steep learning curve for consumers. Therefore, we encourage lenders to think about how they will support their customers to understand the new information about hardship arrangements.
Ahead of this change, lenders should also review their hardship processes and ensure consumers receive assistance options that are sustainable and give them the best opportunity to get back on track so that they can demonstrate positive repayment behaviour in their credit report. It will be important for lenders to report this financial hardship information in a consistent manner.
While it is a matter for lenders as to how they will use the hardship information, consistent reporting on financial hardship information will enable lenders to better understand the material in a consumer’s credit report and make more informed lending decisions.
ASIC’s Indigenous Financial Services Framework
Finally, I would like to close today by looking at some work that is of close, personal interest to me – and I am sure to many of you participating today.
ASIC’s Indigenous Outreach Program provides specialist advice, insights, and support to our teams where our work priorities touch on Aboriginal and Torres Strait Islander consumers and communities. This includes where Aboriginal and Torres Strait Islander consumers are affected or impacted by misconduct within the financial system. This also includes broader engagement with industry on unique challenges faced by those consumers and where ASIC can encourage collaboration and innovative solutions.
In 2019, ASIC initiated a collaborative project led by Professor Robynne Quiggin of UTS to build a stronger understanding of the needs and experiences of Indigenous Australians across the financial system. ASIC is using learnings collated from a range of consultations to develop ASIC’s Indigenous Financial Services Framework.
This Framework will drive how ASIC engages with Aboriginal and Torres Strait Islander peoples and drive the priorities of ASIC’s Indigenous Outreach Program. It will provide the opportunity for other stakeholders, including industry participants, to engage with the learnings and work together to collaborate on innovative solutions to complex challenges. The ultimate goal is to drive positive financial outcomes based on the values, priorities, and perspectives of Indigenous Australians.
In late October, ASIC and Professor Quiggin hosted a workshop with participants from across the credit and banking sector. Going forward we will engage with financial services providers and industry associations from other sectors as well as Government departments and agencies with shared priorities. These engagements will ensure ASIC’s work in implementing the Framework is mindful of relevant priorities of other organisations and does not overlap with or duplicate any existing networks and programs.
We look forward to finalising the formal ASIC Indigenous Financial Services Framework and I encourage all of you to engage with this work.
While we will look back in time at the past 18 or so months and measure the impacts on this sector and its people, we at ASIC are mindful that everyone here is part of the broader Australian community, many of whom have endured much hardship in this period. But from these challenges, renewed commitment, determination and competitive energy will, I am confident, emerge.
A fair, strong and efficient financial system, and the recent law reforms which serve to underpin that goal, are not inconsistent with commercially successful businesses. Your clients, and their trust and confidence in our system, is what will help rebuild our economy from the shocks of the past two years.
We look forward to working with you to achieve that goal, and I am happy to take your questions. Thank you.