03 June 2014

Credit Management

Hardship Policies in Practice: A comparative study [PDF] by Lauren Levin and Fiona Guthrie for the Australian Communications Consumer Action Network (ACCAN) and Financial Counselling Australia (FCA, Australia's peak body for financial counsellors) reports on "hardship practices" in the banking, energy, water and telecommunications sectors.

The authors comment
In 2012, Financial Counselling Australia (FCA) received a grant from the Australian Communications Consumer Action Network to conduct research comparing hardship practices in the banking, energy, water and telecommunications (telco) sectors.
The overarching aim of the research was to elucidate effective practices – ‘what works’ – for consumers, as observed from the vantage point of financial counsellors, and then expanded to include the perspectives of other stakeholders. More specifically, the research aimed to facilitate an ongoing dialogue between FCA, relevant consumer organisations and the telecommunications industry when assisting customers in hardship.
The research methodology comprised semi-structured interviews with experts in the financial hardship sector: financial counsellors, consumer advocates, staff from the hardship teams in telco, banking and finance, and the utility sectors, regulators, external dispute resolution (EDR) schemes and government. Three focus groups were held with consumers who have telco debts, a literature review was generated and a workshop was held to review the overall findings of the study.
Why is this research important?
Financial difficulty is often the result of a change of circumstances, such as unemployment, illness or relationship breakdown – events that can happen to anyone.
Poverty is also a major cause of financial hardship and, not surprisingly, data from the Australian Bureau of Statistics shows that the people at greatest risk of experiencing financial stress are those on low incomes. This group includes people whose main income source is social security benefits and single parent families with children. However, there are also relatively large numbers of higher income families with assets, who are also struggling with high levels of debt.
Financial difficulty is also correlated with (or may cause) other problems. It can affect physical and mental health, relationships and children. To our knowledge the costs of these associated problems have not been documented, however, they are likely to be significant. Whatever the reason for financial difficulty, appropriate action could mean the difference between financial recovery and financial oblivion. If financial problems can be minimised or rectified, there are obvious benefits for individuals and families, as well as industry and the wider community.
Six factors that make the greatest impact on hardship policy and practice
On review of the interview data, workshop participants identified six key factors that contribute to effective hardship policy and practice. These areas are: access, early identification, sustaining good performance, attitudes and culture, the business case, and concession and grant frameworks.
Access – access to a hardship team is of benefit to consumers. However, many people in financial difficulty are either unaware of hardship assistance or sometimes find that access is blocked by ‘gatekeepers’. The banking industry has recently tackled this issue; as part of an industry-wide voluntary initiative, the home page of every bank website has information about what action to take when experiencing financial difficulty. There is also a dedicated website, as well as information in bank branches that advise on hardship practices. Early identification – the water industry has had success in proactively identifying customers who may be in hardship, but there has been mixed success in other industries. To be successful, early identification has to be approached sensitively.
Sustaining good performance – all interviewees said that sustaining good performance is hard. A key factor is the commitment of the people in the hardship team and the leadership from the CEO and senior staff. The effectiveness of the regulatory framework also influences the extent to which companies focus on assisting customers in hardship in a meaningful way.
Attitudes and culture – critical for sustaining good performance are the attitudes and culture of the people in an organisation. Training is one mechanism to ensure appropriate attitudes. Cultural change at an industry level through the development of specific hardship frameworks has been initiated by the banking industry and is expected similarly in the telecommunications industry.
Business case – it is a widely held view that the business case for a hardship function within an organisation is cash positive, but this research only unearthed one example where one had been undertaken (Yarra Valley Water). This is an area where significantly more work could occur.
Concession and grant frameworks – participants reported that many Australians are missing out on concessions or grants that could assist them and that Australia’s concessions framework is ad hoc, inconsistent, complex, confusing and, in many cases, inadequate. A national framework with consistent eligibility, appropriate funding and online accessibility is necessary.
Other research findings 
‘Hardship’ was a term commonly used by interviewees. It was also referred to in some legislative frameworks. However, interviewees also noted that it is not a term commonly used by customers. This is important to remember when interacting with customers. For example, individuals should not have to use the term ‘hardship’ to access a specific hardship team.
In essence, two competing value judgments shape the way hardship programs operate in different businesses. These are: ‘people want to pay’ versus ‘people are out to avoid their obligations (or they’re paying everyone else but us)’. These value judgments flow through in many ways, for example in the use of language (whether people experiencing hardship are ‘customers’ or ‘debtors’) and in requirements for ‘proof’ of financial hardship. 
Financial counsellors, as well as a number of the telco focus group participants, reported that affordable payment arrangements were difficult to arrange. Some of the industry interviewees were also aware of this problem, noting that sometimes customers could be too optimistic about what they could afford. They recognised that customers may agree to an arrangement simply to terminate the call. Incentive arrangements, which involves the business crediting a payment after a number of payments to an outstanding debt has been made, were very effective. Some energy and water retailers offer these to their hardship customers. Customers feel like their efforts are being rewarded.
Not surprisingly, interviewees said that staff training and skills were critically important. Training needs to be across a business and not just for the hardship team. Training that provides real life examples of what it means to be in financial difficulty is the most successful. Financial counsellors said that the collections and hardship teams are typically ‘worlds apart’ in their approach to dealing with customers in financial difficulty. The general theme in collections is ‘what can you pay and when?’, whereas hardship arrangements are more flexible. All interviewees said it was vital that the collections and hardship teams worked together. Some collection departments have the tools to identify people in financial hardship and respond, for example, by linking them with Centrepay on the spot.
There is a growing consensus about the treatment of ‘bulk debt’ clients – those with very low incomes, no significant assets and where neither of these factors is likely to change. Interviewees recognised that from a commercial and social perspective, a debt waiver or at least a cessation of debt collection activity, is an appropriate response.
Financial counsellors noted that in their experience it is easier to get positive outcomes with some debt collectors than the original creditor. The arrangements are affordable, can be over a longer term and are generally more flexible.
Telco focus groups
The research included three focus groups with consumers who had difficulty in paying telco bills. The overall theme from the focus groups could be summarised in just one line: ‘please help us’. Participants overwhelmingly found the experience of dealing with a telco about their debt exhausting and stressful. Many participants found it difficult to negotiate affordable repayment arrangements and said that collections staff did not listen. Participants also raised issues related to service and sales problems and overseas call centres. One focus group was comprised of new arrivals to Australia. Comparatively this group found the process of financial difficulty much harder to navigate.
Comparing industries
The research shows that that there are different approaches to hardship between the banking, utility and telco sectors. Water companies were generally seen as being the most progressive by interviewees – however we note that these comments were about Victorian and New South Wales businesses and may not apply generally. A couple of the large debt collection companies were also singled out as dealing effectively with customers in financial hardship. The banking sector stands out as having made a conscious decision, at CEO and industry level, to engage with consumer organisations. This has resulted in a number of positive initiatives as outlined above.
None of the financial counsellors interviewed considered any of the telecommunication companies to demonstrate good practice. Instead, they were viewed by the majority of financial counsellors and consumer advocates as the least effective sector for offering hardship assistance.
In discussing performance the authors note
Sustaining good practice is difficult
A common refrain in the interviews with financial counsellors, consumer advocates, and other stakeholders, was ‘company x used to be good, but they’re not anymore.’ In other words, sustaining good practice is difficult. Importantly, interviewees noted that a good reputation for assisting customers in financial difficulty lifted a company’s profile and reputation. 
Factors that sustain good performance 
Critical factors in sustaining performance (as noted by workshop participants) include:
  • measuring the right things, including customer experiences; 
  • rewarding success internally within the company; 
  • showcasing effective (and non-effective) practices across and within industries; 
  • leadership; 
  • the effectiveness of the regulatory framework, including a baseline of regulatory requirements and performance measures. Regulators also need to enforce the rules. 
The regulatory framework is a very important driver 
It was clear from the interviews that the regulatory framework, including the strength and pro-activeness of the regulator, had a major impact on hardship approaches. In particular, interviewees from the banking sector were very conscious of ASIC as the regulator, the potential sanctions for breaches and the requirements imposed by credit laws. In addition, they were very aware of media attention highlighting ASIC sanctions and expressed a strong desire to not be dragged into the public spotlight. Banking industry interviewees said a negative report meant that ‘heads would roll’. The market would react negatively to sanctions such as enforceable undertakings and senior management would be concerned about reputational damage. 
‘With the NCCP24, we don’t want to be the first with a $1.7 million complaint, so ASIC has a big impact on the way we operate. And don’t want to be in the news. ASIC is very strong’. Bank interviewee
Individuals from other industry sectors did not appear to be concerned by regulatory sanctions to the same extent, although the utilities sector interviewees were very conscious of the legislation and codes. The telco regulator and code was not raised by interviewees in this sector to anywhere near the same extent as by interviewees from other industries. 
Performance drops away with a change of leadership and/or staff 
When interviewees discussed companies whose performance had changed, a common theme was the loss of key staff, including those at senior levels. As one interviewee said:
‘The CEO (of the energy company) was very compassionate and had the vision. Their focus then shifted to the bottom line and vertical integration. This flowed through to their hardship program ... on companies going backwards – the biggest issue is someone leaving.’
One EDR scheme interviewee presented the example of a high performing company with a solid hardship program and a visionary managing director. The program became less effective after the company underwent a major operational restructure. The ombudsmen team also noticed a deterioration in their working relationships with the company’s hardship team, after the staff members on the ground disappeared in the restructure. The interviewee observed that a case management model relied on making local referrals, but energy and water retailers struggle to refer customers effectively when they operate from a centralised model. 
 The importance of leadership was reinforced by Sue Fraser, a financial counsellor with Kildonan UnitingCare, Victoria. Sue has worked with a number of companies on a consultancy basis helping them to improve hardship responses.
‘When we have been working with industries, when they’re participating, they do well. Working with vulnerable consumers it looks and sounds easy because you just talk to people, get them to pay something and they do. 
As they get less complaints and greater cash flow, it’s like “we’ve done that now” and we can move on. When we worked with [one of the banks] they blitzed all their measurements but they’ve lost some of the structural program – [an energy company] too. While you have a champion things are fine, but when they move off new managers want to put their mark on it. 
[An energy company] at one stage were by far the leader. We stopped working with them six years ago. If you ask any financial counsellor, they used to be good but are shocking now. As soon as management changes, then it is lost. So we work with senior management, they take ownership internally, and don’t see it as a fly by night affair. So it’s not negotiable.’ 
Performance can also drop away when there are structural changes 
Small changes can have profound consequences and can even negate previous gains. We were informed about one energy company that had been recognised as having a standout hardship program. The company then made a structural change, diverting all callers through a triage centre. Previously customers had benefitted from direct contact with the hardship team. The triage team’s role included organising the payment arrangement with the hardship team responsible for subsequent account management. This introduced a disconnection between the hardship team and the customer. There was no longer a direct relationship between hardship staff and the customer when they initially explained their situation and needs. 
Regulatory measures of raw numbers are not of great assistance in making assessments about effective or non-effective performance 
While industry regulators monitor company hardship performance the data can be difficult to interpret. For example, is it a good or bad result to have high numbers of people entering a hardship program? A low number in a hardship program could imply that customers are not being proactively assisted and that their financial positions are worsening as a consequence. One regulator noted:
‘There is not just one measure that is valuable. We probably need to look at a cluster of indicators to show both absolute rates and trends over time. The number of people going into a hardship program doesn’t mean too much.’ 
Indicators that reveal the effectiveness of a hardship program in the energy and water sectors may include:
  • The number of disconnections (with a benchmark indicator) and the size of the debt at disconnection; 
  • The number of restrictions initiated in cases where the customer was a concession cardholder (well-developed programs have significantly lower rates); 
  • Absolute size of debts; 
  • Availability of alternative payment arrangements and flexible payment arrangements (such as the ability to make fortnightly payments) and incentive based schemes; 
  • Payment plans – the number of people meeting their commitments under the plan amounts and the numbers of unsuccessful arrangements; 
  • Debt arrearage indicators, which show how companies manage high arrears, when the customer is struggling to pay for current consumption. One view from some community sector interviewees is that businesses have an obligation to consider debt forgiveness or have an affordable (and perhaps reduced payment plan) if they have allowed debts to accrue without acting earlier;  
  • Uptake of government programs (such as utility relief grants);  
  • Time taken to send debts to a debt collector (or alternatively, how long since the customer has paid in full);  
  • The average amount of hardship debts for different customer profiles – $200 may be a huge amount to a pensioner but not that much for a family in a higher income bracket.