Banks to Improve Debt Collection Standards to Reduce Bankruptcies

Banks will clamp down on debt collectors who threaten customers with bankruptcy proceedings under new guidelines that will insist banks are consulted before debt buyers begin legal proceedings and are given the option to buy back the debt of vulnerable customers.


The Australian Banking Association has also written to federal Attorney-General Christian Porter, along with consumer groups, seeking a review of the Bankruptcy Act to increase the minimum amount of debt before a customer can be made bankrupt, which is currently $5,000. Consumer groups say it should be $50,000. As the government considers the request, banks are pledging to increase their own thresholds.


After the shocking treatment of customers was exposed by the Hayne royal commission, banks want to ensure their reputations are not tarnished from actions taken by the firms which banks sell debts to, or hire to manage the collections process.


Alan Harries, CEO of the Australian Collectors and Debt Buyers Association, said debt collectors have a difficult job given all their files involve problematic customers. The 15 members of the association make 110 million contacts with customers each year, and he insisted members want to maintain high standards of conduct.


“We are supportive of it and we welcome it,” Mr Harries said of the new ABA guidelines. “No-one wants to see anyone made bankrupt. The guidance statement reflects current practices and I think it will be useful for banks and debt buyers to assist people in financial difficulty.”


It is unlikely the new guidelines, which will be released on Tuesday, will have a significant impact on the price at which bad debts are sold in the market, he added.


The major banks have been reviewing engagement with debt collection agencies this year, in the wake of the royal commission and after consumer groups in August drew attention to the high number of bankruptcy applications being issued by Lion Finance, a subsidiary of Collection House.

Panthera Finance was sued in July by the Australian Competition and Consumer Commission, which is alleging three consumers were “unduly harassed” over debts they didn’t owe.


The ABA’s new guidelines on the sale of unsecured debt will seek to standardise the way all banks engage with debt operators.


All contracted debt buyers will have to follow all regulatory codes and a bank’s own policies for supporting customers in hardship. Banks will pledge to not sell a customers’ debt until they have been proactively contacted to offer restructuring, consolidation and hardship support. No debt will be sold if it is in the process of being disputed by a customer. And regular auditing of all contracted debt collectors will take place to ensure they meet standards in the new guidelines.


Gerard Brody, CEO of the Consumer Action Law Centre, said debt collectors sometimes preyed on vulnerable people with low level English skills. He said his centre had intervened to stop a bank customer who had an initial credit card debt of around $5,000 losing their house after the amount outstanding 18 months after a forced bankruptcy had spiralled to $60,000 due to various fees.


Financial Rights Legal Centre CEO Karen Cox said the community legal group appreciate the banks supporting the call for an increase in the bankruptcy threshold “so that people are no longer subject to similar risks from other types of small debt”.


Recent data published by the Australian Financial Complaints Authority shows the debt collection industry attracted 2416 complaints in the year to August, more than the entire superannuation industry.