Credit, Collections & Insolvency News
Lenders should be wary if their back office is not making the most optimal lending decisions in the light of upcoming Consumer Duty rules.
At an industry event earlier this month I overheard someone call the FCA’s looming Consumer Duty standards ‘Treating Customers Fairly on steroids’.
There can’t be many in the industry who won’t privately admit to thinking this is a fairly accurate characterisation of what is coming down the track. The industry has until July 2023 to implement what is a far stricter code on new and existing products.
Amongst its standout features is the requirement for regulated firms to consider ‘the needs, characteristics and objectives of customers (including those with characteristics of vulnerability) and how they behave, at every stage of the customer journey’.
As well as acting to deliver ‘good’ customer outcomes, firms will need ‘to understand and evidence whether those outcomes are being met’.
The FCA wants Consumer Duty to major shift in financial services, promoting competition and growth ‘based on high standards’. It says that, as Consumer Duty ‘raises the bar’ for the firms regulated, it will prevent consumer harm and will ‘make it easier for it to act quickly and assertively when we spot new problems’.
You only have to ponder the wording of the above to realise where this might lead, particularly for those whose back offices cannot always ensure compliant lending.
I need not remind anyone that the ‘heads-you-win, tails-you-win’ Financial Ombudsman Service is still in place, where, for zero cost, consumers can lodge a mis-selling claim against a lender. However tenuous, there is still no disincentive for anyone to lodge a dubious or unfounded claim, and we know how badly that works for lenders and how profitable it can be for the claims-chasing industry.
A number of high-profile providers, particularly in the HCSTC end of the market, are no longer in business as a result of misjudging their compliance and being inundated with claims. Wonga was perhaps the most notable, but there have been many others over the years.
So what we have with Consumer Duty amounts to what could, in time, be a terminal combination for some lenders: more wide ranging compliance requirements that require the lenders to act at all times for the ‘good’ of the borrower, and a still very permissive compensation regime.
This, during a period of rising interest rates and escalating consumer stress, is not good news.
With this in mind, lenders are going to need to be very clear and confident about the quality of their back-office decision making. If they are not, they have less than a year to put in place something that can straightforwardly evidence they have made every reasonable effort to meet the requirements of Consumer Duty.
There will undoubtedly be those lenders who sleepwalk into trouble, carrying on as they were, in the hope that they can take on board the new rules without any risk to their viability, and reluctant to make the necessary investments in management resource.
They will have no one to blame but themselves if they are targeted by claims chasing companies, which have proved to be very good at focusing their attention on businesses that they know find it problematic evidencing quality compliance.
Culpability will reside in the boardroom and nowhere else, because there is ‘plug-and-play’ technology available to ensure compliance to Consumer Duty.
We all know how assisted underwriting technology can ensure rapid, optimal outcomes for both the lender and the borrower. Platforms such as LendingMetrics’ Auto Decision Platform (ADP) have been quietly working in the background for some years, using real-time data to generate the right decisions from both the consumer and credit risk perspective.
There will not be so many, however, who appreciate that they have a welcome extra benefit. Finance providers no longer have to rely on patchy due diligence documentation – often amounting only to a disparate mix of proofs – when trying to remain compliant.
Such platforms provide a robust decision-making process, much less susceptible to human error, that generates a digital audit trail able to stand up to the most intense scrutiny. All of the data elements that go towards making every decision are stored and a full audit kept of how they are used.
The lender has a policy signed off by their compliance team, which is in line with the latest regulations, and it is diligently enforced by technology. Decision making is 100% consistent and backed-up by a digital footprint. So, if a mis-selling claim is made, a lender has a quickly generated justification for its decision to present in its defence to a regulator.
Consumer Duty is yet another big step away from caveat emptor, or buyer beware, towards a ‘seller beware’ regime, where providers that fail to have a 360-degree view of the applicant, pay a penalty.
This direction of travel is going to make platforms such as ADP indispensable for those that want to remain in business and profitable.
