While some developed markets have historically had some responsible lending laws, it is only in the wake of global financial crisis that the responsible laws have become a key focus worldwide. Thus in US, the Dodd-Frank Act enabled the formation of the Consumer Financial Protection Board (CFPB) in 2011. The Consumer Credit Directive was adopted by the EU in 2008, and strengthened further in 2011.
In Australia, the Australian Securities and Investments Commission (ASIC) published the responsible lending obligations in the National Consumer Credit Protection Act 2009 (National Credit Act).
However, in 2014, ASIC issued Regulatory Guide 209 (RG 209) which sharpened the expectations around responsible lending conduct, putting heightened expectations on banks and lenders.
Basic tenets of RL in Australia
Banks and lenders in Australia are required to take three steps to meet responsible lending obligations. They are meant to make adequate inquiries about financial situation of the customer, their requirements and their objectives. They must then take reasonable steps to verify their financial position.
What lends ambiguity to the RL guidelines is that the steps required to satisfy them are not outlined unequivocally. Thus, measures that qualify as sufficient to satisfy the guidelines are left at the discretion or understanding of the credit provider. These measures may vary depending on the product offered and business model of the provider. This opacity opens the credit decision-making process to regulatory interpretation.
Retail credit forms a significant part of revenue of banks. Lending representatives are incentivised through commissions and bonuses to push sales. Therefore, regulations turn into nothing but a high-cost hindrance for banks. Complying with RL would negatively impact bank margins and reduce profitability. It also increases risk of being penalised. And major banks often suffer much more reputational damage from such incidents compared with small players.
How are banks reacting to the conduct regulations?
ASIC has made it clear that banks are not utilizing data effectively enough. Furthermore, it is not convinced that banks’ controls have been designed to ensure the best risk vs return outcomes. As a matter of fact, several banks are struggling to use their PMO for regulatory projects of similar nature.
There is an urgency in the system – banks, vendors, regulatory bodies such as Australian Retail Credit Association (ARCA) and ASIC, government, vendors and fintechs are in discussions to pave the way forward. Everyone, including banks, agree that this will have to be a collaborative effort to improve banking and regulatory standards.
However, the dichotomy of the situation is such that banks are lobbying to safeguard their interests as they are worried that tight regulations will increase the costs of business.
To support consumers, in the short-term, banks need resources to assist in remediation and project-based initiatives that improve and transform lending operations. In the medium and long-term, they will need to drive and obtain digital, Big Data, Artificial Intelligence (AI), Robotic Process Automation (RPA) and machine learning based solutions, with transformational changes, to improve processes. AI and ML create tremendous value for automation, scalability and data-based decision making by embedding analytics across the organization’s core processes.
In order to achieve responsible lending compliance while also maintaining smooth and efficient customer experience, there are three key things Genpact recommends:
- Use of Household Expenditure Survey by the Australian Bureau of Statistics appropriately adjusted for inflation, and the Henderson Poverty Index, along with other local adjustments as a benchmark for comparison of customer provided living expenses data
- The creation a robust digital platform to obtain customer bank account data to estimate living expenses. Introduction of digital tools will not only help standardization, but also significantly increase productivity
- A robust monitoring system to handle exceptions. Initially this will require significant resources to manage all the exceptions. Over time, however, banks may automate information retrieval using digital tools (for example – digitally obtaining a customer’s banks statements to arrive at a reasonable assessment of income and expenditure)
Banks need to start integrating and leveraging data from all their business units to obtain a holistic view of their customer’s information. Using data to evaluate health of the portfolio, from customer dynamics perspective, adds significant meaning to compliance without compromising customer experience. This will enable responsible lending compliance and also enable effective portfolio management.
Banks need to ensure they engage with a partner that is equipped to handle the scrutiny of records to assess compliance. Additionally, in a fast-paced digital banking environment, using partner expertise to automate record scrutiny will improve customer service without causing inconvenience to the client.
An experienced technology partner should be able to automate the process of analysing customer documents and their inputs, via online tools, which will strengthen documentation process. The process does not end here; customer service executives will have to generate additional enquiries based on analysed inputs and make sure products are mapped to customer requirements. Banks need to ensure that all requirements are appropriately reviewed and any exceptions or deviations are captured and flagged.
This process will:
- Minimise customer inconvenience and impact by selecting the depth of scrutiny using AI
- Enable efficient operations and faster processing, by providing a digital solution for obtaining and verifying customer income and expenses
- Minimise bank costs, while ensuring compliance with heightened regulatory expectations, by infusing ‘intelligence’ in digital solutions
With such astute initiatives and its possible positive outcomes, the industry has all the reasons to welcome these regulations. By bringing experienced partners on board, banks can create an ecosystem that diffuses risk, bringing immense value to the repertoire of customer services. The journey to compliance is not an easy one, but a strategic approach and commitment to change will augment and regenerate the banking sector.
Manish Chopra is the SVP and global risk and compliance leader and Ashwani Bhardwaj is global head of risk products at Genpact.