20 May 2023
The latest turbulence in the financial services sector has highlighted – amongst other things – how the push for automation in customer acquisition has possibly come at the expense of maintaining robust processes behind the scenes.
This is a topic Likezero recently discussed with lending leader Simon Featherstone in a wide ranging conversation about the current risks and opportunities facing finance businesses.
Simon, who is Interim Chairman at financial broker Funding Xchange and Chair of Risk at agricultural specialist Oxbury Bank, is concerned that some senior teams are not doing enough to ensure their existing back-office systems are fit for purpose. Nor, he believes, are they being sufficiently proactive when it comes to evaluating the range of technology solutions on the market that are capable of driving improvements.
He told us that many banks and lenders had been working hard to eliminate some of the costs that go with client onboarding and acquisition, and some had consequently neglected essential processes that help understand where risks lie.
“In my opinion, this relentless focus on automation can be attributed to recent market pressures, which have arisen out of downfalls driven by historic misreporting” he said.
He noted that misreporting delivered other types of real-world consequences for financial institutions beyond failures and bailouts. For example, if banks incorrectly calculate and wrongly report the risk weighting of assets, regulators can and will impose fines worth millions.
So it’s vital then that boards ensure their investments are balanced, with a focus on both ROI-generating growth and up-to-scratch internal processes.
Simon added that he would like to see more senior teams proactively trying to understand where the risks are, so that they can deal with challenges more effectively when they materialise.
He advised: “Trusting you have a central repository of loans documents and that you can rely on the associated data to help make decisions is a good place to start.”
Regulatory pressure in both the corporate and retail lending space is increasing, and lenders need to be ready to adapt. For example, accurate record-keeping could become even more important with the advent of Consumer Duty regulations.
New rules coming into effect in the UK later this year will require retail lenders to ensure a good outcome for customers. Financial institutions will need to be able to demonstrate that end users fully understand the products or services being sold to them. This is not a one-off activity either. It will require ongoing work to ensure that lenders are continuing to act within the rules.
And it’s not beyond the realms of imagination that regulators might want to take a retrospective look at the way customers have been sold a product, Simon believes.
In such a scenario, those institutions that have executed an effective document and data record-keeping strategy will surely find themselves on the front foot.
With bank bailouts back in the news, there’s a renewed interest in operational rigour. A compelling example here is Likezero’s work with a global investment bank.
By implementing Likezero, our client was able to remove major inefficiencies from deal lifecycles, enhance governance and reduce both data accuracy risks and resource implications across operations. Our client was additionally able to optimise portfolios for creation and sale – demonstrating how investments in rigour actually serve growth objectives when done right.
We’ve written further about this below.
It’s clear then that modern platforms not only ensure accurate records of loans documentation and associated data, reducing the chances of misreporting risk. They can also help identify where risks lie in a portfolio, empowering financial institutions to act quickly before problems reach the point of attracting penalties from regulators or worse.
