27 April 2023
With interest rates heading north and bank bailouts becoming daily news again, many say the financial world is facing levels of uncertainty not seen since 2008. But what are the risks for lenders and how can businesses navigate this period of turbulence? In an attempt to find clarity amid the confusion, Likezero spoke to Simon Featherstone, a veteran of the SME and consumer finance world who holds executive roles with the likes of Oxbury Bank, Funding XChange and Alantra among others.
Here’s what he had to say…
At the moment lenders are having to model a really unusual collection of circumstances encompassing rising interest rates, higher inflation, different economic situations in different industries, some doing well, some not – and then pick who will be the winners and losers in various sectors. This is not a situation many credit people or new business people will have faced in their entire careers.
If you’re the CEO of a business or bank trying to grow and develop a really strong equity story and value for shareholders, then there is arguably still an excess of liquidity out there. You need to define your point of differentiation that will allow you to win in your chosen markets. Worryingly, at the moment I don’t think I see enough lenders being specialist enough to have a point of differentiation in the eyes of their customers.
The Financial Conduct Authority’s incoming Consumer Duty rules are super important. Banks will be aware of this but I’m hoping that smaller lenders are taking this very seriously, too. As Funding XChange chairman I see how we help a lot of lenders to take Consumer Duty extremely seriously. But it’s yet to be seen whether smaller lenders have got the resources to deal with that comprehensively, particularly if they’re trying to set themselves up for a successful equity story event at some point.
Consumer Duty is focused on a good customer outcome and brings in a set of rules based around four outcomes of products and services, price and value, consumer understanding and consumer support. It’s about how you as a lender ensure that you have sold not just a loan or asset finance or something but you’ve actually delivered a good customer outcome and that they have understood what they’ve bought and any choice they may have had as an alternative – and crucially that you can evidence that to people as and when required.
Although there is no suggestion Consumer Duty will be applied retrospectively, it might be in the future and at that point, you’re really going to need a central record keeping solution such as Likezero to provide insights into your current documentation and evidence risks in your portfolio.
There’s been a lot of focus on front office automation, trying to take out some of the cost of onboarding clients or winning new clients for lenders. I’m not sure there’s been enough focus on some of the back office processes and understanding where they’ve historically got risks – we’ve sort of seen this with recent market pressures where historic misreporting has arguably led to downfalls. So, I do hope that people are just as focussed on accurate record keeping, as well as improving the more exciting front end. There’s definitely a need for investment in back office processes.
I’m not sure senior management teams are doing enough to consider whether their current systems are fit for purpose, let alone evaluate some of the available solutions. It’s one of those situations where hindsight is a wonderful thing. I’d like to see more senior teams proactively trying to understand where the risks are so that they’re able to deal with them more effectively when they arise. 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.
Generally, it’s the pressure on sales in the front office. It’s the need for growth that tends to drive investment as opposed to making sure everything in the back end is properly sorted as well. My favourite word in life and business is ‘balance’. In business, this is about boards considering the balance of their investment as they chase the equity growth story. I just think that’s why you’ve got to seriously consider technology solutions that future-proof your organisation against the changing landscape and help with a balanced approach.
If you take some of the derivatives contracts that Likezero helps understand at the moment, there can be huge sums attached to that. In the commercial space, whilst the individual contracts may not be massive, the collective contracts for even a small or mid-sized bank are significant. And therefore understanding where you might have some challenges, and getting yourself set up for the future, just makes a lot of sense to me. The software also helps us to optimise the pricing of contracts and generate opportunities, while reducing risk of misreporting etc. Taking an automated approach allows teams to spend time on much higher-value add activities and increase deal execution.
