Credit risk professional Andrew Tierney looks at the environment
The regulatory juggernaut that is thundering down the road is going to hit financial lenders and intermediaries hard. Following heavy criticism in the recent Royal Commission report, ASIC is reinventing itself as something remarkably similar to the aggressive US Securities and Exchange Commission (SEC).
In April’s Federal Budget, $404.8 million was allocated over four years for ASIC to implement a more ‘in-your-face’ enforcement strategy.
With its greatly increased financial heft, ASIC is putting the industry on warning that prosecutions will be more frequent, penalties much larger, and companies will no longer be able to sidestep by striking settlement deals.
Furthermore, in his report, Kenneth Hayne recommends ASIC assess every suspected contravention for whether the penalty should be determined in a court.
Those that I speak to in the industry have been alarmed by this change of regulatory approach. Surely, they say, this is not only going to expose operators to more ASIC action, but to more rejected applications and lower levels of business.
They see a big shake-up of the industry on its way, with many businesses closing down.
However, I do not share their alarm. I am a fi rm believer that every challenge presents an opportunity.
Those who grasp the opportunity offered by Open Banking can dramatically slash their regulatory risks, while also making themselves more profitable.
If truth be told, many lenders still rely on an applicant’s say-so, paper proofs and manual processes.
In terms of the regulatory risks identified by ASIC (i.e. affordability and creditworthiness), this is a complete nightmare.
Thankfully, Open Banking is a straightforward way out of this predicament.
As we all know, Open Banking requires banks to share their line-by-line customer statement data with other parties.
This treasure trove is available to third parties at little cost via integrated tech companies such as LendingMetrics, Equifax, Experian and Illion.
With an applicant’s permission, months of transactions can be captured from their current account. And it is supplied in real time.
Someone applies for a loan, agrees to limited timeframe and read-only access to their current accounts, and thousands of lines of transactions can be analysed.
In milliseconds, they are tested by algorithm to determine whether the loan should be granted or not.
With Open Banking, lenders – for the first time – can make an affordability assessment that is extremely accurate and virtually eliminates the need to use HEM.
The technology can place the lender’s own rules around the intelligence.
There is either a ‘decline’ or ‘referral’ outcome. And with referrals, instead of the underwriter having to go through a long list of standard tasks, only those tasks relevant to the applicant are flagged.
Mistakes are eliminated and you have a digital audit trail to present to ASIC that is based on a factual picture of your client.
Open Banking is a neat solution to the higher bar that the regulator is putting in place, but it is additionally a tool that can maximise profits in the new age of cautious lending.
An obvious plus is that it slashes the proportion of bad lending decisions made, which feeds through directly to the bottom line. Loan management is made far easier.
Open Banking allows a borrower’s bank transactions to be taken over a wide timeframe, so if a first payment is missed, the account can be ongoingly interrogated to establish when the customer may be in a position to pay.
Signs of stress can be flagged and payments reorganised rather than missed.
This level of automation brings big cost savings. Underwriting that used to require a team of people no longer does.
The granularity of Open Banking means terms can be adjusted to match the individual’s circumstances.
Those reading this and thinking cost may be an obstacle, need to know that there are Open Banking and Auto Decisioning platforms – such as LendingMetrics’ ADP – that are inexpensive and available off-the-shelf. They are already in use by early-adopters.
So, if you are keen to stay the right side of the regulatory juggernaut, while at the same time taking your business to the next level, all I can say is, can you really afford not to embrace this change?
Andrew Tierney is a risk management expert who works in credit analysis and underwriting at Balance Risk Management. He has had previous roles at Westpac and Equifax.