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Banking & Finance

Lifting barriers to regtech innovation in responsible lending

14 Jan 2020, by Amy Sarcevic

Regtech innovation is currently being stifled by industry uncertainty, despite being a crucial tool in the responsible lending landscape, according to Lisa Schutz of Verifier.

“The need to automate affordability assessment has never been stronger. In fact, it’s one of the greatest points of friction in any loan application. But at the moment we’re seeing a notable lack of innovation in this space, and appear to be regressing, more and more, to manual processing,” she told Informa ahead of the Responsible Lending & Borrowing Summit 2020.

“2019 was a challenging year for responsible lending, with the Royal Commission, the ongoing ASIC versus Westpac case – currently being appealed by ASIC – and the revision of the RG209 guidelines. It created a perfect storm of uncertainty,” she said.

“2020 is definitely starting better – with only the Westpac case outstanding, and thankfully, the RG209 revision is not as prescriptive as anticipated. But given the turmoil of the post-Hayne industry, we still don’t have the right innovation settings,” she said.

Ms. Schutz is particularly concerned about the controversy surrounding loan affordability diagnostic tools and  the suggestion by ASIC that benchmarks are not an appropriate substitute for bank statements when verifying expenditure.

She and other experts question the efficacy of bank statements as a diagnostic tool. “Bank statements are seasonal. Your expenditure in the lead up to Christmas could be totally unrepresentative of how you spend money the rest of the year. As would a month in which you had unforeseen expenses like your car breaking down,” she said.

“Not to mention getting information on one bank account but not others you have (or your credit cards). Benchmarks are built more comprehensively and robustly, so as long as they are used well, they will outperform bank statements for many applicants.”

Ms. Schutz also notes the growing privacy concerns around bank statements. “Ten years ago, bank statements  weren’t expressed in nearly as much detail as they are now. Nowadays, our every latte or cocktail purchase is documented.

“I expect that – with a heightened national focus on privacy – there may be mounting consumer pressure on lenders to use  benchmarks and other diagnostic tools going forward,” she said.

A further point of uncertainty, Ms. Schutz wonders if it is time to reconsider ASIC’s role in determining what tools are appropriate. “I personally think ASIC should be assuming more of a supervisory role and focus more on the governance of responsible lending programs, rather than prescribing to the industry what tools they should or should not use.

“When ASIC gives guidance on what data is available, without considering all the operational issues and challenges, it creates more, not less, pain for the industry.”

Ms. Schutz believes regtech is the single best way to reconcile the financial service industry’s key priorities and recently submitted a paper to the Senate calling for systemic change to support regtech development.

“Responsible Lending is in many ways at the centre of two crucial policy areas – the ‘public health’ issue of responsible lending (avoiding harm to borrowers) and the competition goal of supporting more competition in lending, as part of the digital transformation going on with new entrant fintechs,” she said.

So, how do we make responsible lending a safe place for lenders to innovate?

“To start with, we need to acknowledge that affordability assessment is not an exact science, as does the UK equivalent of ASIC – the FCA.

“We need to find ways to provide lenders with a safety net when they are directionally getting it right and not throw the book at them when, inevitably, cases of substantial hardship occur which were theoretically, but not operationally, foreseeable at the time the loan application was made.

“That way, innovation can occur in responsible lending processes and we can also work as an industry to find better ways to mitigate harm when cases of substantial hardship do slip through the cracks – we have begun work on both counts in the Expense Initiative and Safe Loan Program. We need more of that kind of proactive work and less finger pointing,” Ms. Schutz suggests.

“What makes supporting innovation harder is that it’s rare to get all the stakeholders in the system together – and it’s particularly difficult in the context of regulator and enforcement risk.

“We [Verifier] have been playing a convening and facilitating role this year via the Expense Verification Framework Initiative. The initiative has focussed on systemic thinking, design thinking and evidence-based approaches to policy, using real application and bank transactional data.

“It has been not only a privilege, but also extremely gratifying. We truly have managed to get what we consider to be the system together on at least two occasions,” she concluded.

Lisa Schutz will talk more about the initiative, what else we can do to support regtech innovation, and provide an update on her submission to the Senate, at Informa’s 4th annual Responsible Lending & Borrowing Summit – due to take place 2-3 March in Sydney.

Learn more and register.

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