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To explore the implications of the Royal Commission, we hosted a roundtable discussion with some of our clients, many of which were Mutual Banks. We looked at some of the changes that were made in the UK post their own financial services review, changes we are already seeing in the banker/customer dynamic, and what the future may look like once the Royal Commission makes its final recommendations. Here are some of the highlights.
What has become clear during the hearings is that low historical arrears data doesn’t equal sound lending practices. While Boards have traditionally taken this data on face value to support governance and business strategy, the revelations from the Royal Commission have already prompted Boards to interrogate their data more closely.
Recognising skill set gaps, and seeking third party and independent expertise, was also highlighted as an important way for Boards to ensure they are challenging assumptions and meeting their obligations.
Boards now recognise they cannot assume that the data presented to them is the whole story. By digging deeper into the data and existing processes, emerging risks can be revealed and addressed.
During examination, Barristers have strongly criticised some of the loans that were made – stating that they should never have been approved. This poses an interesting question to the customer and the industry. While there are clear cases of bankers taking advantage of vulnerable customers, to what extent should the banking sector go to in ensuring that every customer is fit and aware of the choices they are making?
In the UK, they introduced training to help their sales teams to identify vulnerable customers – assessing language capabilities, literacy, special needs, market awareness and other background factors that might impact on a customer’s ability to understand their contract and to meet their repayments.
To do this effectively will require a shift from quantity to quality of loans – and the evidence and time required to fully investigate an applicant will increase. Even as the Royal Commission continues, feedback from mortgage brokers is they are already being asked to provide more evidence and verification of information on income and living expenses on behalf of their clients, in response to tighter underwriting standards being enforced by ADIs.
The Royal Commission is expected to hand down recommendations to stamp out the exploitation of vulnerable customers, however, the question will be where the balance of responsibility will finally lie for a customer’s choices: with the individual or with the bank? How will this translate into credit risk management and conduct frameworks for the future?
The definition of hardship, and how it is accessed by customers experiencing difficulties, continues to be grappled with during the Royal Commission. While all financial institutions would have hardship policies in place, the interpretation of the policy and the motivation to support customers experiencing hardship varies across the board.
It is expected that there will be an increase in hardship requests post Royal Commission as customers begin to learn that there is an avenue of support when facing financial difficulties. Interestingly the roundtable discussed how Mutual Banks, focused on members, meant they were already motivated to work with a member in need while the bigger banks were more likely to cut their losses, call in a debt and move on.
Financial institutions will likely be required to lift their game in terms of providing support for hardship cases. Member-focused, Mutual Banks, can certainly differentiate themselves from the larger, for-profit institutions.
The big banks weren’t always big. They grew to their size and market share over time and through mergers and acquisitions. Fast growth, alongside legacy systems issues, employee attraction and retention and culture have enabled much of the bad behaviour that is coming to light.
The Mutual Banks and Credit Unions are also growing – both organically and through mergers and acquisitions – and need to ensure that their member focus, quality of advice and culture remains intact, and a differentiator.
The challenge for Mutual Banks as they grow is to clearly understand what they want their institution to look like in the future – and put the systems in place to prevent culture cracks from appearing.
Many financial institutions consider their favourable Terms and Conditions as a differentiator. However, it’s common knowledge that very few people read the fine print.
An interesting idea floated during the roundtable discussion was for a standard set of Terms of Conditions for all financial products, providing standard protection for customers, and encouraging financial services institutions to develop and communicate more meaningful differentiators.
Look to your customer – what is important to them and how can you communicate this in an easy to understand way? Your Terms and Conditions might not be hitting the mark.
Boards can play a role in working with internal audit to elevate findings, challenge the resolution of outstanding issues and require an increased focus on “red” rated items, overdue items and findings that have a direct customer impact. Internal audit needs to deliver insightful findings supported by root cause analysis but the culture and accountability within the organisation can align to enable audit to protect the business and the customer.
How do internal audit report to your Audit Committee? You can challenge internal audit to draw out the weak spots in your organisation and focus on customer outcomes.