Digital Technology
Feb 06, 2018

What's complicating compliance?

Technology can cut through the obstacles

The past few months have been frenetic for Australian bankers. Along with other bankers around the world, they've been making a beeline to Washington waving copies of the paper Household Debt and Financial Stability. On one hand, they understand that they have every reason to comply with banking regulations. On the other, they worry that they will put off potential customers by coldly and clinically investigating their ability to pay back loans.

It's ironic. For every home buyer, purchasing a house is a symbol of status, security, and stability. Yet cracks in the housing market—brought on by their own actions—have bankrupted many of the world's biggest financial institutions.

Many countries have put the onus on lenders to lend responsibly—and in my opinion, that's a questionable practice. It's even more worrisome when they place the responsibility on borrowers, expecting them to be adequately informed. That's a tight spot to be in for any borrower. I'm a seasoned risk professional. I've worked extensively with the world's top banks. But if I were a borrower, even I would be wary. Banks may have a long list of lending rules, but enthusiastic employees who want to sell loans often dismiss these rules. And customers aren't necessarily familiar with complex loan requirements.

Clearly, putting all the responsibility on lenders—or borrowers—doesn't work. 

Discipline is just part of the answer

Is more restraint and discipline the answer? To some extent. In Australia, the government responded to the financial crisis by introducing strict rules to ensure that banks lend responsibly. The effort only goes so far, however. The reason: The Australian Prudential Regulatory Authority (APRA) has done everything it can to control the cost of houses—and after the Reserve Bank of Australia reduced interest rates in 2016, the rush to buy property was on.

These lower rates took away the incentive for responsible lending. Customers hit the road to buy dream homes—and banks backed them with easy credit and throwaway interest rates. The Australian Securities and Investments Commission (ASIC) pointed out that banks increased credit card limits too, adding fuel to the fire—an unethical practice that doesn't meet responsible lending requirements. What happened next is a no-brainer: The housing bubble re-inflated and prices soared up. Of course, the system came crumbling down.

Banks also relied extensively on the Household Expenditure Measure (HEM)—not the best industry parameter—to give generous loans to borrowers. In my opinion a better one is the Henderson Poverty Index (HPI), which Australian lenders use to assess a borrower's ability to handle a loan. Why do I think HPI is superior? While HEM calculates the biggest loan borrowers can get based on their income, conveniently, it does not factor in expenses. HPI does.

Digital banking also encourages riskier loan practices. Banks are under immense pressure to provide better services faster than their competitors. 

Digital solutions can help

If they want to resolve all these issues, banks will have to invest in new digital technologies. They're going to need artificial intelligence (AI), robotic process automation (RPA), and machine learning (ML) to take advantage of big data and analytics. Automated solutions based on these technologies will improve processes and help banks comply with regulations. I've had a lot of experience seeing what digital can do to mitigate risk and I believe that some of these investments will make it easy to separate bad customers from good ones without negatively impacting the overall customer experience.

Banks have plenty of data. They just need to leverage it. If financial institutions worry about inconveniencing their customers, I suggest they adopt automation, powered by AI and digital capabilities, to scrutinize records. Technology does have answers. And we have the best people in the industry, capable of creating tools and processes to help banks meet their regulatory goals. I always tell my clients—leaders of large banks—that to manage risk we need a singular view of every risk the entire business faces.

Compliance is key. Becoming compliant isn't easy—but it's definitely attainable. 

About the author

Manish Chopra

Manish Chopra

Global Risk and Compliance Leader

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