Responsible Lending and Affordability

Can you readily access the right data which evidences that your responsible lending framework is working as intended? Do you perform enough testing to demonstrate that it works as well in practice as it should in design?

The Consumer Duty has introduced an increased requirement for firms to monitor and regularly review the outcomes their customers are experiencing to ensure that their products and services are delivering good customer outcomes. And if you can’t demonstrate that your products are affordable to customers, it’s hard to see how that could meet a customer’s needs.

In the third and final blog of this series we will be talking about monitoring and testing requirements, as well as the opportunities and potential developments that we think firms should be thinking about for the future.

The first blog can be read here.

The second blog can be read here.

Firms need to be monitoring and regularly reviewing the outcomes their customers are receiving through a combination of quantitative analysis of data points (top-down analysis) and qualitative analysis of the customer experience during the journey (bottom-up analysis).

Without this regular monitoring and testing, it is common for issues with the framework and assessment to go unidentified – for example:

• Errors or incorrect calculation of affordability in automated decision engines;
• Incorrect judgement in manual decisions;
• Poor communication with customers

Firms should be able to identify where customers, or groups of customers, are not getting good outcomes and understand why. Firms with processes that can be easily flexed or adapted to address any risks or issues identified are much more likely to be able to respond quickly, stop issues from occurring again in the future, and deliver good outcomes to customers.

We believe that to do this effectively you need the right customer outcomes data, combined with the right mix of automated controls, QC, and customer journey/ customer outcomes testing (a review of a distinct customer journey with a focus on the overall outcome received by the customer). This combination then has to be reviewed, discussed and challenged throughout the business to drive real informed decision making. The days of a Green rated dashboard just being ‘noted’ are over – it’s equally as impact to discuss whether you are delivering good outcomes as well as when you have identified poor outcomes.

Whilst it’s important to get responsible lending and affordability right now, it’s also important for firms to be thinking about the future and what opportunities exist to deliver better, more robust lending decisions for customers.

With access to more and more information about customers, including their behaviours and characteristics, there is great potential for machine learning solutions to better predict potential outcomes for customers. Leveraging data on actual customer behaviour (e.g. payment behaviour, re-financing requests), and linking this to certain traits could allow firms to specifically tailor the affordability journey for individual customers (e.g. an applicant demonstrating shared traits for a group of customers known to be more likely to experience payment difficulties can trigger a more detailed assessment, or increase the buffer applied in calculating NDI).

Recent developments in Generative AI also present opportunities for firms to create a more bespoke service for customers, without having to introduce more hand-offs or breaks in the customer journey. For example, generative AI chat bots can probe and gather more live information from a customer on their application data, without requiring the customer to leave the online sales journey to take a phone call or visit a branch/ store. They can also help identify potential vulnerability in customers and signpost them to more tailored support, or even to products and services which may be more suitable to their specific needs.

Setting up your responsible lending framework and affordability assessment is not a once-and-done exercise. Firms need to be continuously monitoring to identify where poor outcomes are occurring, and taking actions to address them, whilst at the same time being mindful of how technological advancements can be leveraged to deliver even better outcomes for both customers and firms themselves.

KPMG in the UK has specialists with extensive experience with Responsible Lending frameworks and affordability assessments, ranging from supporting firms with design, development and implementation, all the way through to testing whether assessments perform as expected and are delivering good outcomes to customers. If you would like to hear from one of them or require specific support with Responsible Lending and/or BAU activities, please do not hesitate to get in touch.