Technology review

“More flexibility” says the FCA – and I am 100% with them

Jerry Mulle

MD, Ohpen

We’ve known it was coming for some time now, but on 27 July the Financial Conduct Authority (FCA) published its final policy plans confirming the implementation of a new consumer duty.

Announcing the paper, the regulator said this duty of care “will fundamentally improve how firms serve consumers.”

It said, “It will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first. The duty is made up of an overarching principle and new rules firms will have to follow.

“It will mean that consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it.

“Clarity on our expectations and firms focusing on what their customers need should lead to more flexibility for firms to compete and innovate in the interests of consumers.“

This last line is interesting. I would agree wholeheartedly that focusing on what customers need (and want, within reason) should lead to more flexibility, innovation, and competition.

Should is the operative word when it comes to translating that theory into practice.

Understanding customers has to be central when it comes to product and service design. But understanding demand is quite different from delivering to it.

Now skip to the boardrooms of banks and building societies the UK over. My sense is that no-one needs to be persuaded that it would be a good thing to have more flexible systems that allow swifter product design changes and reactive criteria updates that support a better-served customer.

Practically speaking, the question being asked in most of those boardrooms is, “How do we do this?”

The FCA is itself aware of this. In February last year it published a review of the use and role of technology in financial services firms. Over 90 per cent of the firms it surveyed said they rely on legacy technology in some form to deliver their services.

“We found that firms with a lower proportion of legacy infrastructure and applications had a higher change success rate,” the review noted.

“This supports the view that technology change is more difficult to implement without disruption when dealing with legacy infrastructure. Firms with a lower proportion of legacy technology also had a lower proportion of changes being deployed as emergencies and had a higher chance of those emergency changes being successfully deployed.”

This is not news, perhaps, to many of you, but it is fundamental if operational excellence and delivery are to be achieved so the interests of borrowers can be properly served. The banks, mutuals, and other financial services companies that have experienced the absolute horror of IT going spectacularly wrong will be only too aware of how devastating technology failures can be for a business.

The FCA’s 2018–19 Cyber and Technology Resilience Review found “change-related incidents” are consistently one of the top causes of failure and operational disruption, accounting for 17 per cent of reported cases.

The need for fast and flexible change, four years later, has accelerated.

It’s not just consumer expectation or operational security, either. The economic environment is moving at breathtaking speed. Energy prices, interest rates, inflation, wages, and both fiscal and monetary policy are mind-bendingly unpredictable.

It makes for a market ripe for innovation and competition. It also presents serious challenges for lenders who haven’t yet decided how to implement systems that allow them to be dynamic and reactive.

The FCA’s review asked board members, “If you had an innovative idea that required IT change as a key component, how long would it take to approve the idea, build it, and deploy it to users on average?”

What do you think the answer was? Six to 12 months. Just think where we all were this time last year. And I’ll leave you with these words from the regulator.

“One of the main benefits of change management in the cloud is that it enables a high degree of automation. This can reduce the manual risks of change and increase the agility of incident response.

“While automation doesn’t guarantee that a change won’t have an adverse impact, it can reduce the risks involved. Automation drives repeatability and consistency through the change lifecycle, reducing the risk of human error and enabling the creation of identical environments for predictable and testable outcomes and automating aspects of recovering from change incidents.

“Public cloud offerings also allow for the automated scaling of IT environments, removing the need to provision additional resources to meet business demand.” M I

Data, AVMs, and valuers have more to offer together

Mark Blackwell

COO, CoreLogic

In the past few months we’ve seen an increasing number of lenders run automated valuation models before approving a decision in principle (DIP). There is triage on valuations in which properties trip certain switches, flagging them for a closer look, but it’s increasingly likely that 24-hour DIPs will come to be expected from lenders.

It’s an interesting move, particularly given how unpredictable the current market is. And yet, competition demands that decisions be made quickly and with certainty.

But it’s easy to see why this move is attractive. Borrowers may be tricky to pin down in terms of credit risk – more so now than usual. Security, on the other hand – that’s considerably more predictable. Recession or recovery.

It’s arguably even more important than ever, in fact, because capital protection is going to be increasingly important for both borrowers and lenders if the economy does a nosedive.

When it comes to evaluating security, somewhere in between sensible scrutiny and speed is an increased role for data.

For the most part, freehold data is more accurate, and conveyancing quirks are reasonably unimportant for a mortgage and transaction to complete. Leaseholds are much harder to predict, however. As recently as August, the Competition and Markets Authority ruled that Taylor Wimpey must refund leaseholders the doubled ground rents they snuck into contracts. That sort of intervention materially affects the value of a property and has the power to turn an AIP into a flat no.

Risk on leasehold is a moveable feast. Added to far more frequent occurrences of disputes over common parts, rights of way, and leaseholder obligations, the data that lenders need to ensure both they and the borrower are protected must be granular. Accessing that sort of data, particularly as it relates to property condition and the way it is used in practice, is not straightforward, although it is improving.

In a paper published by RICS last year, it was suggested that the valuation and appraisal sector has “reached an inflection point as a result of the application of artificial intelligence, machine learning, and other algorithms to structured and unstructured data sets of increasing size and complexity.”

An ever-evolving regulatory landscape and the market’s demand for speed and innovation are driving change faster than ever before, it asserts. I would tend to agree.

Accurate valuations and lending decisions that match lending expectations are vital for banks and building societies to get right. Balance sheet stability depends on it. It is also vital for lenders whose funding is off balance sheet. Jeff Rupp, director of public affairs at INREV, was quoted in the RICS AVM insight paper, noting, “Valuations are arguably more important for investment in real estate than any other major asset class. For non-listed real estate vehicles, they play a crucial role in reporting to investors, monitoring portfolio strategy, and undertaking transactions, and as a basis for secondary market trading.

“As digital technology advances apace, investors’ expectations and demands of real estate valuations are growing. In part this reflects the increasing complexity of many real estate transactions, which often now involve large portfolios of assets. But more importantly, investors want to benefit from the full potential that technology promises for valuations, potentially making them quicker, less prone to human error, and sensitive to a far wider range of evidence than is currently the case.

“We agree that big data, blockchain, and automated valuation models [AVMs] are all likely to have a role, but an openness among valuers to new ways of harnessing information is likely to be just as crucial as any single technology.”

RICS is of the view that AVMs can be useful to tease out nuances and aid with statistical analysis that valuers may not ordinarily be able to observe during their usual investigations. That is a positive, and adds robustness to the data we have.

On the other hand, the property is not usually inspected when an AVM is used. Instead, an average condition is often used, which RICS admits “could well be inaccurate.” It’s hard in the residential market. Stock is far, far more varied in the UK than in other countries. Condition and age of a property do not necessarily correlate. Value is determined by emotional needs as well as investment sense.

To hold sufficient weight to provide the basis for a DIP, AVM providers require large amounts of reliable, detailed, descriptive data about properties and market transaction prices to model accurately.

The market is getting there, as is clearly evident in lenders’ increasing willingness to rely on AVM valuations at the DIP stage. But let’s also remember – analytics and modelling can take us far, but we understand the power of the sum of the parts. Technology, data, and people are the answer. M I

Tech + expertise = what we need

Neal Jannels

MD, One Mortgage System (OMS)

I’m writing this article on a Monday morning after watching far more football over the course of the weekend than I probably should. Although these days, there seems to be more discussion of the game than actual play. And this was more evident than ever with a number of games that were dominated by three letters: VAR. Don’t worry – I won’t be analysing individual decisions. But some of these did cause such a groundswell of criticism that it feels like a pivotal moment for the future of VAR and technology within the sport.

Not that technology and football have not worked in perfect unison in recent years; they have. Goal-line technology has generated zero debate, as the decision is absolute and there are no grey areas around human interference (up until its little foo-pah this weekend, that is!).

This is where it gets a little trickier for VAR, as there is still a high element of human interference, interpretation, and decision-making. Suffice to say that there is nothing wrong with the technology used in VAR, and technology is not to blame for any poor decisions made on the back of reviewing it. The questions are all around how the technology is being used, when it should be used, and whether it should be used at all.

There is often a balance to strike between enjoying technology and avoiding being too reliant on or distracted by the wealth of technological enhancements available to us. Even worse, tech advances may make the original product worse, and no longer attractive or identifiable to users. What we do have to remember is that the primary role of technology is to enhance our lives, be that from a personal, business, or sporting perspective.

The correct implementation of technology can be a tricky one for businesses operating in the mortgage market, although the past few years have really emphasised how it can help speed up and streamline the mortgage journey, plus help make the process more secure.

One prime example of this is electronic verification (EV), and this is an area that is seeing greater business engagement – although arguably still not enough.

A new survey from SmartSearch outlined that more than 80 per cent of regulated firms in the legal, property, finance, and banking sectors are considering a switch to electronic verification of their customers. The switch comes as firms feel the growing weight of compliance around antimoney laundering (AML) measures amidst a sharp increase in the number of companies being fined by the regulator for breaches of the rules.

The most recent figures from HMRC showed that 85 firms were fined and named last year for breaches of compliance regulations. And a freedom of information request revealed a sixfold increase in the number of legal firms fined by the Solicitor’s Regulation Authority since 2017. However, almost a quarter (23 per cent) of all the firms persisted with the misconception that using hard-copy documents was more reliable than electronic checks for verification.

Breaking this down, property firms were least likely to turn to EV, with 40 per cent saying they wouldn’t consider it and more than one in ten (12.5 per cent) saying they didn’t trust the technology. This is despite the 2020 Money Laundering and Terrorist Finance Act recommending that regulated firms use EV in order to make their due diligence as effective as possible.

This data represents a good example of how firms don’t always understand the capabilities of technology to help support and safeguard their business and clients in certain areas. In a digital age, addressing tech concerns and integrating the type of technology that can enhance front- and back-office systems, improve efficiencies around the advice process, and protect data have moved rapidly up the agenda for a range of businesses, but more still needs to be done.

Investing in or subscribing to a system, platform, or solution is only the first step. Fully understanding its capabilities and having the right training from real experts to use its benefits are key elements in getting the most from it – as is ongoing support to ensure the right outcomes are sought to meet individual business needs.

In a similar respect to VAR, this emphasises the importance of the people behind the tech. We need real experts who know their product inside-out, understand its capabilities, can see all the right angles at the right time, and can make the correct decisions under pressure. If this combination isn’t firmly in place, the whole process can break down and, through no fault of its own, technology can appear to be a hindrance rather than the asset it was intended to be. M I