As we wait for the final word to come down from the banking Royal Commission this week, the interim report released in September last year clearly lays out
In this post, rather than try to identify potential legislative or regulatory changes, I wanted to take a few steps further ahead and look at the implications of the Royal Commission on the digital ecosystems being used by the financial services industry and explore how this will shape customer experiences over the next few years.
The issues that emerged in connection with consumer lending concerned:
- intermediaries, and confusion of roles;
- communication with customers; and
- responsible lending.
One of the key outcomes of the Royal Commission will invariably be that banks will need to take ultimate responsibility for the compliance risks and provide consumers more transparency as to with whom they have agreements and what their obligations would be under those agreements.
Most consumer lending banking technology platforms could be considered inward-facing. These platforms have spent the majority of their lives (if not all of them) as purely back-office systems. The push to provide completely digital
I would argue that one of the driving factors for this separation between ‘direct consumer experience’ and ‘back office’ is the proliferation of channel relationships that have developed over time that provide banks a steady stream of customers. The Royal Commission identified these relationships as complex, fragmented, and very difficult to control from a risk-management perspective. It makes sense then, that the organic growth of these relationships and channels over time would drive fragmentation of back office systems and also create manual back office processes within the financial institutions servicing these channels.
So, how can banks manage their compliance obligations with the myriad of intermediaries that stand between consumers and the providers of financial services?
We have already seen more and more lenders move to consumer-friendly digital workflow solutions that walk customers through the application process. These systems often start as digital application forms and proceed to walk the user through uploading all the required supporting documentation. Today, these tools generally stop short of integration with ‘post-commitment’, instead just treating the loan as another account on the customers’ online banking dashboard if such a solution exists at all.
I think we will see an explosion of ‘end-to-end’ consumer digital lending solutions that are integrated into core banking systems. Everything from the initial application, through the compliance workflow and including post-commitment where consumers continue to be informed about their risks, rights and obligations. This full customer life-cycle solution would provide consumers with the transparency levels the regulators require and at the same time create operational efficiencies within the banks.
Further to this, I believe there will be an ‘arms race’ to develop integrated white-label versions of these end-to-end digital lending solutions to allow financial institutions to gain control of sales channels that were crippled by the outcomes of the Royal Commission. I am specifically referring to the world of mortgage brokers, aggregators, and introducers, where I would expect the biggest impact of the Royal Commission would be felt. Even the major players in that space have ‘home grown’
‘White-label’ solutions are ones that take the customer-facing end-to-end digital experience and allow the mortgage brokers, aggregators, and introducers rebrand or co-brand them. Many white-label solutions in other industries such as telecommunications allow adaptation of brand, process, wording and reporting. In fact, the Mobile Virtual Network Operator (MVNO) model is the paradigm I would see the banking/broker relationships adopting.
The MVNO model in the telecommunications industry started due to very similar circumstances as those of the brokers, aggregators and introducers in the financial services industry; high demand, high-value services in a highly regulated environment. Smaller players were able to target niche segments more effectively, but not able to achieve the scale to operate in such a highly regulated environment that requires massive capital outlays. Due to the high volumes of subscribers, and the technical nature of the telecommunications industry, end-to-end customer experience ecosystems were essential for the MVNO to enter the market and use the carrier’s infrastructure – whereas mortgage brokers, aggregators, and introducers have had no such constraints until now. I see new regulation introduced after the Royal Commission as being the tipping point for a technology transformation across this segment of the industry.
The issues that emerged in connection with financial advice related to:
- culture and incentives;
- conflicts of interest and duty, and confusion of roles; and
- regulator effectiveness.
The landscape for financial advisers and planners has changed so dramatically over the past few years. This started with the Future of Financial Advice (FOFA) reforms in 2013 with the most recent being the Corporations Amendment (Professional Standards of Financial Advisers) Act 2017 with the introduction of rules regarding qualifications, ongoing skills development and a focus on ethics with the introduction of the Financial Adviser Standards and Ethics Authority combined with a much more tightly regulated operating environment. As regulators have tried to resolve the structural conflicts that affected the quality of financial advice, the net result for advisers has been reduced fees for service, combined with dramatically increased costs associated with compliance.
Financial adviser groups are also under pressure as their client’s expectations are changing. As the impact of compliance with the new qualifications requirements will see many older advisers simply leave the industry, a generation of younger financial advisers and planners will be looking at ways of providing their generation-X, Millenials and generation-Z clients with the kinds of customer experiences they would expect from a modern human service-provider. Further to this, advisers will be looking for technology to augment their advice capabilities – both in creating ongoing engagement with their clients and in allowing them to increase the number of clients they can service.
The impact of the Royal Commission on financial advice groups will come back to transparency, quality of advice, and ensuring fees are only paid for service. I am going to assume that while the regulatory environment will remain brutal for individual advisers, the responsibility for compliance will come back to the holder of the AFS license. It is important to note that I really do not believe the future of financial advice is
Self-service solutions will provide compliance through assigning the burden of understanding complex financial products directly on the consumer. This will mean a large number of wholesale and specialist products will never be available to those people and it will be important that regulators ensure this is made clear to consumers. Meanwhile, I think all advice groups are going to come back one key question:
How can we deliver compelling, personalised customer experience while servicing more clients with higher levels of compliance?
I think the answer to this will take several forms:
Over the next few years, we will see a heavy focus on providing client ‘nurture’ programs to make the adviser more relevant in the life of the client all year round. Nurture solutions will show clients the following information (at minimum):
- how their mix of investments are
performing whatworld events or market forces are affecting investments
- understand more about their investments – what is the fund manager doing? Why?
- what legislative changes are coming and their impact on the client’s investments
Providing systems that give clients personalised information like this in real-time, with the ability of the client to discuss issues further with their adviser, is the key to nurture programs.
There will be stricter compliance reporting. License holders will be looking for ways of ensuring they are compliant in real time. I would expect that within the next 2 years we will see broad adoption of artificial intelligence solutions that not only ensure advice is provided but can determine if there are material errors or omissions in the statement of advice.
Customer Relationships / Product Fit
Advisers will need vastly more advanced ‘customer relationship’ tools that provide deeper insights on the consumer and visualisation tools that help them better understand the relationship of their
Back Office Automation
Robotic process automation solutions will be developed centrally – by the licensee or adviser group – and rolled out to their advisers to reduce operating costs associated with compliance. These tools will not only automate a lot of the very manual back-office processes currently undertaken for compliance, but homogenise the processes across advisers reducing variability of documentation and reducing risk.
Small and Medium sized Enterprises
The most general issues emerging from consideration of lending to small and medium enterprises can be identified as being:
- Should there be any change to the legal framework governing small and medium enterprise (SME) lending?
- In particular, should any lending to SMEs come within the reach of the National Consumer Credit Protection Act 2009?
Given the current focus on empowering smaller business combined with an election year and it would be safe to assume that these changes will be enacted – and we will see a drastic change in regulation around SME business loans.
With this being the case, I would assume the natural extension of technology developed for consumer loans would be SME business loans. This would provide all of the transparency, compliance and reporting required by a ‘
It is safe to assume that there will be some big changes coming from the Royal Commission. Many financial institutions will need to take some immediate action to mitigate the fallout, however, there will soon follow regulatory and legislative changes, and for this, I see a focus on technology as critical.
I see all the solutions envisioned in this post being big wins for both the institutions and consumers. If we can provide customer experiences and technical solutions that provide consumers with transparency, management and regulators with real-time visibility, and at the same time reduce manual processes and operating costs, everybody wins.
Photograph by John https://www.flickr.com/photos/shebalso/ under CC BY-SA 2.0 license