Balancing legislative constraints against the need to maintain lending will test banks’ technology systems
As the financial services market prepares to embrace a brave new world under a coalition government the challenge facing lenders will be how to balance government pressure to allow lending to continue while risk-averse legislative constraints are imposed by the regulator.
Regardless of the long-term future of the Financial Services Authority under the new political regime, these planned reforms will come into force in one guise or another and lenders will have to Perhaps the most pertinent reform on the table at the moment is the Mortgage Market Review, which aims to prevent high-risk lending strategies.
Much of the MMR concentrates on introducing stringent affordability checks designed to ensure that financial institutions only lend to individuals who can afford to borrow.
Also, under proposed liquidity regulations lenders will be required to provide the regulator with proof they have sustainable business models and are adequately capitalised.
Put simply, if a lender does not have the cash upfront it will no longer be able to lend it.
And the implications of this change will reach much wider than traditional banks and building societies.
We’ll have to wait and see if lenders have the funds or the agility to successfully overhaul their platforms
Retail finance providers that have traditionally been dependent on wholesale financiers for funding will also now need to build up independent reserves of cash.
To survive, lenders will need to diversify their portfolios to include investment and lending products if they want remain compliant.
This is a trend we are already witnessing in our own client base, as customers commission us to upgrade their technology systems with efficient lending platforms and management information reporting systems that are capable of processing investment and lending transactions simultaneously.
Lending system requirements will be further stretched from December 31 2010 with the introduction of changes to the Financial Services Compensation Scheme.
This legislation will require all deposit-takers to supply a single customer view of eligible compensation claimants within 72 hours of this being requested.
Lenders operating multiple lending and deposit systems, including most big banks and building societies, will face high data merger and de-duplication costs to comply with this.
Existing inhouse systems will have to be adapted and upgraded onto single platforms if profit margins are to be protected as well as compliance ensured.
Only time will tell if existing lenders will have the funds or the agility to successfully overhaul their operating platforms, or if they will be forced to leave the market.
Fewer lenders in the market will mean less competition, and this will almost certainly push up the cost of borrowing for customers.
Meanwhile, those firms continuing to operate in the new regulatory environment will find they are increasingly dependent on efficient technology platforms that can maximise the return on investment from every transaction.