The first two months of public hearings from Australia’s Royal Commission into the big four banks have highlighted some massive global issues for financial services marketers that will not go away.
So far we’ve seen the conflict at the heart of the mortgage broker industry — fuelled by commission schemes and trailing bonuses that incentivise brokers to make loans bigger and longer regardless of the ability of the householder to pay them — brought to light.
This is no small matter, given more than half of all mortgage loans in Australia go through mortgage brokers.
Car loans have also been scrutinised: stories have emerged from people who were signed up to car loans they could not afford, in some cases for dodgy vehicles that didn’t work.
These cases have been shown not to be isolated instances, and Legal Aid, which is often left to help affected individuals find their way out of the straitened financial circumstances that result, is not impressed.
“Our experience is that car loan providers are very poor at complying with their responsible lending obligations,” says Legal Aid NSW lawyer Rebekah Doran.
The resulting stress and hardship for individuals can be devastating.
And for financial institutions, the penalties that can arise are significant: in January the Federal Court fined one bank $5 million after its finance arm was found to have breached responsible lending requirements 24 times. It also paid $5m in remediation for more than 300 customers who got inappropriate loans.
Banks have changed, and are changing, many of their lending practices, but there are some inescapable conclusions that can be drawn about the future of marketing financial services products:
1. The volume of marketing risk and compliance work will increase
The banking industry is facing the threat of increasing regulation to cope with these and many other regulatory breaches that both sparked the Royal Commission and that will be examined by it in the coming year.
But the failure to comply with these requirements is perhaps the biggest issue facing banks and the other financial institutions affected. Responsible lending requirements might exist in law, but loans and other financial products have been offered in breach of those requirements.
That means all financial institutions will have to improve their game when it comes to ensuring compliance with that increasing regulatory burden.
2. Banks cannot assume their agents will regulate their own behaviour
Already in public Royal Commission hearings, witnesses have talked about car dealerships, in concert with the car finance arm of a big bank, offering loans the applicant could not afford, or mortgage brokers incentivised to offer bigger loans when it was obvious there was a high risk the householder would not be able to meet those repayments.
Banks are being called to account for those practices, regardless of whether or not they believed the bank or its agent was liable to ensure responsible lending requirements were met.
3. Compliance costs are set to skyrocket
The Royal Commission is expected directly to cost the banking and financial services industry more than $1 billion. And in-house legal and compliance units are expensive, which means the increasing regulatory burden will see legal, compliance and risk management costs skyrocket.
Compliance teams can hardly read every message from a broker to a potential loan customer. But the spot-checks audit teams have made in the past do not appear to have done enough to ensure regulatory compliance. That means the volume of work facing those compliance teams is set to grow.
But marketing teams can’t afford to have every campaign bogged down in compliance for weeks. Marketing cycles are getting shorter, not longer. And the number of different communications channels marketing teams are using is growing.
4. Marketing compliance issues must be managed in real time
Emails from agents such as car finance arms and mortgage brokers offering loans might occur outside the banks’ own in-house compliance frameworks, but thanks to the wonders of modern technology, that does not mean they can’t be monitored or addressed.
And they need to be addressed in real time to prevent those breaches from occurring, rather than months or years down the track.
So what can be done to address these issues? Modern technology — including machine learning for compliance, natural language processing and voice technology — can be employed to ensure marketing compliance issues are managed more effectively.
And central marketing resource management platforms can be deployed to provide up-to-date approved marketing materials both internally within banks and to their agents.
Banks and financial institutions that do not quickly utilise technology to address their marketing risk management and compliance issues will continue to struggle to deal with the fallout from the compliance nightmare facing the financial services industry at large.