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The Cost Of Slow Progress

Wednesday 31 August, 2022

As I write, the Bank of England is currently trailing a possible half of one percent interest rate rise later this month. Indeed, outgoing member Michael Saunders warned in a speech to the Resolution Foundation only last week that rates may in 2023 surpass two percent as the Bank of England acts to prevent high inflation becoming embedded in the economy.

His views echoed a poll of economists that suggested UK interest rates were on course to rise from 1.25% to 2% or even higher in the coming year.

This backdrop presents many challenges to lenders, but it has shone a light on the need for operational excellence if lenders are to have any hope of delivering rapid effective responses in terms of propositions, markets and pricing.

In a market like this, the best laid plans are of no use to anyone if they cannot be implemented quickly. Systems and processes that take an age to change can kill a business – even if the answer is properly understood.

In this respect, product pricing is probably the most front of mind among these now. Being caught as last man standing has significant risks for lenders. Of course, there is the risk to service standards but more fundamentally there is a disconnect between what is being sold and the cost of funding it. When this goes wrong, service is usually poleaxed and repairing the damage is nigh on impossible in the immediate future.

This new (it isn’t new of course just not seen for a generation or two) dynamic means the importance of getting products into market and out of market swiftly is crucial.

The Target Operating Model is about more than systems. Procedures and processes are an integral part of delivering the right result. But the system you use to deliver operations needs to be able to flex and cope with new demands quickly.

In other markets, such as personal loans, the regulator is looking to change how these function for consumers. This will entail significant change to current models. A focus on outcomes rather than just affordability will mean the necessity to capture and interpret new data. The duty of care programme being rolled out by the FCA for Mortgage Lending may mean systems need to evolve to capture the right decision to deliver the right outcomes and the measurement of them.

The mortgage industry has always been quite good at understanding granular detail, but it is not its starting point. Even today, the nature of secured lending means that a crude measure like LTV is used to calculate affordability. The stress on current procedures and processes if mortgage lending were to become outcomes focussed too would necessitate some significant change that most systems cannot deliver quickly.

Target Operating Models need to evolve. Yes, you should know what a problem is before you fix it but you should also build for likely future challenges and the central one to all lenders is change – driven by monetary, fiscal or regulatory events. With our expertise in delivering the correct governance for such technical change, and our experience in delivering the right contractual arrangements, your business is in a much better place to embrace the change.

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