A theme threads through much of the recent output from the UK’s financial regulators. Whether that be objective-setting leadership speeches, the content and goals of the Customer Duty consultation paper, or a set of requests set out in a “Dear CEO” letter to trade financiers, post pandemic priority leans toward the rigorous implementation of existing guidance rather than to policy overhaul.
The clearest marker is perhaps laid down in this trade finance CEO correspondence – a letter that raises a range of concerns flowing from recent lender and market investigations. The language and tone are direct, and the conclusion clear. Regulators perceive lender drift toward product and portfolio level risk analysis rather than the client and transaction assessments required under the Financial Crime policy framework.
It’s a set of circumstances that feels at odds with much of the product development work lenders and their software partners have tackled over recent times. That focus has been on the granular. It makes use of direct data connections to individual client accounting applications, open banking inspired financial and cashflow analysis, collation of client specific underwriting data, and the construction and integration of sophisticated KYC / KYB solutions. In aggregate these initiatives have driven tailored facilities - an approach and set of outcomes that should chime with regulatory objectives. Something is clearly going a little awry - perhaps uneven adoption of these contemporary product solutions.
“Flexibility within a framework” is an objective so often cited to have been rendered a little meaningless, but one that has some relevance in this context. UK SMEs have historically found credit facilities both poorly matched to their needs and problematic to access. To most observers they are a diverse, vibrant, and successful group - crucial contributors to national incomes and economic progress. The lender view of SMEs is more nuanced. They have tended to see complexity, inconsistency, incomplete data, a lack of predictability and little homogeneity. Packaging them into product frameworks is challenging. Taking them at scale through recruitment, underwriting and onboarding whilst retaining a focus on the specific risks they present is a complex problem set.
Banking software vendors are increasingly able to help address this tradeoff, developing solutions that recognise SME diversity and their credit requirements whilst acknowledging the need for product and process control. Leading developers are configuring journeys that efficiently collate and compile decision-making data, apply underwriting frameworks and provide the process space to accommodate the views and inputs of relationship teams working directly with clients. Increasingly, strong and sustainable SME funding portfolios will rely on finding the point of balance between technology and a face-to-face relationship. It’s in that equilibrium that the granular regulatory financial crime risk assessment can co-exist with a contemporary client experience.
Delivering that balance is intrinsic to the solutions built by Trade Ledger. They have set out to frame and support an incremental, logically constructed journey from initial prospect contact, through collateral assessment, data-driven risk analysis, relationship team perspective, credit decision-making, KYC / financial crime review and ultimately new client start. The software captures and archives collated data and decision making – maintaining an auditable log of activity ready for, amongst other things, regulator review. Theirs is a balanced approach – one that recognises the diverse reality of working with and funding SMEs whilst creating sufficient space for technology to improve and expedite decision making. There is a recognition of the need to create room for further evolution – components built to enable machine learning and AI to augment relationship-based credit decisioning.
In focusing on granular risk analysis, the FCA signposts banks and lenders toward software partners that can re-make the case for “Flexibility within a Framework”.
Trade Ledger’s ability to onboard at volume whilst recognising and addressing the unique mix of risks and requirements that flow from SMEs makes their platforms a compelling lender response to many of the regulators’ “Dear CEO” concerns. Get in touch with Trade Ledger to find out more.