'Unfair' financial system in 'immediate need of overhaul'

He says modern technology can help financial institutions assess a person's risk of falling into financial difficulty and should be used more effectively across the board.

Vulnerable people in particular are struggling to make informed decisions, he says, adding many are "suffering".

In a Q&A with FTAdviser In Focus, Sugihara explains how artificial intelligence and data can help banks spot problems before they arise, allowing them to tailor their products to clients' needs more effectively.

A truly holistic financial system is one where financial institutions are continually working on the side of the consumer to make them wealthier.

FTA: The rising cost of living is pushing more people towards credit, is there a danger default rates will go up as a result?

SS: Default rates are already on the rise. Statistics from our vulnerability report show that a third (32 per cent) of lenders have seen an increase in borrower defaults over the past 12 months.

Credit is becoming an increasingly important tool to navigate the current cost of living, and when used correctly, it can be a real lifeline for people’s financial stability.

It is vital that mainstream lenders are able to accurately evaluate the real-time financial situation of prospective borrowers to ensure they have access to affordable credit options. 

FTA: Would you say current lending models are fair?

SS: Most lenders prefer borrowers with a stable and predictable income, but the fairness and long-term viability of this approach should be questioned. For example, gig economy workers who lack a constant and predictable income are often shut out of good credit as a result of this.

Combine this with the fact that higher interest rates lead to banks applying stricter affordability assessments, this means an even higher number are getting shut off from credit than usual.

With the cost of living showing little signs of easing, the situation seems set to only worsen for many.

The number of edge cases that are rejected has increased, and this disproportionately impacts the likes of gig economy workers or sole traders.

New probabilistic income assessments can alleviate the number of underserved borrowers by helping lenders assess complex earning patterns.

FTA: How can the use of data help lenders make better decisions on credit?

SS: Enhanced insights and data can help lenders predict changes in affordability, probability of default, and even financial vulnerability levels before they occur. This would allow lenders to offer personalised products and services based on the unique characteristics a customer may exhibit. 

For example, Health Signals – a product that automates vulnerability monitoring by analysing customer transaction data – has been designed to support lenders to meet the consumer duty requirements that were implemented earlier this year.

It is clear that vulnerable customers are suffering.

Products such as these can help provide risk and compliance teams with greater insights into areas of vulnerability as well as predict arrears risk and monitor the impact of financial products on their customers. 

This can help them ensure no group or individual is underserved.  

FTA: How can data be applied to the mortgage market to achieve the best results?

SS: Data can be applied to the mortgage market in a similar way to other lenders, for example by analysing levels of vulnerability, offering more personalised products designed to better meet someone’s financial situation and stepping in if required to provide help at a much earlier stage.

Using AI, we have found it possible to predict how changes in rates will impact individual customers’ financial situation, probability to enter arrears, and their susceptibility to become financially vulnerable. These insights can be applied in a preventative fashion to prevent worse outcomes, or to support customers after such changes.

FTA: Your research suggests one in three borrowers believe their bank could be doing more to support them in making informed decisions. What should banks be doing?

SS: The financial system as a whole is in immediate need of an overhaul to create a fairer, more inclusive model with vulnerable borrowers at its heart. 

With 37 per cent of financially vulnerable people saying that their bank could do more to help them make informed decisions, banks certainly have a responsibility to step up, however, cross-sector collaboration is necessary if things are to improve.

Banks, just like other financial institutions, lenders, and the government, must prioritise good customer outcomes. 

A key aspect of providing support to borrowers is to leverage more effective insights into borrower vulnerability and affordability, allowing lenders to provide more tailored support, identify those at financial risk and intercept issues before they develop into long-term financial problems.  

FTA: How will the consumer duty improve borrower outcomes?

SS: Currently, it is clear that vulnerable customers are suffering; 44 per cent of financially vulnerable people are likely to end up in debt when taking out new credit products – twice as likely as the UK average, which is 22 per cent. 

The new consumer duty rules require firms to not only act to deliver good customer outcomes, but to understand and evidence whether those outcomes are being met, as well as ensure fair outcomes for vulnerable customers.

The rules require many lenders to consider new approaches to support borrowers and take a more outcomes-based view throughout the affordability process. More than three-quarters (77 per cent) of lenders believe that the new rules are the first step in a long journey to improving borrower outcomes. 

By holding financial institutions accountable to equitable outcomes, underserved populations should start to experience more positive financial outcomes. 

FTA: If the lending sector were to be reformed, what should that look like?

SS: Lenders need to push on and transform the industry to offer enhanced support, more suitable products and protect borrowers over the long term.

To help reverse the long-term impact of the cost of living crisis for consumers, it is crucial that financial institutions start thinking in a more outcomes-based way and utilising data to better support borrowers by monitoring their ongoing financial health, while assessing the impact of financial products they use. 

Looking more broadly, a truly holistic financial system is one where financial institutions are continually working on the side of the consumer to make them wealthier.

Every individual deserves to get the service they need, at a suitable price for them, at the time they need it on an ongoing basis. 

carmen.reichman@ft.com