There was frost on the ground this morning and there’s Christmas wrapping paper in the shops. Retailers have been working on Christmas for months but 25 December 2017 is now creeping onto the radar of families and consumers everywhere. The countdown has begun!
But the festive countdown isn’t the only clock that’s ticking just now. For anyone working in the financial industry the sound of clocks ticking is getting deafening.
13 January 2018 is D-day for Open Banking and the advent of PSD2 (Payment Services Directive 2) where authorised third parties can be given consent by an account holder to access their bank account and extract statement information and initiate payments. New entrants to the financial market and innovative technology companies are ready and waiting to offer consumers exciting new products and services. And established, forward-thinking banks are getting ready to head off the competition. 73 more sleeps for those that are counting!
A New Standard of Accounting
But that’s not all that’s distracting the banks’ financial gurus from writing their Christmas lists.
IFRS 9, the new international accounting standard governing how banks account for loan loss provision, is coming into force from 1 January 2018.
IFRS 9 replaces IAS 39 which was criticised for being too complex and, during the financial crisis, causing banks to recognise losses on bank loans and other financial assets “too little, too late”.
The new IFRS 9 standard has a radical new perspective, which all of us at Castlight enthusiastically endorse, as it recognises the importance of looking forward, anticipating problems before they happen. Where IAS 39 only permitted banks to provision for loan losses when they had hard evidence that losses were occurring, IFRS 9 instructs banks to start accounting for expected loan losses from the day they first lend money or invest in a financial asset. In technical terms, the “incurred loss accounting” approach has been replaced with an “expected loss” model.
The View From the IAS
As Sue Lloyd, Vice Chair of the International Accounting Standards (IAS) board said: “When measuring loan loss provisions, they (the banks) will also be required to take into account all the reasonable and supportable information they have available, including forward looking information.”
Stephen Cooper, IAS board member endorses this: “if a loan goes from performing as expected to performing significantly worse than expected, investors will get information about that – something they have told us is important to them”.
And of course, this is exactly the kind of information that we at Castlight believe is fundamental not just to meeting regulatory requirements but to individuals’ financial security and global financial stability, the “safer financial world” we try to build at Castlight every time we come to work.
How Will It Work With CaaS?
It’s why we developed our “categorisation as a service” or CaaS tool, which gives lenders an unprecedented understanding of what their customers can afford to borrow and what they are able to repay. CaaS takes a bank’s customers’ transactional data and processes it through the CaaS neural net. This neural net has been “trained”, by processing more than 80 million transactional records, to recognise 155 categories of discretionary and non-discretionary income and spending. For example, CaaS’s neural net can instantly identify and categorise salary, benefit payments, rental repayments, child care costs, the weekly grocery shop or how much is spent travelling to work. And particularly important in the context of IFRS 9, CaaS’s powerful analysis and reporting of spending patterns or “characteristics” will allow lenders to identify exactly when a loan is “performing significantly worse than expected”. In fact, it will go further than that. CaaS’s incisive categorising will allow a bank to spot tell tale signs that a customer is heading for trouble – such a missed payment, a missed salary cheque or even a switch in the weekly shop from Waitress to Lidl.
Stephen Cooper went on to say that; “(IFRS requirements) will provide important information that will enable banks, investors and regulators to take necessary and timely action. I can’t stress enough how important that is. We have seen several examples where failing to fix problems quickly led to bigger problems and often to inhibit economic growth.”
I couldn’t agree more. Roll on IFRS 9.
And by the way, 61 sleeps before IFRS and 55 before Santa!