Back in October, I gave the new, international accounting standard IFRS9 a hearty endorsement, because I firmly believe it drives right to the heart of affordability. The IFRS9 standard, introduced in January, has a radical new perspective, recognising the importance of looking forward, anticipating problems before they happen. The standard it replaces, IAS 39, only permitted banks to provision for loan losses when they had hard evidence that losses were occurring. By contrast, IFRS9 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.
And just last week, there was further, ringing support for this sea change in perspective. Reporting from an industry event, The Telegraph’s Iain Withers and Tim Wallace, quoted Jonathan Davidson, the director of supervision for the FCA telling credit firms to do more forward-looking credit checks to make sure borrowers can afford repayments. They quote Mr Davidson as saying: “There are a significant number of households that are in so deep that the slightest sign of rough weather could see them in over their heads. Given the potential rough weather that some of your customers may face in the future, I hope you can see why a backward-looking credit check isn’t enough. Will the customer be able to repay without causing them wider financial difficulties?”
We are singing from the same hymn sheet Mr Davidson.
The Castlight Perspective
For the last two years the Castlight team has been hammering out the refrain “ability, stability and the willingness to pay”. We have been banging the drum for comprehensive affordability checks that are robust enough to look forward and that are based on unprecedented amounts of transactional data, not just credit data, so that lenders are empowered to predict the future behaviours of customers who want to take on credit.
Jonathan Davidson is right to worry how some customers will cope with rough weather. We can’t control the financial weather but Castlight can provide the tools to ensure that customers don’t go anywhere near the water if their boat isn’t robust enough to ride the storm.
Our affordability tools, the Affordability Passport and CaaS (“Categorisation as a Service”) were launched in response to our fundamental belief that both customers accessing loans and lenders should be able to assess the suitability of a loan on the basis of an ability, stability and willingness to pay.
The Affordability Passport uses open banking technology to provide a platform for prospective borrowers to share their transactional data in real time with a lender. It categorises discretionary and non-discretionary spending into over 150 categories and then merges the transactional data with credit performance data to reveal the borrower’s ability to afford a mortgage. Both the customer and the lender can review the comprehensive affordability picture and identify any areas of current or potential financial stress or even distress.
Similarly, CaaS, will take batches of customers’ transactional data, categorise the discretionary and non-discretionary spending and allow the lender to identify signals of distress. 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.
Our affordability tools give both lenders and borrowers unprecedented understanding of what an individual can afford to borrow and what they are able to repay. Using both transactional data and credit checks, they are designed to look forward, predict behaviours and highlight signals of stress and distress.
There is no need – ever – for any customer to get in over their heads.
And I am sure Jonathan Davidson would endorse that.