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The Expense Verification Framework
The Expense Verification Framework Initiative seeks to support Credit Providers to develop an Expense Verification Framework and Continuous Improvement Model for Responsible Lending that reflects the community’s expectations of frictionless, fair, transparent lending based on Privacy-by-Design principles.
What is it?
The Expense Verification Framework Initiative is designed to deliver better outcomes to the industry and community by delivering:
Phase One: Approach
A “good practice” Expense Verification Framework which lenders can use to calibrate their approaches that focuses on financial well-being not just avoiding hardship (Including the framing of expense inquiries on application forms and what other questions might be asked)
Testing of the Expense Framework using pooled data.
Phase Two: Governance
Development of a Continuous Improvement Management Model for use in responsible lending together with a governance process that will refine them as and when required.
An ongoing User Group forum to refresh the findings and discuss implementation.
The industry and community are all aware that current methodologies are not achieving community expectations. The intent is to rethink what an expense verification framework would be that can deliver on five key goals:
Avoiding consumers falling in to difficult circumstances
Promoting financial literacy and financial wellbeing
Avoiding invasion of privacy and the unintended consequences of transactional data
Promoting efficiency – to keep system costs and the costs to the community down
Avoidance of unintended macroeconomic consequences.
Benchmarks such as HEM, whilst a useful starting point, can be problematic. The alternative of resorting to a review of bank statements does not of itself fix the problems and can create a range of inaccuracies and ethical dilemmas such as:
Coverage: Non-ADIs do not have access to bank statements for applicants. However, even with access, a specific bank statement may not accurately represent the full expenses of the applicant. Further, new-to-bank customers have no bank statement data available to share.
Accuracy: Even if the right account is being reviewed, timing issues around bill payments, determining which expenses are recurring, identifying what expenses are discretionary and other issues create interpretation challenges. Categorisation of expenses is also at risk of error.
Granularity: Looking at transactional data can create ethical and privacy dilemmas which are not easily addressed.
Consumer data rights not obligations: The fundamentals of the Consumer Data Right is the right of consumers to share the data they want to share and with whom. Creating obligations to share this data as a requirement for lending is counter intuitive to these rights.
Regulators Observing – a way to accelerate creation of new, better practices
In line with global best practice to support adoption of regulatory tech (RegTech) and automation of compliance in general, ASIC will attend the kick off the workshop for the Approach Phase and be briefed periodically. Their role as observers enables them to deepen their knowledge base of the challenges the industry faces, and to provide whatever feedback they can. We would like to see early indications of where they question a specific approach but what feedback is provided is up to ASIC.
ASIC has indicated that they will:
attend the workshops and advisory committee meetings
refer to existing guidance and
report publicly on their observations.
ASIC has also made it clear that:
the absence of comment by them in any aspect will not imply that they agree with the approach (in whole or part) and
no endorsement of any aspect of the initiative should be inferred from their attendance as an observer.
Credit Providers who participate are not obliged to adopt or change current lending practices based on the findings but instead are encouraged to engage in a framework of continuous improvement.
Our involvement in this space is not new, nor is it opportunistic. Verifier is all about putting people in control of their data to get better financial outcomes.
Verifier is a founding member of the RegTech Association and is known for innovation around income verification, another key component of Responsible Lending.
In both 2012 and 2014 we proposed an expense pooled data study to address the issue around expenses. However, the Royal Commission has highlighted how important this is and we believe the time is now right.
Verifier’s Governance team will run the Expense Verification Framework Initiative assisted by highly respected industry analysts and consultants. We anticipate that as a result of increasing clarity in this space, lenders will see an acceleration in automation solutions to address this problem, from a range of industry participants.
Why right now? Trust is at stake
Responsible Lending Obligations have been one of the recurring themes from the Royal Commission, especially the role of HEM as a benchmark for assessing a customer’s living expenses when they apply for a loan. Additionally, the complexity arising from the Westpac case reinforces the difficulty facing lenders interpreting the definition of “substantial hardship”. As noted in submissions to the Royal Commission Interim Report, introduction of CCR and Open Banking will raise further challenges for dealing with assessment of a customer’s expenses and liabilities.
Across the industry, the demands of Responsible Lending Obligations in the context of new digitised data are being felt in terms of cost, restriction on credit availability, convenience of products and services as well as new issues in customer privacy.
Companies Supporting the Initiative
The Expense Verification Initiative will involve several partners supporting the data analytics phase of the project
MOGOPLUS: a leading financial data company, offering technology that captures, verifies, categorises, refines and enriches customer bank transaction data securely and in real-time. MOGOPLUS data categorisation services will be used in the pooled data study.
SISS data Services: SISS Data Services is Australia's most comprehensive data feed solution for the accounting and financial services industry and its platform will be used to submit data for the pooled data study phase.