Today's market is being pushed and pulled in all directions. Meeting corporate governance and compliance demands, and delivering innovative products as well as meeting customer expectations are all exerting immeasurable pressure on product providers.
More and more are finding themselves caught up in the tide of charges for missold policies and the compensation claims it provoked, adding to the pain. The knock on effect for the industry is a deluge of legislation. Now more than ever companies must find extra resource from already tight budgets. This can only be achieved by reducing costs and improving potential and existing revenues. But in such a competitive environment, are these realistic ambitions? The answer is yes, but it will require a systematic review of all processes.
The one process that mortgage providers should be looking at closely is securitisation, especially as the 2006 Basel II deadline looms. Compliance to the frameworks it sets out for measuring capital adequacy will rest on the ability to increase or dispose of financial assets. As increasing capital is expensive, especially if process re-engineering is not on the board's agenda, many will find securitisation to be a saviour on two counts – liquidity previously not available and an improved risk profile.
The flexibility such financing provides will also take away some of the pressure to create innovative new products and cut costs. Bondholders have a secure investment in an attractive yield and the borrower can access more competitive mortgages.
However, securitisation as a process demands a high level of administrative expertise and the free exchange of intellectual property. Technology will inherently play a significant part in this but lenders must take care that the technology in place maximises the full potential of securitised asset management. Much of the success will rest on the lender's ability to provide credit rating agencies with accurate information from which to complete a due diligence review.
If lenders held this information in an electronic format, the process of assessment for each securitised loan has the potential to be very efficient. Agencies should have access to readily available information such as the geographical spread of assets, loan to value, credit risk exposure, solvency levels and underwriting policies to evaluate the level of risk to rate the asset pool.
Alas, currently few lenders hold this information electronically and so cannot provide credit ratings agencies with the data they require to make precise risk calculations. In the absence of comprehensive data the agencies have no choice but to make conservative estimations that downgrade the value of the portfolio. Clearly, lenders are losing money before they even start.
Having electronic information available is also important if the agency is to later monitor performance and maintain and adjust ratings and accurately reflect an asset pool's attractiveness to investors.
But in reality the process is blighted by inaccurate and incomplete information not just at the assessment stage but throughout the asset pool's life.
Is it not ridiculous that in a computer generation few lenders have the systems that allow them to provide such levels of accuracy and transparency? If an electronic record of the loan file was available, the values that providers could command, and potentially over longer periods, would significantly improve in the vast majority of cases.
The benefits of turning paper-based processes into inherently compliant electronic processes do not stop at securitisation. There is an opportunity for lenders to reduce their cost bases drastically across the business if information is always captured and made easily accessible.
Holding records electronically will reduce administration and processing costs by providing transparency throughout loan origination, completion and loan servicing. But more than that, a complete audit trail of an application through to termination will exist. For those providers caught up in the endowment crisis, this kind of transparency could be saving them millions.
The lessons learnt from this disaster and others, have provoked the financial governing bodies to consider how such events will be avoided in the future. The onslaught of legislation to protect the consumer and the industry will inevitable rest on transaction audits. Increasing transparency has to be an integral part of all business and operational strategies and processes in the future.
Of course, aside from operational benefits, customers will be happier as their requests can be dealt with efficiently at any point in the policy's life. And in today's lending market where customers can show their displeasure by changing horses easily – a happy customer can only be good for business. Aside from this, the agent's life gets easier, stress goes down and staff retention goes up.
If so many benefits can be derived from one simple objective – maximising the value of securitised assets – surely, the benefits of changing all processes could be colossal. With shareholder value, consumer confidence and corporate reputation all at stake – is it not time that companies woke up to the harm they could do if they do not invest in solutions that will enable them to reduce costs and meet compliance demands?