In the US, the foreclosure crisis which emerged in 2010 remains unresolved, despite tremendous regulatory scrutiny and notable industry reform. It has revealed a widespread epidemic of foreclosures that were inappropriately initiated and inappropriately handled. Many have involved a lack of understanding of the legal/regulatory requirements and often been coupled with poor or in some cases fraudulent processes:
- Mortgagees have foreclosed on homes with no outstanding debt, employed ‘robo-signing’ methods to expedite thousands of false affidavits and foreclosed on the homes of servicemen and women on active duty in express violation of federal law.
- There have been significant failures of the controls intended to safeguard the positions of both the borrower and the lender.
- Insufficient attention has been paid to borrowers and to the overall borrower experience.
- Institutions placed excessive reliance on third parties – especially attorneys – to do the right thing.
JPMorgan Chase was one of the first major banks to halt foreclosures completely, affecting proceedings against 56,000 borrowers in 23 states; in a sworn deposition, a JPM employee admitted that she and her team signed off on about 18,000 foreclosures a month without checking whether they were justified1. Bank of America, Wells Fargo and Citigroup were among other major banks to follow suit. The fifth largest lender in the US, Ally Financial, halted evictions and resale of repossessed homes once a document processor for the company admitted that he had signed off on 10,000 pieces of foreclosure paperwork a month without reading them2.
In the UK, the continuing issue over the widespread mis-selling of payment protection insurance (PPI) by banks and other providers was dramatically thrust back into the spotlight in 2010. In a volte-face from its earlier stance, the BBA (British Banking Association) decided not to appeal the judicial review decision. This resulted in a need for the UK banking industry to calculate provisioning requirements to cover the anticipated costs of millions of customer claims.
Lloyds Banking Group was the first to announce a provision of £3.2 billion. As a consequence, the bank reported a £3.4 billion loss for the financial quarter concerned, and shareholders saw 8 percent wiped off the market value of their investment. Other banks quickly followed suit, with Barclays setting aside £1 billion and RBS £950 million. The estimated total cost to the industry could be £9 billion.
The PPI issue followed in the wake of the systematic mis-selling of endowment mortgages to more than five million UK customers. Millions more were advised to opt out of employee pension schemes for worseperforming private schemes.
As demonstrated through the examples above, these crises can cost the industry billions of dollars in redress and operational costs, requiring onerous, resource-intensive remediation infrastructures to be built and subsequently decommissioned. Many providers have faced quality and consistency concerns that have in turn invited regulatory scrutiny and increased reputational risk as a result. An increasingly intensive and intrusive regulatory landscape, together with growing media and political pressure, make it almost inevitable that the remediation burden will continue to rise over the medium to longer term. Firms should consider it a business imperative to be better prepared.
Many of the principles are consistent with the crisis management discipline. Prevention is better than cure:
- Avoid capping innovative product development by designing flexible risk-based frameworks to deliver robust management, analysis and reporting aligned to different products/ services.
- Create a business culture that focuses on customer outcome as well as commercial gain, with early identification and rectification of failings being a key requirement.
- Ensure compliance: interpretation of regulation and statute needs to be thorough, systematic and up-to-date. Avoid technical and tenuous legal interpretations of regulatory rules by maintaining a pragmatic, principle-led ‘treating customers fairly’ approach – get it right.
- Introduce standards, policies and controls to support compliance: even small problems in distant corners of the business can have catastrophic results.
- Controls need to be designed in an appropriate manner to mitigate and manage the risk (i.e. control design needs to clearly correlate with a robust risk assessment).
- Controls need to be tested and re-designed regularly to ensure they reflect the regulatory environment and requirements.
- The provider must always assume accountability for the quality of outcomes and delivery, irrespective of the level of third party involvement.
- Information sharing (industry forums) between financial institutions can help companies understand what other key players are doing and how they measure up.
However, in the event an issue and/or control failure is discovered, immediate action is imperative:
- If a problem does emerge, address it head on.
- Develop a clear, explicit project and action plan to tackle it.
- Document all critical decisions and how you got there.
- Identify the root cause and make sure your solution is not just a quick fix.
- Always be transparent.
It is important to avoid the checklist mentality, and ensure the focus is on understanding how consumers are affected. Ultimately, the world will be more forgiving if a financial institution can demonstrate that it did its best to consider the impact and outcome for its customers throughout the process.
If a product or service fails to deliver the right customer outcome, the firm should:
- Identify the population of customers affected.
- Determine the level of detriment based on the customers’ situations and experiences.
- Taking the above step may allow the population to be segmented based on likely detriment and appropriate actions for specific customer groups (previously paid/declined claims, arrears customers, open/closed policies, ineligible, etc).
- If a customer raises concerns directly, the firm takes into account the identified failings when investigating and assessing the customer’s allegations.
- Redressing the customer should always reflect a desire to put them back in the position they would otherwise have been had the failing not occurred.
- Any customer impact should be rectified in a timely and consistent manner to reduce further adverse customer impact.
For most firms, their existing operations and resources cannot absorb the requirements of the remediation activity. As a result, there is a need for large numbers of temporary resources, with limited time for robust training and competency frameworks. This in turn results in subjectivity when assessing and redressing complaints leading to inconsistent outcomes, high levels of rework and regulatory scrutiny.
Most large financial institutions can demonstrate at least one such experience in the past. The key to avoiding this is to develop a consistent approach to the upfront work in understanding and identifying the impact of the failing. The findings should be used to inform the scope of the remediation activity and drive population segmentation. Once this has been established, an automated approach to triaging the customer population for mailing and responses can be developed. The rules used to drive the system will reflect the customer segmentation defined by the upfront work undertaken by the firm, driving objective and consistent outcomes that are right first time.
The extent of an automated solution is dictated by the complexity of the customer remedy. For example, a customer with an open policy may want to maintain the policy and the benefits therein, making it more appropriate to relax the terms. However, a customer with a closed policy may simply wish to receive financial compensation. There are many potential outcomes; it’s never a case of one size fits all
While the main focus of remediation activity is to rectify any customer detriment in a compliant and timely manner, a key benefit is often missed. Understanding the core reasons for the failings provides the firm with a window of opportunity. Not only can the failings be used to design a more robust risk framework, they can also help to inform and mould business culture, product and sales development. If, for example, the issues arose as a result of the incentives and drivers in place, the business should review whether these existing incentives encourage the right behaviors and outcomes. They may choose to weight future incentives towards suitability, persistency and quality, not just volumes.
The final piece in the jigsaw is the governance and reporting structure. The firm should be able to access and provide transparent material that informs all areas of the business – such as compliance, complaints, product design and marketing. Engaging all relevant business areas and driving accountability for necessary change is key to reaping the benefits of remediation and reducing future liability and failings.
In summary, a firm’s ability to deliver successful remediation projects and use the learnings from them to shape its future business model is completely within its grasp. However, time will tell whether the industry continues to view remediation as an expensive and inevitable result of identified failings, or grasps the opportunity to use the learnings for long-term financial and reputational gain.
Head of Banking and Head of Remediation
UK Risk Consulting
KPMG in the UK
Tel: +44 (20) 76945575
Director – Financial Management
US Management Consulting
KPMG in the US
Tel: +1 973 912 6320
1. New York Times, 29 September 2010;
2. Washington Post, 22 September 2010