The evolution of our approach to voluntary standards
New standards of lending practice are now in place at the Lending Standards Board (LSB).
In the last 12 months the Lending Standards Board (LSB), with the support of its stakeholders, has launched two sets of Standards of Lending Practice, representing a tangible step forward in the way protection for personal and small business customers is delivered and overseen.
The LSB has adopted a risk-based approach to account for the different states of maturity and complexity of each of its registered firms as well as to determine an oversight strategy for each firm.
For example, conduct regulation is more advanced for personal borrowers than for small businesses.
The focus is firmly on outcomes and understanding how the risks specific to each firm can impact on its ability to meet requirements of the standards ̶ and ultimately deliver fair customer outcomes.
How does this differ from the lending code regime?
Previously the lending code focussed on rules and provisions, and the oversight approach adopted included exercises such as the annual self-certification exercise which required every firm to self-attest against each provision of the code. This clearly had, at one time, a part to play but the evolution of regulation, new market players with different business models, and the need to add value meant we needed to be much smarter in our approach.
High, medium or low?
The standards are supported by a new oversight strategy, which has already involved all our registered firms undergoing a risk assessment review in respect of the personal standards. This has enabled us to understand the firm’s risk management framework, its internal control environment and governance arrangements to assess whether these are sufficient to provide comfort over the operation of the standards and that, where gaps exist, steps are in place to fix them.
This approach has meant we have been able to design a bespoke oversight strategy for each firm, which has meant categorising the firm’s governance framework as either mature, progressive or immature and allocating an overall assessment of risk – high, medium or low.
This exercise now means that we have re-baselined all our firms, pinpointed where we feel the key risks to the achievement of the standards are, and provided a basis on which to oversee each firm in a proportionate, risk-based, value adding way, that is efficient for the LSB and for the firm. We will adopt a similar approach for the business standards, which went live on July 1.
A risk-based approach
We believe the shift in our thinking, following the introduction of the new Standards of Lending Practice, is an important one in the development of voluntary standards. We are moving to principles and standards, which are overseen using a risk-based approach, that are aimed at delivering the right customer outcomes. This new approach, which provides firms with flexibility in how the service is delivered and accounts for a variety of business models, can only make for a more value-adding experience.
Our ongoing interaction with our registered firms, through the work of the LSB compliance managers and industry roundtables, provides opportunities for constructive and proportionate discussions on what organisations are doing to manage their risks and prevent poor customer outcomes, as well as the chance to talk through issues when things go wrong.
While significant progress has been achieved to promote fair lending across the industry, our hard work does not stop here.
We will work collaboratively with our registered firms, regulators and stakeholders to continue developing the standards with the customer at the centre of our thinking.
This will ensure we achieve the balance of encouraging innovation, reducing the net burden on firms, yet enhancing consumer protection and improving customer outcomes, both for personal and business customers.