UK Finance’s latest must–read blogs?

Navigating consumer duty regulations: The power of dynamic scenario planning?

As the financial industry evolves, so do the regulations governing consumer protection and duty. In this developing environment, financial institutions are turning to scenario planning software to not only adapt but thrive in the face of new regulatory challenges.?

One may ask how scenario planning software can help??

Whilst Consumer Duty rules focus on ensuring customers are receiving ‘good outcomes’, a lot of the focus, quite rightly, has been on the customer experience and fair value.?

For a bank to determine fair value, it needs to have the ability to quickly create ‘what if’ scenarios to compare and understand the impact of customer outcomes on the pricing of its products and ascertain fair values. Fundamentally, this helps keep the customer at the centre of the bank’s decision making process. It allows a bank to consider the value of customer loyalty and how it can return that loyalty to its customers, For example, by way of providing better interest rates for its customers.?

This analysis and decision making should not be isolated from the core balance sheet. How much more risk is involved? Does it need more or less capital or liquidity? How much more capital/liquidity is required? Banks should be considering the impact of these decisions at a strategic level and analysing the impacts on its key ratios.?

Read the full blog by Neil Shah FCA , Head of Financial Services, Board .

Can automated risk-based pricing expand mortgages access for the self-employed??

With mortgage rates fluctuating and?Moneyfacts?reporting a mere 15-day average lifespan for mortgage products in June - the shortest since March - quick responses in the market have become essential.?

For self-employed individuals, securing a mortgage is even more daunting due to their unpredictable income streams. This underscores the need for lenders to adopt agile, dynamic pricing strategies to better accommodate these borrowers’ unique financial situations.?

Challenges faced by self-employer borrowers?

Historically, self-employed applicants have struggled more than their traditionally employed counterparts to secure mortgage approval. A?2022 study by The Mortgage Lender?revealed that self-employed borrowers were twice as likely to face rejection compared to those with regular employment. This disparity highlights a challenging outlook for the self-employed borrower.?

The primary hurdle is the stability and predictability of income. Recent economic volatility, even influenced by factors such as weather conditions, has further complicated this. For example, the?ONS reported that GDP growth stalled in April?due to adverse weather affecting consumer spending. This unpredictability is particularly problematic for self-employed individuals whose businesses rely on fluctuating footfall, making it challenging for lenders to assess repayment capacity accurately.?

Read the full blog by Rowan Clayton , Product Director, finova .?

Assessing third party risk management in financial institutions?

Firms must individually remain stable, to avoid disrupting the wider financial services industry and overall economy – in the UK and beyond. We’ve seen the impact of specific banks not being able to adapt in recent history (there have been 562 bank failures since the year 2000), with high profile collapses such as Lehman Brothers around 2008 leading to a period of economic downturn.?

While traditional governance around capital and crime (for example KYC, risk-weighted assets etc) remain critical to ensuring banks are financially solvent and?protected against crime, such as fraud, corruption, and money laundering, this is no longer enough.?

The interconnectivity with and reliance on third parties to support the acceleration of digitalisation, transformation, and implementation of new technologies is introducing a new, complex threat landscape. These threats include Cyber concerns, ESG performance and other non-financial risks that may impact the bank’s ability to continue operating. Incidents such as the global technology failure on 19 July highlight the need for strict third-party risk management. ???

It starts with a ‘single version of the truth’?

While regulation and policy provide clarity around the bank’s obligations, the practical steps needed to complete more in-depth third-party risk management can be challenging.?

Third party risk management is everyone’s job. And when different parts of the bank, and the teams within it, can collaborate it’s easier to meet obligations around understanding and reporting on third parties. Building a consistent foundation with one ‘single version of truth’ for each third party, which can be leveraged throughout the business, is one way to reduce the burden and operational resilience easier.? ? ??

But achieving this can be challenging. When it comes to data, financial institutions must invest in the foundational technology, infrastructure, and data strategy of their business, with an immediate, ongoing focus on data management. Institutions still operating in siloes, with legacy technology, and/or with no ‘single version of the truth’ will fall behind.?

Read the full blog by Sara de la Torre , UK Head of Financial Services, Dun & Bradstreet UK .?

The rise of Bond Execution Management Systems (EMS)?

Bond market trading is changing. 25 years ago, equities trading underwent a shift that embraced electronic order books with opening and closing auctions that could provide definitive reference prices for trading, having previously been by appointment and over the phone. ?

This led to vastly increased volumes in Exchange Traded Funds (ETFs) and equity linked derivatives.?

We are now seeing similar changes in the bond market. In terms of value, it is about a third larger than the equity market, but with equivalent trading volumes; on any given day only about 25 per cent of bonds are traded, and it is not the same bonds that are traded each day.?

In the past few years, platforms such as Tradeweb, MarketAxess and Bloomberg have established themselves, beginning to replace trading by phone. Bond EMSs have emerged that sit above dealer runs. Asset Managers, Outsourced Dealers and Investment Banks are all benefiting from these systems which, along with Request for Quotes (RFQ), help manage order books, optimise liquidity access and enable best execution.??

Evaluated prices?

Currently, most bond index levels are derived using evaluated prices whereby a price is estimated based upon bonds with similar characteristics. But bond calculation agents don’t have access to all the trading information due to the fragmentation of bond trading platforms and other liquidity pools. As a result, bond fund managers often feel that the price at which they have executed a trade is not reflected in the evaluated price used in their benchmark index. This lack of transparency creates pricing risk for bond ETFs and is detrimental to their growth.?

Read the full blog by Raphael De Santos , Director – Asset & Wealth Management, Consulting, Davies - Consulting Division .?

Warm Homes Plan at the Budget: Government needs to galvanise demand for retrofit

In 2022, UK Finance released?Net Zero Homes: Time for a Reset, which called on government to do far more to improve UK household energy efficiency and reduce carbon associated with home heating.?

In her?October?Budget, Chancellor Rachel Reeves announced over ￡1bn for?2025, and a guarantee of an initial ￡3.4bn towards low-carbon heating and household energy efficiency over 2025-28.??

This is a welcome continuation of the previous government’s financing package to support homeowners in lowering household emissions.??

But so far, because of an?absence of household demand, packages like these have failed to make a dent in the levels of carbon emitted by UK homes — one of the oldest housing stocks in Europe. For example, only one per cent of UK homes are heated by a heat pump, according to the Climate Change Committee’s latest?progress report.?

Banks and building societies are ready to support homeowners?to make the green transition but have first-hand experience of this low demand. They have offered green homes loans for several years but see minimal uptake. For example,?Nationwide recently highlighted?“limited” take-up of its zero per cent interest Green Additional Borrowing product, despite extensive promotion.?

To get finance flowing at scale, we need a range of government interventions – not just public funding. The?Net Zero Homes: Time for a Reset?report sets out ten recommendations for government. All of these remain valid.?

Read the full blog by UK Finance ’s Manager, Mortgages Policy Ronnell Reffell , and Principal, Strategic & Sustainability Policy Ian Vijay Bhullar .

The power and challenges of sanctions in Economic Deterrence

Sanctions remain a critical tool in global economic deterrence, but their effectiveness is increasingly challenged by evolving circumvention tactics, increasing the need for international coordination.

As malign actors develop more sophisticated strategies to evade restrictions, the future success of sanctions depends on innovation, collaboration, and transparency.?

A recent Clue Software webinar?explored these pressing issues, with experts from the?Foreign, Commonwealth & Development Office, National Economic Crime Centre, National Crime Agency, Lloyds Banking Group, and UK Finance?offering valuable insights on the opportunities and challenges facing sanctions regimes today.?

Challenges in sanctions enforcement?

• Sanctions evasion and circumvention?

A key challenge is the growing sophistication with which bad actors evade sanctions. Countries like increasingly utilise shell companies, complex ownership structures, and cryptocurrencies to bypass restrictions. These techniques make it increasingly difficult to track beneficial ownership and enforce sanctions effectively.?

Experts highlighted the need to tighten oversight where evasion is most prevalent. For instance, the use of "shadow fleets" to evade the oil price cap was flagged as a prime example of how sanctions are being undermined.?

• Coordinating a global response?

Effective sanctions enforcement requires seamless coordination between government agencies, international allies, and the private sector. However, ensuring consistent information-sharing and aligning policies across borders remains a significant obstacle. Coordination is essential, as sanctions span multiple sectors and jurisdictions.?

Read the full blog by Laura Eshelby , Head of Economic Crime, Clue Software .

Navigating the cost-of-living crisis: how advanced analytics can mitigate credit risk?

Britain's cost of living crisis isn't up for debate.?

It's real, and it's biting hard. With the?Consumer Prices Index?(CPI) surging by 10.1 per cent year-on-year, the squeeze on household finances is undeniable.? Rising inflation, soaring energy costs, and stagnant wages are putting unprecedented pressure on consumers and businesses, with families struggling to cover basics like housing, food, and energy bills. In a volatile economic situation like this, banks and financial institutions must find a way to lend responsibly and inclusively.??

Historically, credit has been rooted in a social system where the Banking system lent to borrowers not merely as a financial service but also as a Socio-economic responsibility. Credit was often viewed as a public good, aimed at sustaining communities. This was especially true in times of economic hardship. This approach has been somewhat dented in the aftermath of the financial crisis. Banks have become more risk-averse even with products that did not have anything to do with the crash of 2008, in the first place.?

Increasing complexity in financially engineered products provide avenues to Banks to invest Capital and higher return instruments. As such, the vanilla Loans and Mortgages products have become more an “also-ran” for Banks. However, Banks don’t exist in a vacuum. They deal with real people in the real world. And they get impacted by every upheaval in society. The real test arises when borrowers struggle to meet their basic needs—such as putting food on the table. In these challenging times, banks must rethink their approach to lending, especially in the context of financial inclusion for the underprivileged.?

Read the full blog by Shuvo (Subhabrata) G. Roy , Vice President & Head – Banking Solutions (EMEA), Mphasis .?

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