The last few months have seen numerous car finance providers announce to shareholders that they’ve set aside provisions for the likely redress required due to potential car finance mis-selling. While these numbers are likely worst-case scenarios based on high-level initial analysis, it’s important to prepare in advance so your car finance business isn’t caught off guard.
Over the next few months, data analysts at these firms will be working through the much more complex task of identifying every customer that has been affected by this issue and then calculating the redress at customer level down to the penny.
The problems with marking your own homework
Internal review bias
Financial institutions possess a wealth of customer data, but reviewing their own mis-selling practices creates inherent bias. Analysts, even with the best intentions, might subconsciously use inclusion criteria during model building to minimise the identified mis-selling. This can lead to an underestimation of the issue’s scope.
Knowledge gaps
Many firms also lack the expertise required for robust data management solutions. Data analysts might be skilled in financial modelling and MI reporting but lack the specific knowledge required to calculate overcharged interest in a complex case such as this. This lack of specialisation can lead to inaccurate or incomplete results.
Single points of failure
Using just one expert to write complex code carries risks. Without a second expert for review, coding and calculation precision errors can slip through, creating a single point of failure. If firms can only assign one analyst with the necessary ability to develop such a complex process, they’re putting a lot of pressure on and trust in that person.
Experience builds expertise
Larger financial institutions have dedicated remediation teams with years of experience in addressing a variety of mis-selling issues. These teams develop their own internal standards and principles to ensure consistent and accurate outcomes across different projects.
However, many smaller firms will be asking data analysts with little or no remediation experience to come up with these principles. These analysts will need to address specific, unfamiliar situations such as:
Reconstituting loans
Using data to recalculate the history of the loan balance (and interest) on a day-by-day level can be complex and time consuming. However, this is the best way to ensure accurate and consistent redress, especially in cases where the terms of the loan may have changed since the start date, or where overpayments have been made.
Tracing missing parties
Dealing with deceased customers or those with outdated contact information requires specific protocols. Established remediation teams have strategies for locating these individuals or their representatives to ensure that they receive proper compensation. There will also be processes in place to make sure money flows legally to executors or legal representatives.
Complex compensatory interest levels
Calculating compensatory interest accurately, especially for complex financial products, is crucial. Experienced remediation teams will have well-defined methods for calculating the appropriate 8% compensatory interest on projects involving interest transactions, ensuring that customers are accurately reimbursed but not overpaid.
Handling data gaps
Missing data can be a hurdle in any analysis. Experienced remediation analysts have developed strategies to address missing information to minimise the impact on the overall accuracy of the remediation process. This could include estimation techniques, extrapolation or leveraging similar data sets to fill gaps to provide analysis that is as accurate and comprehensive as possible.
The value of external expertise
With all this in mind, it’s clear why so many firms choose to bring in external experts to validate their assumptions and calculations. These professional assurance analysts provide an unbiased perspective and bring specialised knowledge that internal teams might lack.
By leveraging this experience, firms can ensure that every aspect of the remediation process is handled with precision, and minimise the chances of having to re-remediate any customers after the project is completed. This approach not only enhances the accuracy of the redress but also builds trust with regulators and customers, ultimately safeguarding the firm’s reputation.
Speak to the experts
At Dufrain, we stand prepared to leverage our consultants’ extensive experience in remediating millions of customers for top-tier Financial Services firms.
Looking to learn more? Visit our car finance mis-selling hub today to uncover our insights across a range of videos and blog posts.
Get in touch with our remediation team and to hear how we can support you with any upcoming car finance remediation schemes.