FICO Logo200FICO shares the story of a client, which it refers to as Bank C, which was fined by regulators for misconduct in selling fee-based extra services to new account holders.  Moreover, the light shined on this problem made it clear that over-zealous sales activities weren’t the institution’s only vulnerability to fines and reputational damage from regulatory noncompliance.

Bank C executives began asking questions such as: Are automated originations processes confirming that customers understand and accept product and credit terms?  Are collections agents making the required disclaimers at the proper time in the conversation, and avoiding using inappropriate language and threats?  The answers convinced them the bank needed to put in place policies, systems and processes to provide better visibility into and controls over compliance risk exposure.

As part of this solution, Bank C deployed analytic models to score new sales for compliance risk. The objective was to identify potential high-risk cases for review and follow up with the customer. To improve efficiency, the bank got started by working with FICO to implement an automated scoring service across a number of different product lines, including credit, savings and insurance.

But in such a dynamic market, where regulations, bank products and customer behavior are all changing, how could the bank ensure that the deployed models continued to accurately identify the risk level of these sales?  Factors indicative of high risk today might not be significant a few months from now, and vice versa.

The solution was to also implement centralized, automated model management, illustrated below. Regularly scheduled model validation processes will fully document analytic performance, generate alerts when it drops below specified thresholds and even capture actions taken in response to validation findings. An accompanying model development environment will allow the compliance risk models to be quickly refreshed and deployed back into the scoring service. This framework also has the potential to support other conduct risk assessments, such as those used for collections calls.