Banks strug­gle to root out bias in al­go­rithms

‘The board has to weigh up ben­e­fits. It’s not about buy­ing a book of loans, it’s about get­ting the tech­nol­ogy’

The Daily Telegraph - Business - - Front Page - By Margi Mur­phy in San Fran­cisco

BANKS are strug­gling to au­dit al­go­rithms for racial bias be­cause of Euro­pean pri­vacy laws, ex­perts warn.

A pri­vacy clam­p­down has made col­lect­ing the in­for­ma­tion needed to work out if an au­to­mated sys­tem has made an un­fair de­ci­sion dif­fi­cult under Gen­eral

Data Pro­tec­tion Reg­u­la­tion in the UK and Europe, busi­nesses have said.

Sci­en­tists have long warned that au­to­mated sys­tems which make de­ci­sions about who to lend money to may be as prej­u­diced as hu­mans be­cause the data used to train the al­go­rithm may not be di­verse enough to be fair.

Roger Tay­lor, chair­man of the Cen­tre of Data Ethics in In­no­va­tion, said: “In the UK, GDPR and the Data Pro­tec­tion Act should not pre­vent or­gan­i­sa­tions from ef­fec­tively au­dit­ing their al­go­rithms for bias, but it is clear that un­cer­tainty on this point could prove a blocker for or­gan­i­sa­tions.”

Grab­bing attention was never some­thing Metro Bank strug­gled with. Its branch open­ings fea­tured dancers on stilts, popcorn stands, face paint­ing and bands play­ing mu­sic. Vernon Hill, its flam­boy­ant founder, who once brought Big­gin Hill’s an­nual air show to a stand­still so he could fly to Italy in his pri­vate jet, tried to make the lender seem as cud­dly as pos­si­ble with the motto “dogs rule”. The UK had never seen a bank like it. But the cud­dly image came to an end last year. A loans blun­der sent its shares crash­ing, wip­ing £800m off its mar­ket cap in one day, and it has strug­gled to re­cover. The gaffe shone a light on cor­po­rate gover­nance con­cerns, and by the end of the year both Hill and Craig Don­ald­son, the chief ex­ec­u­tive, had gone. Probes into the loans er­ror are on­go­ing.

Fast-for­ward to to­day and the bank’s new boss, Dan Frumkin, is de­bat­ing whether to go ahead with a takeover of Rate­set­ter, the peer-to-peer lender, in the midst of a global health pan­demic that has hit the econ­omy hard. It is not an easy de­ci­sion. “The worry is you would have the Rate­set­ter brand ‘owned by Metro Bank’ so then if its loans de­fault, cus­tomers will lose out [and Metro looks bad],” one per­son aware of the talks said. “The board has to weigh up ben­e­fits. It’s not about buy­ing a book of loans, it’s about get­ting the tech­nol­ogy, and build­ing one from scratch would take much longer.”

Rate­set­ter, which matches those who want to bor­row with those who want to lend, and like Metro was founded in 2010, has had its own fair share of strug­gles. The peer-to-peer lend­ing gi­ant was pre­vi­ously backed by Neil Wood­ford, the fund man­ager, and fell to a £26.7m loss in 2018 af­ter it was forced to ac­quire the “car­cass” of a mo­tor lend­ing busi­ness. The pan­demic has put the sec­tor under fur­ther strain. How­ever, Rate­set­ter’s loans are thought to be no riskier than any of its ri­vals, none of its in­vestors have ever lost money, and it does not ex­pect losses in the fu­ture. The com­pany, whose board is run by Paul Man­d­uca, the Pru­den­tial chair­man, has close to £70m pro­tect­ing in­vestors’ cap­i­tal on its £800m loan port­fo­lio. Its ex­per­tise in the per­sonal loans space could be a big boost to the em­bat­tled bank, which is ea­ger to grow in this area.

“If you go to a Metro branch and want an un­se­cured loan, it would take two to three hours [to as­sess] and most would get a no as the bank doesn’t have the so­phis­ti­ca­tion of data to make an in­formed de­ci­sion,” says one per­son close to the process. “With this deal the tech­nol­ogy would be pro­vided by Rate­set­ter, the loans would be white-la­belled as Metro.”

As the board weighs up the pros and cons of snap­ping up the busi­ness af­ter the worst year in its history, and as the UK econ­omy shrinks, the price of any deal be­comes even more cru­cial. Analysts have said Rate­set­ter could be sold for £50m, a fig­ure that has been re­peated by Frumkin in­ter­nally. Sources in­sist the talks are not driven by Jaime Gilin­ski Ba­cal, the Colom­bian bil­lion­aire. Ba­cal re­cently be­came one of Metro’s top in­vestors. How­ever his back­ground in bank­ing means he is of­ten used to “bounce ideas off ” and he speaks to the chief ex­ec­u­tive reg­u­larly, one source says.

Frumkin and the rest of the board will have to tread very care­fully over the com­ing months. Hav­ing al­ready nursed huge losses and with the bank still fac­ing the re­sults of a reg­u­la­tory in­ves­ti­ga­tion into its loans er­ror, in­vestors have lit­tle pa­tience left for fur­ther mis­takes.

Spokes­men for Metro and Rate­set­ter de­clined to com­ment.

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