Navigating the Cost-of-Living Crisis: Challenges and Innovations in UK Lending
By Paul O’Sullivan, Global Head of Banking and Lending, Aryza
The United Kingdom continues to grapple with economic challenges, including a cost-of-living squeeze compounded by various factors. While recent months have seen falling inflation figures, particularly in food prices, other pressures persist. Heightened energy and fuel costs, disruptions in global supply chains, and ongoing geopolitical tensions such as the war in Ukraine and the aftermath of Brexit continue to impact households nationwide.
According to Citizens Advice, the combination of housing and energy expenses has pushed five million people into negative budgets, marking a 50% increase over the past four years, with an additional two million cutting back on essentials to avoid financial strain. Despite the downward trend in inflation, the high cost of necessities remains a significant concern for millions of individuals and families across the country.
The Impact of Economic Turbulence on Customers
The cost-of-living crisis has affected borrowers profoundly, exacerbating financial struggles and potentially leading to increased defaults. However, the crisis has also impacted new groups with some demographics experiencing faster pay rises compared to inflation rates, and many face income stagnation or decline, meaning a combined two-year fall in real household income of 4%.
Understanding the Challenges of the UK Lending Landscape
In response to the cost-of-living, lenders confront heightened defaults and fraud, making loan approvals more stringent. Lenders have faced several challenges with collecting borrowers’ repayments due to rising living costs including income instability, limited disposable income and the ability to service existing debt, increasing the likelihood of delinquency or default.
As more individuals seek credit to cover their expenses, a growing number, particularly those already in vulnerable circumstances, encounter challenges in securing loans. Numerous lenders report an increase in rejected applications due to applicants failing to meet affordability criteria, highlighting the heightened financial burden faced by consumers.
Charting a Course with the FCA
The Financial Conduct Authority (FCA) has outlined its expectations for lenders to support customers facing financial difficulties. Building upon the Tailored Support Guidelines (TSG) introduced during the Covid-19 pandemic, the FCA aims for these measures to be an enduring element of a lender or debt collector’s Consumer Duty.
Lenders are asked to extend support not only to those already in arrears but also to customers at risk of payment difficulties. Key expectations include better identification and engagement with vulnerable customers, offering transparent forbearance options that consider existing indebtedness, and providing affordable and sustainable repayment plans. Additionally, lenders are encouraged to explain the benefits of debt advice and facilitate access to it for customers. Implementation of Standard Financial Statement (SFS) guidelines, along with the ability to share income and expenditure assessments with customers for use with other creditors, is emphasised as integral to supporting customers effectively.
The FCA’s Borrowers in Financial Difficulty (BiFD) project, initiated in response to the pandemic, aims to assess firms’ policies and processes following the implementation of TSG for mortgages, consumer credit, and overdrafts. The BiFD Report underscores the importance of lenders being well-equipped to support customers, particularly given the ongoing cost-of-living challenges.
Firms should be proactively identifying and addressing financial difficulties, necessitating the implementation of robust systems and processes. Increased customer contact and tailored forbearance options were highlighted, stressing the need for a better understanding of individual circumstances to ensure sustainable debt repayment arrangements. Furthermore, lenders are encouraged to provide signposting advice regarding money guidance and free debt advice, facilitating access to support services for borrowers. Fair treatment of customers in vulnerable circumstances is paramount, with the FCA emphasising the importance of prompt action by financial firms to assist customers facing financial difficulties and encourage early engagement to mitigate financial challenges effectively.
Lenders Continue to Adapt
Firms are already acutely aware of the financial strains brought about by the crisis and are taking proactive steps to manage their situations. They are diligently adapting their practices to provide support to those in need, offering forbearance options and prioritising vulnerable customers. Despite the current absence of revised regulatory guidelines from the FCA, lenders are proceeding with these adjustments to the best of their abilities, aligning their practices with the current guidelines. Focused on agent-driven journeys that prioritise understanding clients’ individual circumstances, lenders remain committed to offering tailored support until further regulatory clarity is provided.
Harnessing Technology for Solutions
Innovative technology and diversifying offerings present a path forward for lenders navigating the current financial landscape, FCA requirements and changing borrowers’ needs. Lenders are leveraging innovative technologies to streamline operations and processes, from digitising collection processes to automating decision-making, ensuring a more seamless and responsive approach to supporting borrowers amidst the ongoing economic challenges.
Lenders should look to leverage technologies such as advanced debt recovery management software. Digital collection and recovery tools can enable real-time communication between lenders and consumers, alongside facilitating the application of SFS guidelines. By allowing consumers to input affordability data directly or via Open Banking, the process of creating suitable payment plans is streamlined and consumers can accurately understand their financial situation.
Customer engagement software is also crucial to aid in building lifetime value. Consumers can receive their financial information and details, empowering them to manage their finances and acquire tailored support. By utilising rules-based automated decisioning, lenders can ensure that customers are presented with the most suitable solutions for their individual needs, enhancing their financial well-being.
In instances where consumers are declined a loan, lenders should employ appropriate software to offer alternative solutions. Automated decision-making and signposting for declined customers, utilising application information and Open Banking data, enable lenders to manage and communicate with declined customers effectively, alongside providing suitable tailored non-lending options.
The cost-of-living crisis poses multifaceted challenges to the UK lending sector. While regulatory requirements demand comprehensive support for borrowers, technological innovations offer avenues for efficient and sustainable solutions. By embracing both regulatory compliance and technological advancements, lenders can navigate the current landscape, empowering borrowers, ensuring financial resilience and building an inclusive financial landscape.