CHANGING TIDES?
COST OF LIVING AND BORROWERS IN FINANCIAL DIFFICULTY

CCTA

Undoubtedly, the Financial Conduct Authority (FCA) is taking the cost of living very seriously. To a certain extent, this is a continuation of a project that emerged from the COVID-19 pandemic. While there has been some good news around the fall in inflation and wage growth, a group of families will find themselves in a difficult position.

The cost of living has been the highest public agenda item at times and then fallen away as other issues emerged and inflation started to fall. As winter approaches and energy prices become a more significant factor, we will see pressure increase again, though hopefully, inflation will be less of a feature.

There may be a debate about the scale or direction of this issue, but it has been of crucial importance to the FCA. It is a key element within their work on Borrowers in Financial Difficulty.

From our discussions with the FCA and our review of their communications, we can see that they want lenders to be more proactive. They push for more customer contact and expect forbearance options tailored to individuals.

OUR STARTING DEFINITIONS

Returning to the basics, below are the definitions the FCA use for the cost of living and borrowers in financial difficulty.

• Cost of living: The amount of money a person or household needs to spend on necessities, such as food, housing, and transportation. Inflation has been part of this story.
• Borrowers in financial difficulty: People having trouble making their loan payments. The idea of borrowers in financial difficulty, as a group, has been around for as long as lending has taken place. It has never been in firms’ interest to lend to those without a chance of paying back.

DIFFERENT PHASES

However, it was around the pandemic that the FCA used this term more, and it has since then become a standard part of our vocabulary. This FCA focus has continued as we moved into a phase of increasing inflation.

There were three critical areas of increase: energy, food, and transport costs. Within those are pressures from the war in Ukraine and the global supply chain crisis. There is also debate over the impact of Brexit.

In 2022, we saw this reflected in an inflation rate that reached 11% by the year’s close. However, in discussions with our members, we know that financial position is not as simple as sometimes suggested in newspaper articles. The red flags that we would expect to see have not appeared.

(The FCA) want lenders to be more proactive. They push for more customer contact and expect forbearance options tailors to individuals.

That may be because we have also seen wages increase. Pay rises have run way ahead of inflation at specific points, which means some families have found themselves in a better position.

The issue of inflation may be falling away as we progress to a new phase. However, as we move into winter high energy prices are likely to come to the fore again putting some under strain.

WHAT DOES THE FCA WANT?

Of course, every lender must consider the FCA expectations and what that means for their processes. From our discussions with the FCA and our review of their guidance, we can see that they want lenders to be more proactive, step up communication and provide tailored support.

Tailored support is a principle that now seems to have been established, replacing a more fixed approach we saw at the beginning of the pandemic. This is not about removing some of those tools used at that time, such as repayment holidays. It is more about using the right tool out of the toolbox.

We have consistently heard from the FCA about the importance of communication. When they met with larger lenders, the FCA asked for firms to consider how they step up the level of communication. This takes us into the need for proactivity.

It is essential to have those forbearance options ready, but increasingly, the FCA wants you to be looking to spot problems early. That will alter depending on your customer base and the nature of your product. However, we believe that the FCA expects you to think about how you can set up systems that might identify problems before we get to an arrears stage. This pre-arrears activity is clearly of interest to the FCA.

There should be no surprise that the FCA wants you to be able to demonstrate that you have taken this as seriously as they do.

Our advice to all our members and other lenders is to consider all these issues at the highest level in the organisation. Consider what these economic conditions will mean for borrowers and how you adapt where required. Make sure that all your discussions and decisions are recorded. Look at how you will move on to monitor and review your position.