WEATHERING THE STORM
CHALLENGES AND INNOVATIONS IN UK LENDING

ARYZA

The UK 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 across the nation.

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.

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 consumer’s heightened financial burden.

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.
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.

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 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. 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 collections to automated decision-making, ensuring a more seamless and responsive approach to supporting borrowers amidst ongoing economic challenges.

Lenders should look to harness 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. 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 landscape, empower borrowers, ensure financial resilience and build an inclusive financial landscape.