Moving from lip service to action
Treating vulnerable customers fairly

Published 09 February 2022

The media has recently been flooded with government and royal scandals and, while the fuel crisis has received some airtime, the potential impact on millions of households has not received the publicity it merits. The decision of to ‘Eat or Heat’ is a very real threat to many. The negative impact on household expenditure a risk to us all. It is more important than ever to be able to identify who our vulnerable customers are and give them the appropriate level of support. The Vulnerability Registration Service (VRS) recently published a report highlighting the need for businesses to, not just acknowledge that vulnerability is an issue, but start to take action to address it. The full report can be viewed on the VRS website. The figures are already alarming – a dramatic increase in the cost of living will only exacerbate the situation so now is the time to act. Delays blamed on resource, data protection challenges or not acknowledging that a customer base has an element of vulnerability should no longer be an option. Over a third of the population already deem themselves to be in vulnerable circumstances and, of those, 41% feel unfairly treated by organisations with 15% finding it difficult to communicate. Some of these issues can start to be addressed through tailored and efficient customer service but it is essential to be able to establish who those customers are in order to do so. Data sharing is an essential component in vulnerability identification. Society has made big strides in recognising the impact mental health can have on all aspects of people’s lives. 25% of the people VRS surveyed had experienced mental health issues in the last twelve months, identifying individuals who are affected and treating them appropriately is a major element in the quest to support vulnerable customers. Some of the findings in the report are surprising – typically, younger people (potentially those without a weighty credit history) identify as vulnerable. Those who would be classed as living in comfortable circumstances also form a large minority – possibly as a result of unexpected issues arising from the pandemic who, again, will be affected by rising household bills. VRS obtains data from non-traditional sources providing an extra layer of insight for its customers. This allows companies to overlay the information it obtains through credit reports, affordability models and fraud prevention services and determine which customers may need to be referred out of the customer journey. VRS holds Court of Protection data obtained from local authorities and solicitors whereby the individual often should not be obtaining credit and is not responsible for their own financial affairs; referrals from charities supporting a range of individuals suffering from gambling addiction to financial abuse including the victims of loan sharks. In addition, individuals can self-register or service providers who are clients of VRS can share information about their customers where there is a legal basis to do so. The VRS database is accessible directly to VRS clients or through solutions providers …

Teetering on the edge
Fair For You partners with Iceland

Published 09 February 2022

As a responsible lender focused on providing ethical credit to those unable to access mainstream credit, Fair for You hears a lot of our customers say that they are teetering on the brink of financial crisis all year round. They live in dread of unexpected bills and out of the ordinary expenses. For many, a free school meal is a crucial part of their children’s diet, often the only hot meal they get. And when the school term ends, so does that, leaving those parents needing to find a way to bridge the financial gap during the holidays and feed their families. Even during term time, the wait until income arrives at the end of the month can present a major headache – and an empty stomach. It’s very sad that this should be the case in the UK today. But I’m proud that Fair for You, the ethical lender I lead, has been able to alleviate that burden, smoothing out incomes and ensuring families can put food on plates all year round, thanks to our new and growing partnership with the retailer Iceland. In 2020, Fair for You debuted the Iceland Food Club, making thousands of micro-loans of £25 to £75 to help customers feed their families during the holidays. A £75 loan paid back over eight weeks will accrue interest of £2.89. For a £25 loan, it is just 40p. It’s intended to bridge gaps in customers’ expenses at times of peak need rather than as a year-round solution. Those loans, which are loaded onto a dedicated Food Club card, were initially available to families in two locations in Yorkshire and North Wales. Following an initial trial, the Iceland Food Club has been rolled out across the North West of England and South Wales. It’s heartening to hear the impact it has had – one unemployed single mother in Yorkshire has told us she’d barely eat for the last week of the month without Food Club. Another in Wales, who works as a teaching assistant, said it had been a “godsend” at Christmas, commenting: “I do have an alright monthly income, but it’s not much after the rent and the car comes out. The Food Club has been really good, you’ve got that option of filling up for the holidays, it’s good peace of mind knowing that it’s there.” They are far from alone – Food Club social impact reporting shows that 83% of customers no longer need to use food banks; 80% report improved mental health; and 75% say their kids’ diets had improved. Crucially, 85% say that they are less worried about meeting their monthly expenses. We are delighted that Iceland has committed to sharing further results with other retailers, allowing them to think about whether they could replicate the scheme. Depending on the success of the pilot and the availability of investors, our ambition is to use our unique position within the market – lending exclusively to customers seen as risky or unsustainable by mainstream …

Nurturing loyalty
Are you building loyalty in your new recruits?

Published 09 February 2022

Covid has turned our view of the world on its head. Our sense of belonging and connection has changed significantly, our habits and routines have altered, and our appreciation of things has shifted. Businesses discovered that it’s a face-to-face transaction that generates real loyalty, customers connect with people and the impressions they make, their helpfulness, service and attitude. In contrast, the web-based world is as loyal as the service is good. Without the face of a person and someone to connect with, once something goes badly, loyalty is switched off and it’s just too easy to go somewhere else. It’s now just the same for employees. More and more employers are finding it challenging as individuals continue to look for flexibility and security, whilst also placing increasing importance on the work-life balance. If you’ve taken the plunge and moved to a “working from home” policy permanently then engaging your employees from the outset and gaining that connection will be critical. Today, new recruits can move onto the next job within days of starting with you, being remote from the outset makes the connection with new recruits incredibly important. Just like customers, it’s easy to go elsewhere. Wages have also been pushed higher and recruits are no longer willing to accept travel costs to their place of work. On the contrary, they are looking to increase their wages to pay for their home working costs such as electricity and heating. The home working or hybrid package is yet to settle down, recruiters are competing with some impressive packages right now. In the pre-Covid office environment, there was generally a team approach that was nurturing for new recruits, easing new members into the team with a buddy or support system. Now with hybrid or home working, the way new recruits find their feet within the team has changed considerably and has become challenging on both sides. To add to the complexity, for the first time in history, there are up to five generations in the workforce at one time: the Traditionalists, the Baby Boomers, Generation X, Millennials, and Generation Z, are all making up the modern workforce and vary in ideals and expectations. Creating the right hybrid model for workforces will be a key challenge for business leaders in 2022. This new way of working requires additional investment, balancing the right amount of online manager time for everyone, helping new recruits get the right support from training, team leaders and colleagues and additional mental health awareness support and engaging online activities. Getting a laptop in the post and a quick call with IT and HR isn’t going to create any loyalty in those critical first few days for your newest recruits. At TieTa we have been managing these challenges continuously over the last twenty months. Most of our clients, who are choosing to outsource their customer contact strategies or simply bolster their internal teams with additional support from our experienced agents are happy to adopt a hybrid approach. Some in highly regulated …

What lies ahead
A view of potentially worrying trends

Published 09 February 2022

Members will no doubt be aware of the continued focus by the FCA on the assessment of consumer vulnerability as part of their ongoing Consumer Duty consultation. They have made it clear that more is expected from lenders with a recent survey highlighting 27.7 million adults in the UK with characteristics of vulnerability such as poor health, low financial resilience or recent negative life events. Having listened to and participated in many discussions over the last twelve months, there seems to be a general consensus that of course this should be taken seriously, but the regulator must assess each lenders approach proportionately and relative to their offering and customer base. There is no one-size-fits-all approach, but data and process should lead the way. Although some may feel this is a topic that has been talked to death, it is not without good reason given the current landscape. In the wake of the pandemic, lenders, regulators and the government came together to provide unprecedented measures to support consumers through what was an extraordinary situation which very few had planned for. However, moving into the “new normal” it is clear that as that support may be reduced there are some significant challenges. At Data On Demand we have seen some potentially worrying trends from our own ID.VU data which aggregates consumer loan application data to highlight changes in circumstances. We are also able to map this back to the FCA’s characteristics. The below excerpt highlights some of the statistics and application volumes we saw in October following the raft of changes to government backed support including furlough ending, cuts to universal credit and the end of payment holidays: • 729,000 individuals making high-cost credit applications • 92,000 making high-cost credit applications who had not before • 10,000 making high-cost credit applications to pay household bills • 6,000 applications from individuals stated as newly unemployed • 2,000 applications to consolidate debts These stats highlight customers who are clearly in very difficult circumstances and in need of support. The return to “business as usual” has been something we have all been striving for, but the reality is that we may be much closer to the start than the finish when it comes to identifying and supporting consumer vulnerability. IS THERE TECHNOLOGY THAT CAN HELP? Absolutely. Many organisations may already have the platforms and process in place to identify customers in potentially vulnerable circumstances and facilitate the required bespoke customer journeys. However, there are now several businesses and offerings that can help create new, or adapt existing processes and platforms to achieve this, such as Aveni, Callminer, Cerebrion and IE Hub. CAN DATA REALLY IDENTIRY VULNERABLE CUSTOMERS? I’m slightly biased and there is no silver bullet, but yes. We can clearly see from our own data instances of consumers who have recently suffered a significant life event such as loss of employment, income reduction, or a bereavement. We can also identify people who are making applications for high-cost short-term credit to cover bills. Data like …

Forewarned is forearmed
The impact of Consumer Duty and why firms should act now

Published 09 February 2022

In May 2021, the Financial Conduct Authority (FCA) published its Consumer Duty Consultation paper, setting out its expectations of firms to provide higher standards of care for their consumers. We commented on this and how long firms had to prepare for changes (CCTA publication July 2021) and we now further explore what firms should be doing, and what we are already seeing in the sector in anticipation of the final policy statement expected later this year. WHAT IS THE CONSUMER DUTY? The Consumer Duty consists of three key elements: 1. The consumer principle will set out a clear tone for firms, and the language used will reflect the overall standards of behaviour the FCA will come to expect moving forwards 2. The ‘cross-cutting rules’ provide guidance on how businesses should be conducting themselves in practice 3. The ‘four outcomes’ is a suite of rules and guidance that set more detailed expectations for firms in relation to key elements in the firm-customer relationship: Communications, Products and Services, Customer Service, Price and Value. PRACTICAL IMPLICATIONS AND WHAT FIRMS SHOULD DO NOW The impact the new rules will have for firms will naturally differ, however, there are actions all firms can take now to ensure they are well prepared for the imminent changes: Project management – firms should consider establishing specific projects to understand the scope and impact of the expected rules on their business model, taking early action where possible. Any implementation projects should reflect statements of responsibilities and should be sufficiently resourced, reflecting its fundamental importance to the firm and its business plan. Customer journey – firms will need to consider the entire product lifecycle and the way that they engage with their clients at each point to ensure customers achieve their agreed outcomes. This will include focusing on initial interactions within the sales journey, such as the accuracy and fairness of financial promotions and other marketing material for products. Here, firms will also need to interrogate customer behaviour more rigorously to understand where behavioural biases may lead to poor outcomes, and how information provision and communication strategies should be re-engineered to help customers achieve their financial objectives. Product governance – firms will wish to carefully consider the ways in which the expectations around value delivery and benefits can be accommodated within existing product governance processes, and where changes are needed. Within this context, it is clear that firms will need to regularly monitor customer behaviour and product performance to satisfy themselves that they are achieving the outcomes required by the new duty. WHAT WE ARE CURRENTLY SEEING We are seeing firms complete scoping and impact assessment exercises and the mobilisation of Consumer Duty project teams. We strongly recommend that firms take a similarly proactive approach, as results from initial deep dives have revealed the need for a greater focus on outcomes testing and general weaknesses in firms’ overall control frameworks. Whilst not under the Consumer Duty banner, we can see that the FCA have already engaged with firms regarding the customer journey, …

What next?
A closer look at Buy-Now Pay-Later

Published 09 February 2022

The payments and financial services sector has changed radically, with shifting consumer and business preferences accelerated by the Covid-19 pandemic. As we move into 2022, I expect to see further innovation and growth, in line with the huge digital shift and prioritisation of personalised consumer experiences that we have seen in 2021. While there is still uncertainty, the payments sector must leverage collective transformation efforts to align with the changing needs of the future customer. Over 2.5 million UK consumers and businesses now use open banking-enabled products, a number expected to grow in 2022. Open banking enables third-party financial service providers to access consumer data from external financial institutions, allowing consumers to seamlessly manage their finances and have more choice over banking services. In response, there has been a boom in new fintech platforms championing innovation and economic growth. SMEs can benefit from this development, connecting directly to financial institutions via APIs, making it easier to accept payments and focus on business growth. As the demand for accessible financial services continues to rise, I predict that over 30 million UK consumers and four million businesses will use open banking by the end of 2022. This year we have seen B2C Buy-Now Pay-Later (BNPL) platforms, such as Klarna and Zilch, grow in popularity. Now providers are looking to expand into the B2B market, solving the issue of a lack of funds for buyers and the sellers by creating a credit line for B2B buyers. When it comes to B2B BNPL, companies that make purchases do so with the intention of positively impacting revenue and growth, reducing the risk of defaulted payments. B2B BNPL allows businesses to make purchases on margin, while the BNPL provider pays the seller in full, taking on the customers’ default risk. I foresee a possible evolution of B2B BNPL models to take advantage of the huge benefits of creating efficiencies within the accounts payable and receivable cycle. B2B BNPL will alleviate the time taken for purchase order and invoice processing, creating efficacy within payments. The future of B2B BNPL innovation will rely on data. Through adopting machine learning, BNPL providers can assess the chances of recovering any overpayments, allowing them to predict problematic businesses. These benefits of data analysis are not just limited to BNPL. According to IDC’s Digitisation of the World study, by 2025, every person in the world will produce a data interaction every eighteen seconds on average. By analysing customers’ data, businesses can identify the consumption habits of existing customers, enabling the personalisation of experiences. Embedded AI tools will be key in achieving this, as their capabilities allow businesses to analyse an incredible amount of customer data quickly. So far, fintechs have been using these technologies for automation and fraud detection but increasingly will help businesses access and understand their data, creating added value. It is difficult to predict how far innovation within the payments sector will go in the next five years. The role of payments is now more than a simple exchange …

Burning questions
An introduction to the Financial Ombudsman Service

Published 14 October 2021

Who are you? We were set up by Parliament in 2001 under the Financial Services and Markets Act (FSMA) as a free and informal alternative to the courts to resolve complaints between financial businesses and their customers. As well as FSMA, we follow the FCA’s Dispute Resolution (DISP) rules. How are you funded? We are funded by a combination of a levy and case fees. Importantly, financial businesses don’t currently pay a case fee for their first 25 complaints of each financial year. This means that most financial businesses never pay a case fee. We publicly consult on our plans and budget each December and we would welcome your views. I’ve received a complaint. What do I do? DISP describes a complaint as any expression of dissatisfaction. This may seem basic, but it’s important. Once a consumer or their representative presents you with a complaint, you have eight weeks from that point before they can refer it to our service. The rules don’t allow for the eight weeks to be extended, so it’s important that you engage with the complaint from the outset. Final Response Letters (FRLs) are important. Not only is it a chance to resolve the complaint, it’s also the first we’ll see of your argument. If you don’t think the complaint is one we can look at (for example, if you think it is time barred) it is important you are clear about it in your FRL. If you’re not sure how to answer a complaint or how we’ll look at it, you don’t need to wait for it to be referred to our service before you speak to us. As well as online resources that set out our approach in detail, including published decisions, our technical desk is available to answer questions about how we deal with complaints. You can contact our technical desk either by phone on 0207 964 1400 or email at technical.desk@financial-ombudsman.org.uk. How do you approach complaints? The majority of complaints we see in consumer credit (alternative lenders in particular) are about irresponsible lending. Our approach to these complaints is well established and is rooted in longstanding regulatory principles. The four key pillars of our approach to affordability are to ask whether: • proportionate affordability checks were completed before lending • those checks were borrower-focused. It’s not sufficient for lenders to consider only whether they are likely to get their money back • checks have adequately assessed the sustainability of the lending, thinking about the customer’s wider financial situation. Repeat lending is a particular indicator that lending has become or is becoming unsustainable. • firms have appropriately monitored how customers are repaying debt and whether they stepped in where there are signs of financial difficulty. These pillars are based on longstanding regulatory principles going back at least ten years and examples of good industry practice which go back further still. We set out on our website which specific rules within the OFT’s Irresponsible Lending Guidance and the FCA’s CONC handbook set out these …

What lies ahead?
Looking to the future of consumer lending

Published 14 October 2021

Autumn is a time for discussion, and this year the impact of Covid-19 is on the agenda. One of the traditions of Autumn in the trade association world is that it is time to hold business events. We had our own Autumn Summit, while others are running workshops, conferences and roundtables. Many have returned to physical events, others remain virtual. Having spent the best part of two years living in extraordinary circumstances, there is an understandable wish to comprehend the impact of the Covid-19 pandemic and predict what it might mean for future lending. In some areas the impact is more obvious, with a tale of growth. No one can deny that the growth of online shopping is one of the reasons why we have seen an explosion in unregulated Buy-Now Pay-Later (BNPL). The seeds were sown before the pandemic, but they have been very effective in making themselves part of the customer journey. So much so, that the Financial Conduct Authority was unable to ignore the expansion of this credit-like product just outside its perimeter. In a review of consumer credit (the Woolard Review) with so many problems and issues to consider, it was the regulation of this sector that dominated. Now the question for BNPL is what that regulation will look like and the impact it might have on the sector. What is clear is that this model will be around for the future. Over in car finance, there are so many questions about whether behavioural change will impact on the lending market. Has the pandemic changed driver habits? Will it alter levels of demand or see demand for certain vehicle types? I was recently invited to give our views about the future at the Car Finance Conference run by Credit Strategy. I was happy to talk about what our members have told us about motor finance. The drop in demand was matched with a drop in supply as many dealerships pulled back from the market. Pent-up demand has led to some spikes in sales, especially around used cars. The impact of supply chain problems on the availability of new cars is also a big issue. But my message was that looking forward is complex. The daily commute is such a big part of car use, and yet the newspaper headlines would tell you very different stories about its future. The death of the office; the return to the office; the drop in inner-city prices as people flee city; the bounce back of city prices as people want to return. That is before we think of all the other dynamics in play. There are so many elephants in the room, including the challenge to make the switch to electric and other greener energies. There is clearly political pressure, backed by a vocal public lobby. The risk is that we take our recent experiences, some of them short-term, and attempt to extrapolate without having enough data points. Elsewhere there are a mix of issues and similar questions about future …

Murky waters
When is a complaint not a complaint?

Published 14 October 2021

When is a complaint, not a complaint? It’s a difficult area, with a number of different nuances, as shown in the recent case of Davis v Lloyds Bank PLC. This case is the first that the Court of Appeal had to consider on whether or not a dispute resolution (DISP) complaint has been made. DECIDING WHETHER A CLAIMANT HAS MADE A COMPLAINT WITHIN THE MEANING OF THE FCA’S RULES It is a requirement that firms must follow detailed rules laid down by the Financial Conduct Authority (FCA) as to how and when they must deal with complaints by their customers. The FCA’s DISP rules prescribe how financial institutions must deal with complaints made by their customers. The FCA defines a complaint to be any oral or written expression of dissatisfaction, whether justified or not, from, or on behalf of, any person about the provision of, or failure to provide a financial service which: • alleges that the complainant has suffered (or may suffer) financial loss, material distress or inconvenience; and • relates to an activity of that financial institution, which comes under the jurisdiction of the Financial Ombudsman Service (FOS). In particular, the regulator’s rules require the financial institution to investigate the complaint, and assess fairly, consistently and promptly whether the complaint should be upheld and what remedial action or redress may be appropriate. It then needs to explain its decision to the customer and undertake that remedial action or pay the redress. In this case the Court of Appeal, for the first time, had to consider and decide whether the claimant had in fact made a complaint within the meaning of the FCA’s rules. The Court of Appeal, agreeing with the court of first instance, decided that the claimant had not. WHAT WAS THE DAVIS VS LLOYDS BANK CASE ABOUT? The case arose from the widespread mis-selling of interest rate hedging products (IRHPs) by a number of banks in 2000 and onwards. The banks involved agreed with the FCA to review their sales of IRHPs to unsophisticated customers and, if they considered that those IRHPs had been mis-sold, to pay redress. Mr Davis claimed that he was entitled to bring an action for breach of statutory duty against Lloyds in relation to the second IRHP, not for the original alleged mis-selling (presumably on the basis that such a claim was time-barred), but for the bank’s conduct of the review process. It appears that Mr Davis was advised that case law had already established that the bank’s conduct of the review process was not actionable in either contract or negligence, nor was it subject to the jurisdiction of FOS. Mr Davis sought to argue that his correspondence with Lloyds in relation to the review process amounted to a “complaint” within the meaning of the FCA’s DISP rules and that Lloyds’ failure to consider that complaint in accordance with the IRHP review terms agreed with the FCA, amounted to a breach of statutory duty. That formed the need for the court …

The full measure
Evidencing good customer outcomes

Published 14 October 2021

In its latest drive to support customers in vulnerable circumstances, the Financial Conduct Authority (FCA) wants firms to be able to evidence that vulnerable consumers experience outcomes as good as those for other consumers. The FCA launched their six Treating Customers Fairly (TCF) outcomes back in 2006 and with the new Consumer Duty outcomes on the horizon, the goal for the FCA has never changed. Yet so many businesses fall into the trap of not fully measuring the positive outcomes we all strive to achieve. In the quest to attain and measure good customer outcomes in the consumer lending space, has sufficient time really been spent understanding what ‘good’ looks like for our businesses? Does the Management Information (MI) you are using to measure outcomes give an accurate indicator of whether you are achieving good customer outcomes or have you made the mistake of only measuring business outcomes, performance, or policy/process adherence? These metrics are important but are they enough to ensure vulnerable customers experience outcomes as good as other consumers? Firms need to take a step back and really challenge themselves and agree on a clear view of what any existing or potential customer should be able to expect and what a good outcome would look like for a particular customer journey. This can be for existing journeys and should form a core part of your development process for any new customer initiatives. Different business areas will have different desired outcomes. A good customer outcome at the acquisition stage will be different from a good customer outcome in collections and this is because different actions are being undertaken with different desired outcomes. Think of your desired outcomes as a set of mission statements for each business area. For example, what is your desired outcome for forbearance plans? How about a new applicant of a loan? Is it appropriate to their circumstances? Ask yourself if it is understood and affordable. Think about the FCA’s outcomes, which are relatable to the action you are undertaking. This may seem quite basic but it will keep you true to what you are trying to measure or test. It will also stop you from solely measuring your policy and process adherence and really focusing on whether you are delivering good customer outcomes. Once you have agreed on your desired outcomes, you can then start looking at what is needed to provide oversight. MI is not just about numbers. Data will need to be quantitative and qualitative and some outcome MI will already exist. You will find that there isn’t a need to reinvent the wheel here. The relevant information may already be available in different guises. Your MI will give you oversight and focus on areas that may require further analysis or deeper reviews such as outcome testing. Outcome testing aims to assess all interactions with the customer, communications, documentation, and records. Outcome testing can range from full end to end journey testing to a ‘point in time’ testing approach and will identify potential …

Watching with interest
No interest loans: Workable in reality?

Published 14 October 2021

For years there has been a policy debate about how best to support individuals that cannot afford to borrow from commercial businesses. There will always be a group of people that are considered too risky for commercial businesses to lend to, and the welfare system is designed to support this group. But there remains a discussion about how best to help them access credit to deal with essential or emergency costs. This came into greater focus when many government support schemes were cut following the financial crash in 2008. Since then, subsequent governments have tried to work out how best to support these groups, often taking inspiration from other countries. Most have tried to expand the credit union network and increase membership, but despite millions in government funding, little has been achieved. Members are often required to save before they can borrow. The system also moves slowly compared to the decision making of the commercial sector, not helpful if a car repair is needed quickly to get to work for instance. The current government has decided to focus its attention on a No interest Loan scheme (NILS). A NILS has long been supported by the Treasury, first announced in 2018 by Philip Hammond, the then Chancellor. The aim of the NILS would be to provide a financial cushion for people unable to access or afford existing forms of credit, but who can afford to repay small sums, by offering a way to spread essential or emergency costs. Following mentions of the scheme as various meetings with the Economic Secretary, John Glen MP, in September Fair4All Finance (founded in 2019 to support the financial wellbeing of people in vulnerable circumstances) announced that they had been appointed to deliver a pilot of the scheme. The pilot is designed to test whether this scheme can be scaled to make resources go further to improve financial wellbeing for customers in vulnerable circumstances. It will receive funding from HM Treasury and up to £1m of lending capital from each devolved administration, matched in England by Fair4All Finance. The scheme will kick off with proof-of-concept loans this Autumn, followed by a wider two-year pilot in up to six areas of higher deprivation starting in Autumn 2022. They will work with credit unions, Community Development Finance Institutions (CDFIs) and other regulated lenders, who will be able to apply to administer the loans through a formal procurement process starting in November. The NILS pilot aims to test the benefits to customers, society and the economy and show whether a permanent nationwide NILS can be delivered in a sustainable way. Though the scheme has noble aims, we need to be aware of the limitations and the associated costs. You can lend with no interest, but all lending comes with a price and with a risk. The launch of scheme is something that commercial lenders will be following. The proposed use of existing lenders is noteworthy and will undoubtedly help tackle the administration costs. However, you must consider the funding …

A slow fuse
Informal borrowing – a time bomb in the making?

Published 14 October 2021

Can the harm of financial exclusion ever outweigh the benefits of increased consumer protection? The short answer is: yes. There is no question that regulated lending standards have been raised under the FCA for the benefit of consumers. The non-standard lending sector has been a particular focus in recent years and there has been significant regulatory and structural change in most, if not all of the sector’s product categories. Operators have adapted their business models to cater both for enhanced regulatory requirements and for changes to the way in which existing rules and guidance are now interpreted by both the regulator as well as by the Financial Ombudsman Service. Such changes however have inevitable consequences for the flow of credit, its cost at the point of issue and the returns that can be earned from its issuance. The payday lending, rent-to-own and guarantor loans segments have all but disappeared while home credit has declined significantly. The market leader in each of these sub-sectors has either stopped lending or is in the process of doing so. While detractors might say “quite right” or “good riddance”, we believe that such rhetoric is masking a more worrying trend, one that should be of concern to government, consumer groups and society at large. Unfortunately, it is going unnoticed or worse, is being ignored. Whilst the regulator has confirmed that it has seen no clear evidence that there has been any meaningful increase in illegal lending as a result of its strides to enhance consumer protection, it has acknowledged that there has been a material increase in the level of borrowing from ‘friends and family’. Some may view such informal borrowing as being preferable to paying high interest rates to a regulated lender. However, this kind of borrowing has none of the protections available from a regulated lender and may also in fact represent illegal lending, albeit in a different guise. By increasing the obligations of lenders operating within the regulatory perimeter, it necessarily becomes more difficult for consumers within that perimeter to access the credit that they need. Minimising the risk of harm within the regulatory perimeter is of course a valuable and important objective. However, as the marginal benefits of increased regulation diminish, so the unintended, but inevitable consequences of greater exclusion also need to be taken into account when determining the right balance between protection and financial inclusion. The FCA has already identified that for vulnerable customers in particular, difficulty in accessing services “can lead to disengagement, exclusion, mistrust or even risk of scams as customers may instead rely on informal access methods.” The focus on consumer protection in recent years has also created regulatory uncertainty and complexity and a number of major providers, including Enova, Elevate and Provident Financial have already withdrawn from certain segments of the market . As we emerge from the pandemic, consumers will need access to credit as they seek to manage the peaks and troughs in their income and expenditure. Due to difficulties experienced during the …