CCTA ARTICLE: Greg Stevens CEO – Addressing the issues
Commentary | 24/11/20
For only a small handful of people has 2020 been a good year, Geoff Bezos and Joe Wicks spring to mind. For most other businesses and individuals, it has been lousy. The retail banks have had mixed blessings. On the one hand, they have taken a hit like everyone else, with a deteriorating economy, less personal and business lending and collections restricted by the Government’s emergency payment deferrals. On the other, they have been able, to an extent, to reverse the narrative that attached to their wholesale arms during the last global crisis (the financial one) in 2008-9, when they were bailed out with public funds for problems they had caused.
A TOUGH ENVIRONMENT
For consumer credit businesses, the commercial and regulatory environment is as tough as it has ever been. Covid has knocked most businesses for six. In response, the Financial Conduct Authority (FCA) and Financial Ombudsman Service (FOS) are doubling down in their scrutiny of lending and relending decisions, even at risk of shrinking the regulated market. Pre-Covid, it was getting harder for credit businesses to ‘price for risk’. The pandemic and its aftermath will make it even less conscionable to policy makers. A spirit of ‘safetyism’ is pervasive in government, which is bearing down on the ‘risk-reward’ trade-off at the heart of credit deals.
This largely accounts for the difficulties businesses are having at FOS. The Ombudsman has the power to dole out retrospective justice on credit deals struck three, four, five years ago, sometimes longer. Given the mood and inclinations inside both government and regulator, this feels like a different era. ‘Good consumer outcomes’ are now sacred, anything short of it is punished regardless of factors beyond a lender’s control. Criticisms of FOS are falling on deaf ears. Government, Regulator and Ombudsman are lock-step in their approach to affordability.
CAUSE FOR OPTIMISM
So what of 2021? Are there glimpses of sunlit uplands that can give lenders cause for optimism?
I suppose the first and fundamental point is there will always be demand for credit, and more so in 2021 than any other year. In the aftermath of Covid, with furlough wound in and unemployment soaring, people will need the smoothing and balancing mechanisms that creditors provide. The sub-prime, non-standard marketplace will grow. But so, inevitably, will personal risk levels. Finances will be tighter, credit records impaired. The million dollar question, therefore, is how can anyone lend into this marketplace and satisfy the regulator’s ‘affordability’ expectations at the same time?
The reality is many of the industry’s ‘de-risking’ models have been deemed inadequate. The use of a friend or family-member as guarantor has come under sustained attack. Even home-collected credit, which officials traditionally regarded as a benign model, is being challenged for the frequency of relending patterns in use for over a century. The reality is there is a market there for any businesses that can sufficiently de-risk, but if they can’t, they will struggle. Some challenge.
BUSINESS AS USUAL?
For government and regulator, 2021 will be largely business as usual. The Treasury will continue to support credit unions and encourage social ‘alternatives’ to commercial lending models. It might even launch a ’no interest loan schemes’ of its own, although the economics of that are highly problematic. The debt charities will continue to attack high cost models and publicise the harms they cause. They will have willing and able co-conspirators in Parliament who will amplify calls for bans and caps and put pressure on Treasury ministers and the regulator.
The Government and particularly Treasury will have major Covid and Brexit related bandwidth challenges, but continuity will be provided in the shape of Economic Secretary, John Glen MP, who knows the issues and treads a delicate line between the marketplace and campaigners. Glen is a One-Nation Conservative who is not reluctant to intervene when markets fail.
For its part, the FCA has a new CEO in Nikhil Rathi and we are only just getting a feel for his instincts and priorities. Like Andrew Bailey, his background points to an expertise in wholesale and capital rather than consumer markets. However, in front of the Treasury Committee he has also displayed a competent grasp of credit-related matters. The little he has said suggests continuity of approach rather than radical departure.
In spite of what the new CEO might ultimately think, the whole post-Covid atmosphere points towards a tightening of controls on lenders, rather than a loosening. John Glen himself has recently spoken favourably of the approach taken by Chris Woolard and colleagues in FCA Policy and Supervision, what Glen described as ‘steadily and progressively brining challenge to behaviours in the market that are not helpful.’ So more of the same can be expected.
Woolard will exit the FCA in early 2021 having completed a review of the unsecured consumer credit regulation. This will largely focus on new forms of credit on the regulatory perimeter (i.e. the likes of Klarna and Salary Finance) but will also consider wider issues. The Review Team is certainly open to representations, and it is undoubtedly an opportunity for businesses to make push arguments beyond the usual confines of their supervisory relationships. The upshot is almost certainly going to be a recommendation to bring Klarna within the ambit of FCA regulation. It remains to be seen if Woolard can be persuaded that there are also access problems in the high-cost market that need rectifying.
There have been rumours that FOS too could soon have a new chief executive. Any change at FOS would be welcome to the credit industry. But the prospect of a more fruitful dialogue about its treatment of credit firms would have to remain a distant one, whoever is in charge. Let’s face it, it is unlikely to be someone sympathetic to credit businesses. Recent comments from John Glen are again instructive: he talks about the need to differentiate between ‘one-off, localised’ complaints about FOS and problems of a more ‘systemic’ nature. The clear suspicion is he sees the former, not the latter.
A VIABLE BUSINESS LIFE
Nonetheless, this is by no means a counsel of despair, there is a lot that can be achieved to make business life more viable for lenders. The current Parliament is less than a year old with over a hundred new MPs and dozens of ‘red wall’ Tories in constituencies where sub-prime credit usage will be the norm (and popular). Covid aside, a Conservative Government with a majority of 80 provides promising conditions for winning arguments on ‘access’ and diversity of provision. Back in December, a Corbyn/Sturgeon coalition was not so unrealistic a prospect.
The All Party Parliamentary Group (APPG) on Alternative Lending published an important report in July that addresses all of the key issues relating to access and complaints. It provides a roadmap for CCTA parliamentary engagement into 2021. And this is where the argument needs to be won, the regulator and Treasury ministers call the shots, but Parliament is sovereign. If it deems that regulations and protections have gone too far, it can call on the authorities to row back. There are also good opportunities in the media market for a credible industry voice who can speak up for businesses and the customers they serve.
So, in summary, it is an uphill struggle but there’s a lot to fight for. CCTA is by far the best equipped organisation to fight for a healthy, viable and diverse commercial marketplace. It represents the full gamut of credit businesses and suppliers. Its members are closer to consumers than the regulator is. The industry needs to turn this to its advantage.
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