The cost of living crisis: How are lenders coping?
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Most people in the UK are tired of hearing about the cost of living crisis, but more than anything they are tired of living it. Yet with it expected to last until the later half of 2023 (at the earliest), there is still a long way to go yet.
Whilst the effect on consumers is predicted to be tough, there isn’t as much focus on how lenders are coping and advice directed at helping them handle the times ahead. We take a look at what the experts are saying and how lenders should be navigating the cost of living crisis.
What exactly does the ‘cost of living crisis’ mean?
According to the Institute for Government, the ‘cost of living crisis’ refers to the fall in real disposable incomes (i.e. adjusted for inflation and after tax and benefits). In the UK, we have technically been experiencing it since late 2021 and it was mostly caused by high inflation followed by tax increases. However, other factors such as the war in Ukraine, the aftermath of Covid-19 as well as weather and environmental concerns have been large contributors too.
Just how bad is it?
The Office for Budget Responsibility (OBR) has predicted that inflation will rise to a 40 year high of 8.7% by the end of 2022. Yet, July’s inflation rate was recorded at 10.1% – so perhaps the forecast was a little too modest. In comparison – the inflation rate in August last year was 2%. While wages will increase somewhat, it will not keep up with the pace of inflation that is predicted.
A report by The Bank of England says borrowing on credit cards is growing at an annual rate of 12.5% and across all consumer credit the growth rate is at 6.5%. So whilst the public is borrowing more than they have in years, there are warnings to those households with high levels of debt – as they will struggle to keep up with cost increases, rising interest rates and therefore difficulty with monthly repayments.
What is the advice to loan providers?
With the cost of borrowing increasing and being one of the largest concerns, loan providers (whether it be banks or credit union lenders) are feeling the pressure.
Lending firms are required to follow The Standards of Lending Practice, which is a set of guidelines outlining how consumers should be treated by lenders. In essence, it outlines that firms should ‘ensure that the risk of financial difficulties is minimised by taking steps throughout the product and service lifecycle, from design through to account management’.
Treating borrowers with fairness
Some seemingly obvious yet key advice from the Financial Conduct Authority (FCA) is that lenders, whether it be banks or credit unions, treat consumers fairly. A letter was sent to 3,500 major banks and lenders reminding them of their responsibilities in times of crisis.
Sheldon Mills, the FCA’s Executive Director for Consumers and Competition, said: ‘People across the country will be affected by the rising cost of living – and this includes small businesses. We were disappointed to find repeated instances of these customers not being treated fairly by banks when they’re struggling. We expect the whole sector to act quickly to improve this. We will take action if problems continue.’
But what does fair treatment look like?
The FCA’s expectations of firms include:
- To provide customers with appropriate care and support
- Give borrowers in financial difficulty tailored forbearance that is in their interest
- Support borrowers showing signs of financial difficulty or struggling with debt
- Ensure fees and charges levied against struggling borrowers are fair and do no more than cover a lender’s costs
- Make sure a lender’s approach to taking on new borrower’s accounts for the financial pressure they may be facing and the impact on their expenditure
Lenders should ensure their policies are fit for purpose
Customers should feel comfortable getting in touch with providers if they are having financial trouble and it should be clear how they would do so. Helpful information should be made readily available on the lenders website, or sent out in the mail. Staff should receive regular and in depth-training in order to best support their customers through hard times and make sure they are fully aware of their policies and kept up to date with developments.
Going the extra mile
Many high street lenders have announced they have introduced extra measures to help customers who are facing financial difficulties. HSBC has launched a new Rising Cost of Living support hub which explains the crisis and offers actionable tips for cutting down as well as additional support.
This month, Nationwide is launching a free telephone hotline for customers who have been affected and customers of theirs who they believe are struggling will be contacted directly.
While granted these are large high street banks, the key takeaway here is that lenders should be implementing ad hoc services into their existing processes.
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