Gearing up for the downturn - Financial Services

Gearing up for the downturn - Financial Services

As the economic crisis deepens more consumers will find themselves in financial difficulty. The regulatory expectation is that financial services firms will gear up to meet the needs of customers during this time.

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What does the economic downturn look like?

The rate of inflation is the highest it has been for forty years, and The Bank of England (BOE) is forecasting it could remain at the current rates until the middle of 2023. The result is rising prices and interest rates putting increasing pressure on households and businesses.

While the downturn already looks like it will run deep there is uncertainty about how prolonged it will be. The latest Financial Stability Policy Summary issued in October 2022 by the Financial Policy Committee projects a deteriorating outlook of considerable uncertainty. The latest Quarterly Monetary Report from The BOE in November 2022, suggests inflation may fall sharply from the middle of next year but the intervening period will be tough with high energy and food prices and higher interest rates.

What this means for consumers?

The pressure on UK households is already taking hold. Non-food sales decreased by 3.3% in the three months to June 2022 (BRC, July 2022). For prime consumers, cutting expenditure on other items may be sufficient to allow them to pay for essentials and honour their lending commitments, but for vulnerable households and those who are less resilient, their choices may be very different. Recent press reports suggest that 18 million families could find themselves in fuel poverty this winter (Guardian, August 2022).

The latest FCA Financial Lives Survey reports 24% of adults have low financial resilience, much greater than two years ago. Low financial resilience means that people are unable to withstand financial shock, due to having no savings or being heavily burdened by other costs. The FCA study also indicates 45% of adults are having difficulty keeping up with their domestic bills and credit commitments and 47% are in some way vulnerable.

Over the forthcoming period many consumers will need support in making repayments or in borrowing more.

What is the regulatory expectation?

The recent Dear CEO letter to 3,500 lenders and unregulated BNPL providers, reminded firms of their obligations towards borrowers in financial difficulty. Another Dear Chair letter to banks on collections practices for small businesses reinforces FCA expectations here. Firms need to ensure they lend affordably, show forbearance to consumers who fall behind, understand their individual financial circumstances, and develop sustainable repayment plans. The FCA has also updated its guidance on treating vulnerable consumers: taking extra care to ensure people with a vulnerability do not get a worse outcome.

The new Consumer Duty expects firms to avoid reasonably foreseeable harm for retail consumers and small businesses. While firms have until July 2023 to implement the new rules, The FCA have indicated that firms should be anticipating the impact of the-cost-of-living-crisis and advancing their plans to ensure consumers are not adversely affected. This includes being prepared for an increase in customer demand, for example increasing operational capacity to manage cases, so that consumers get the support they need. As well as the impact on consumers with lending products, firms also need to think about consumers switching, cancelling, or postponing payments. 

The portfolio letter for lifetime mortgage firms also has focus on operational readiness to manage increased demand and reminds firms to carefully look at advice in a rising interest rate environment.

What this means for firms?

Through the pandemic many firms improved their arrangements to best support an increased number of customers in difficulty. These frameworks will now be tested against the heightened requirements of the Consumer Duty. And while the effect of the pandemic was not easily foreseen, firms can reasonably anticipate the impact on consumers of a sharp economic downturn.

For all firms in the secured and unsecured lending and credit sectors there are some key considerations:

• Anticipate and plan demand: What products and services, and customers may come under pressure? What are the potential volumes?
• Scaling up: What provision is in place to augment existing resources, quickly and flexibly?
• Forbearance measures: What support or forbearance packages can be made available, and how will they be offered? How does this impact cashflow?
• Vulnerable customers: How will vulnerable customers be identified and treated? What additional tools and training may be needed to do this?
• Affordability: How will lending criteria be adjusted to account for an increased cost-of-living?

Our forthcoming series of articles - Gearing up for the downturn - will explore each of these areas in depth with practical guidance for firms.

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