On 6 October 2020, Registry Trust hosted the first in a new series of high level roundtable events using our unique position as a trusted intermediary between the financial services, credit referencing, justice, money/debt advice, financial inclusion, regulatory, Government, academic, and policy-making sectors.
The topic was ‘Building a bridge to credit and financial inclusion post Covid-19’ and we brought together key senior players from organisations including the Financial Conduct Authority (FCA), Fair by Design, Equifax, Experian, Financial Inclusion Commission, Lending Standards Board, Finance and Leasing Association, UK Finance, Cabinet Office, Money and Pensions Service, University of Lancaster, the Consumer Council of Northern Ireland, and others, to discuss the issue from both a macro and micro economic, and household perspective.
During the roundtable we discussed three core issues relating to the economic and financial impacts of Covid-19. How can we work together to:
*Protect financially vulnerable households and small businesses from the economic impacts of Covid-19;
*Help them rebuild their finances as we emerge from Covid-19; and
*Minimise the risk of future credit and financial exclusion as a result of the pandemic?
We set the discussion in the wider context of other domestic and global economic, political, and social issues we currently face from Brexit to international trade wars, to give us the full picture of what the long-term impact could be if we don’t come up with a sustainable strategy now.
It was acknowledged that the Government, FCA, lenders and creditors should be commended for their initial response to the crisis in providing forbearance, as well as the debt advice sector, charities, and consumer groups for their support for those in immediate difficulty.
But, it is what happens next and in the longer term that we should be really concerned about. The picture I painted through my opening presentation was a bleak one when it comes to the starkly different impact for those on lower and higher incomes. If these stats don’t depress and panic you, they should!
*1 in 4 of the poorest workers were furloughed vs 6% of highest earners (Resolution Foundation).
*14m experienced loss of income during lockdown (StepChange); the poorest fifth saw median earnings fall by 15% (£160 a month) (IFS).
*More than 1 in 4 adults said Covid is affecting household finances (14m), with more than 50% expecting their financial position to get a little or a lot worse over the next 12 months, and 14% (7m adults) a lot worse (ONS).
*The reversal in welfare boost will see the poorest households lose 7% of income with major regional differences – 36% of Northern Ireland households will lose >£1,000 vs 21% in South East England (Resolution Foundation).
*The savings ratio is now an astonishing 29% compared to average 8% over the past 30 years (ONS/ FIC). But, this aggregate figure conceals the disparity of experiences between different households.
*During lockdown, a third of low-income households were saving less and a third of high-income households were saving more. Households with the least savings are most likely to have been saving less than usual and those on low-to-middle incomes are most likely to have increased their use of consumer debt in this crisis (Standard Life Foundation).
*1 in 5 borrowed to buy food/ essentials in July 2020 (Standard Life Foundation) and a total of 61% of low-income families with children have borrowed due to Covid (Joseph Rowntree Foundation).
*12% of people (6m people) say they are behind on their rent, a household bill, or a credit payment as a result of coronavirus and a further 13% expect to fall behind on a bill. Between 2016 and 2018, only 1% of households said they were in arrears on a household bill. There are 1.3m more council tax arrears compared to pre-Covid (Citizens Advice).
The ‘two-track society’ split between low income and higher income households – specifically those in unskilled and skilled jobs – has long since been a major problem in the UK, especially since the 2008 financial crisis. But this new crisis is creating a ‘perfect storm’ for exacerbating these inequalities even further. We already know that BAME, disabled, elderly, and younger households are the hardest hit by both the health and economic implications of this crisis and with some forecasts expecting unemployment to reach 10%, things are going to get a lot worse for workers in ‘shut-down sectors’ who tend to have much less accessible wealth and lower levels of financial resilience.
And it’s not just in the UK, we heard from roundtable attendees with an international perspective that the picture is very similar in the EU where a stark increase in inequalities over the last decade is at the route cause of many problems. While the relevant bodies have been very active in addressing the immediate issues with short term measures, there is a serious lack of attention on the more structural and macro-economic picture on a European-wide level.
Access to credit post-Covid
What came out of the discussion was that the challenges we are currently facing are different to 2008 and there is a new demographic of people being pushed into debt by Covid which will need tailored responses. But we can learn from 2008 about what got us out of the last recession, what measures worked, and what needs to be done differently this time around.
It was agreed that access to affordable credit for both consumers and small businesses (who were key to the 2008 recovery) has to be at the centre of this recovery strategy. We discussed what new measures are needed to ensure that those most impacted - and most vulnerable - to the economic shocks of Covid-19 are properly protected and empowered to become financially resilient/secure and economically active. This must include stopping things like late payments and lack of availability of credit pushing small businesses under, which in turn has a negative impact on local communities.
There is a delicate balancing act to be negotiated. We need to protect financially vulnerable households, but we also need to be mindful that any policy response does not cause lenders to become too risk averse. Can we find alternative solutions to manage existing debt arrears and interest owed (and those accrued once the initial protection measures are removed) that are fair to both consumers and creditors?
Access to affordable credit can only be achieved through collaboration across all the sectors that touch this issue, especially when it comes to credit referencing, so that we can build up as accurate a picture as possible of people's financial and personal circumstances and, therefore, how they can best be supported. There is a risk that blunt application of current standards unreasonably constrains lenders at a time when those in difficulty need flexibility to recover their finances. With so much uncertainty, one of the important jobs of the credit referencing industry is to remove some of the guess work from lending. But once the information has been gathered, simply ‘signposting’ those that need it to advice rarely works; it needs to be a properly joined-up and properly funded approach.
Regulation for the long term
We heard from the FCA about how the strategy has moved from a temporary ‘bridge’ with ‘holidays’ (now re-named as ‘deferrals’) providing a quick and simple solution to the immediate shock that firms could operationalise, to longer term thinking about how regulation can be adapted to build a resilient and robust financial services system that is still designed to protect and support the most vulnerable.
There was optimism from some about the potential for technology like Open Banking to promote more effective use and sharing of data, which has been accelerated by ‘lockdown’, but opinions are still divided on the benefits and risks associated with this.
It was highlighted that consumers will need access to objective debt and money advice from the financial services industry and the debt advice sector to manage ongoing issues, prevent future problems, and help them rebuild their finances. While the focus has understandably been on the immediate impact of Covid-19 on debt and arrears, we must not forget the impact on longer term priorities such as helping households build up savings, get access to insurance, and providing for retirement. All these are important elements of financial resilience and security. We need to be alert to the risks of households facing a poverty-stricken retirement as a result of payment deferrals or dipping into pensions/savings pots to get through this turbulent period.
Building back an inclusive economy
A key message from delegates was that we now need to move from ‘fire-fighting’ to ‘architecture’ so that we can re-build the economy and jobs market back differently. This was something that was missed in the last financial crisis where the focus was on ‘getting back to normal’. In such turbulent times ‘normal’ isn’t good enough, we need to be much more resilient and develop an inclusive economy and jobs market.
While we had a great debate, it raised as many new questions as it answered. We must confront these difficult issues and, critically, identify tangible solutions. This is best done by continuing conversations and collaboration between those with shared goals.
We are very grateful to all those who participated and contributed to such a productive event. This was the first in a series of events in which we will develop the themes identified by stakeholders. Watch this space.
Stakeholders who are interested in working with Registry Trust on addressing some of the key issues raised in this blog can email us on firstname.lastname@example.org.