Chris Laverty looks at what this means for lenders, as well as highlighting other issues that the sector face, all of which have the ability to impact on firms’ liquidity and performance.
The FCA has announced guidance which allows consumer credit customers to apply for further forbearance, with the deadline for requests for payment deferrals extended until 31 March 2021. Full guidance, which comes into force on 25 November, can be found on the FCA website.
This follows an FCA statement in October that explicitly urges consumers to speak to their lenders about options available to them, including suspending or cancelling interest, making reduced payments or agreeing a repayment plan.
Forbearance is no longer a short term issue and can potentially put significant financial and operational pressures on lenders. Firms should revisit their forecasts to understand the impact it may have on their liquidity position in the short- to medium-term. Lenders will now be in a much better position than they were back in March to understand what the impact of COVID-19 and related restrictions will be on the behavioural patterns of underlying borrowers.
Accurately modelling forecast repayment behaviour, with as high a level of granularity as possible, and overlaying that on short- to medium-term cash flow forecasts should be a priority for all consumer credit lenders.
It is also a key time, with elongated periods of forbearance and festive holidays on the horizon, to ensure lenders maintain an active dialogue with customers.
There is a risk that, as customers fall out of the habit of making regular payments as a result of forbearance, they will fall into long-term delinquency, particularly at a time of year where there are other demands for consumer spending. Lenders need to consider their ability to maintain customer engagement with already stretched resourcing.
Recently released data shows that complaints to the Financial Ombudsman Service (FOS) about consumer credit products have soared in the three months to September.
For example, the number of complaints about guarantor loans rose by 298%, while complaints about home credit rose by 144%. Importantly, eight out of 10 complaints about home credit were brought to the FOS by claims management companies (CMC).
On a business-as-usual basis, consumer credit firms may underestimate the impact that CMCs can have on liquidity, as well as the resources required to deal with escalating numbers of claims. CMCs can generate a high volume of claims against a lender in a very short period of time. In several recent restructurings of HCST lenders, the claims generated by CMCs were a significant factor in the firm’s demise.
The consequences of claims against a consumer credit firm are much wider than any redress payments that need to be made to the customer. Management should be aware of the expense involved in the onboarding of thousands of claims, as well as the training and resource required to look back at records over several years to adjudicate those claims.
The cost is significant, taking valuable time, resource, and technology investment to implement. This takes away from the critical use of liquidity and management resource in a less-than-ideal market for consumer credit firms.
The Financial Ombudsman Service (FOS) requires that each claim should be looked at on its own merits, which makes it difficult to automate the process entirely. The claimant also always retains the right to be referred to the FOS, which brings an automatic £650 case fee, regardless of the outcome.
Consumer credit lenders should include all these strands of cost in their forecasts to provide more-realistic financial foresight and a better understanding of the resource requirements that CMCs can put on the business.
Financial and operational resilience remains a challenge for consumer credit firms. Many businesses have been on a growth path in recent years via bolt-on acquisitions, leading to poor integration of IT systems and significant branding, marketing and other third-party costs. This contributes to a high fixed-cost base and a lack of resilience, which can make it challenging for firms to withstand market pressures.
When lenders are unable to continue to generate cash due to, for example, forbearance or redress demands, this can potentially restrict lending due to the need to preserve cash, ultimately leading to concerns around delivery of forecasts, covenant pressures and repayment to debt providers. This can quickly become a significant problem.
A recent speech by the Bank of England summed it up succinctly:
"As firms adapt to a new normal, that is the time to ensure that important business services are resilient by design , rather than designed first with resilience as an afterthought." Nick Strange, Supervisory Risk Specialist
A recent study by the credit reference agency, Aire, has shed some light on the number of quality customers consumer credit firms are turning away due to a lack of data.
According to the study, up to 80% of consumer credit applications that were rejected by lenders in 2019 were actually made by responsible borrowers and could have been accepted without increasing lenders’ appetite for risk or burdening consumers with more debt than they could afford.
The study’s analysis showed that applicants with limited or no UK credit history were also rejected. This included 541,000 applications from retirees who had paid off their mortgages more than six years before, 386,000 from recent migrants to the UK, and 283,000 from young professionals.
That people are denied credit due to lack of information, rather than historical credit risk or affordability problems, highlights the importance of good-quality data. Coronavirus has only emphasised the multiple data gaps that many people have experienced for years, with the traditional credit data collected often not agile enough to fairly represent the lives of consumers today.
Having models in place to collect detailed, accurate and timely information on consumers will not only aid lenders when assessing their portfolios, but could also help prevent them from missing out on valuable business.
For more advice, contact Chris Laverty, Financial Services Restructuring.