“It is time for a grown-up discussion about the role of consumer credit”

Since lenders have been focussing intensely on the impact of Covid-19 on their customers, we’re now seeing that the pandemic is affecting people in some very different ways. We need to think through how lenders play their part in our way out of this situation.

We have now been through one or two paydays since the start of lockdown and information is coming back from our members – providers of high-cost short-term credit – about loan performance.

First indications are similar to what we see in other sectors. It seems payment levels are high, in line with the planning done before the pandemic and on occasion, higher. Across consumer credit, individuals are paying down their debts.

None of this is to downplay what we may face as an economy. While individuals may have seen their discretionary income forced down, that drop in consumption has a knock-on impact. Those premium coffees and weekend spending all keep companies in business, which will pay those salaries once the government stops. And the furlough scheme may be holding up many companies that will not be able to survive

On the demand side, there has been a significant drop in demand for credit as fluctuations in income and expenditure reduce and uncertainty about the future increases. Early industry figures would suggest a 30 to 40 percent drop in applications.

At some point, this phase of the crisis will come to an end. We need to be thinking about how we transition lending into that next stage: How do we recover?

The machinery of recovery

We will need lending once the economy starts moving through the gears. The banks are good at what they do, but they are unable or unwilling to serve parts of the working population.

To continue the analogy, short-term credit is what oils the labour machinery. Hopefully, we have all learned that our economy depends on many who work flexibly – those on temporary contracts, flexible hours, and self-employment. They often rely on lending to bridge their finances from alternative lenders.

However, we entered 2020 with questions over the interpretation of affordability and pressure on these lenders.

In our sector, we had seen a 40 percent year-on-year reduction in short-term credit before the pandemic. Issues arose as the FCA decided to review affordability and the financial ombudsman’s position on complaints continued to evolve - forcing some firms out of the market.

When the banks were asked to accelerate lending and use lighter assessment processes, I understood their concerns about being held responsible in the future. At some point, they would be asked to defend their affordability decisions. Nobody would lend under that pressure.

Astonishingly, rather than dealing with the complex issues around affordability, at least one section of consumer credit was lifted out of the existing regulation to prevent this future scrutiny.

However, we cannot put off this discussion about the role of consumer credit. Lenders want to play their part in the recovery.

We start in a difficult place. Like many other pandemic issues, this may require us to take risks. We may need to weigh the various issues to come up with the best option, not the perfect one.

It is time for a grown-up discussion about the role of consumer credit in our society. It needs to be a discussion led by the Treasury and by our political leaders. Most importantly, it has to be realistic and based upon the evidence rather than on assumptions and preconceptions.

Then we can build a public policy that leads to regulations which not only ensure the protection of individuals, but also recognise the part played by lenders.