The FCA has an expectation that the CEO and Senior Directors of consumer credit firms will have a watchful eye on the horizon to avoid unnecessary risks which could jeopardise their business and future trading, and in turn, jeopardise their consumers by producing a poor outcome for them.
Needless to say, all consumer credit businesses in the UK face a varied number of risks at the moment, in fact, I would go as far as saying it is probably an unprecedented number, many of which are sizeable and some potentially fatal.
The last three years have seen the overall total of consumer credit firms reduce by half, with many smaller companies being acquired or merged, as others exited the arena. There is movement in any market, for a variety of reasons, which is the natural order of events. However, consumer credit, as with the life assurance and investment market of 2005, has been hard hit by regulatory change and the cost of compliance.
The harshness of change has hit SMEs (Small to Medium Sized Enterprises) more severely, as their business models do not have the financial flexibility that large firms do. We are still awaiting news from the regulator on affordability, vulnerability, and the full details behind the Senior Managers Certification Regime which could increase cost or necessitate the reshaping of respective business models.
At the top of the risk, agenda is the economy. Since 24 June 2016, the UK has been marching time, awaiting the outcome of Brexit negotiations. The triggering of Brexit on 30 March 2017 was going to provide clarity where there was confusion, hope where there was fear, and comfort where there was
a worry. Instead, we have had dither and complacency followed by an inconclusive snap general election. During that time, Corbyn was a dead man walking, Theresa May was very much in charge and business hoped for a conclusive, measured and clear cut Brexit.
The public affairs update article in this magazine shows where we are on the day of writing. With the government having agreed to a £1bn cash deal with the Democratic Unionist Party, for their agreement to prop up chosen political issues. There are other side matters being discussed which will necessitate further costs, not disclosed at this stage. The agreement is only biding for a two year period which encapsulates the formal Brexit arrangements.
Mark Carney, governor, Bank of England (BoE), at his recent Mansion House speech enlightened and probably disappointed
his audience as he unequivocally stated that Brexit will make Britain poorer. He did provide a little light relief by indicating that interest rates should not rise until consumers and the wider economy can handle it. His comments rattled the markets, as the week before three of the eight monetary policy members voted for a rise, which the city took as a flag for impending rate increases. He said that the Bank could not prevent households feeling poorer, but it could influence how this ‘hit to incomes’ is distributed between job losses and price rises.
Mr Carney added that the markets have already delivered their pessimistic view of UK prospects. He stated that our currency is almost a fifth cheaper that its November 2015 peak, and members who have recently been abroad know only too well that the pound in your pocket is worth less. Many ex-pats since the EU referendum are attempting to return to the UK to protect their standard of living, if they are reliant on their UK pension.
He also stated that UK focused equity prices have fallen by 2%. He raised concerns about the success of service industries which could come under stress if the economy falters. He suggested that we will begin to find out the extent to which Brexit is a gentle stroll along
a smooth path to a land of cake and consumption, a reference to Boris Johnson a leading brexiteer’s statement of ‘having our cake and eating it’.
Mr Carney is due to depart there shores in 2019 to return to Canada. The BoE is leaning on banks to rein in their lending as they have a genuine concern about rising debt at a time when they see storm clouds on the horizon. The Banks will probably raise lending cut offs and thereby increase the pressure on the ‘just about managing’ consumer sector, as loans will be more difficult to obtain for those consumers on the margin. Property prices are starting to falter even in the buoyant outer London boroughs and Home Counties. The economy over the last few years has been underpinned by an easing of mortgage lending rules. With mortgages now available with final payments made at the age of 75, and 45 year mortgages are freely available. Over half of mortgages currently being written are over 25 years long.
The ‘bank of mum and dad’ has also played a major part in many mortgage deposits, and that is a phenomena that will be subsiding over the next few years. The ‘friends and family’ sector has also represented a substantial percentage of lending in the consumer credit market and that will also be under stress.
The ongoing political machinations and Brexit is having a drag factor on the economy but just under the surface there are other problems looming. It looks like real austerity is over, even though, if you then take into account the amount of quantitative easing that has taken place over the years, we are coming out of it
in a worse situation than when we went in. Inflation is increasing, and will further increase because of the Brexit effect
on our currency and because of the free movement of EU citizens. Certain industries are already raising concern about rising vacancies and having to recruit higher paid employees.
The pay freeze on the public sector has been offset to a degree by salary alignments, outside a raise to cover the cost of inflation. The Government
will now be under intense pressure from the public service unions to relax the rules for their members going forward. The pension triple lock and winter weather supplements changes have been lost in the general election wash up. Theresa May has been neutered and Phillip Hammond the chancellor has leapt in to seek a soft Brexit.
Mike Hawes, the CEO of the Society of Motor Manufacturers & Traders, told the audience at their annual summit in London, that: “Britain is unlikely to achieve a comprehensive agreement by March 2019, when the UK’s membership of the EU is set to end, and therefore needs to retain membership of the single market and customs union for as long as it takes to strike a deal”. He stated that the biggest fear of his members was that in two years’ time we fall of a cliff edge and have to rely on World Trade Organisation terms, which would undermine their competiveness and ability to attract investment that is critical to future growth.
I will regularly return to Brexit over the next few months, and we are in communication with our friends at Eurofinas, our equivalent European trade association, based in Brussels. We have collaborated with Eurofinas over many years on credit and data issues and through them we have connections in the EU Parliament. The UK Members of the European Parliament remain in situ until March 2019, the end of the Brexit negotiating period.
Whilst not attempting to depress members, I probably have.
The reality is that the market is tough, the economy is tough, regulation is tough, trading is tough, and the political scene at best is hard going. In the words of Vince Lombardi, coach of New York Giants and Green Bay Packers: “When the going gets tough – the tough get going“. CCTA, your trade association, is getting tough by further stepping up its public affairs and media activities, and reaching out to business stakeholder groups and cohorts to collaborate in educating and persuading government, consumer groups, and all other interested parties to work closely with our industry to elicit the best options and outcomes for consumers.
Greg Stevens, Chief Executive Officer at the CCTA