The number of consumers in the UK living without financial protection is growing and the Government now needs to review what it can do to stop it so that we can safeguard our borrowers.
There is a growing loan protection gap in the UK and it is something we need to address urgently.
A significant number of vulnerable consumers continue to experience the damaging effects of excessive debt on their work, health and family life, with little or no safety net to fall back on.
Given that the squeeze on real incomes continues at a time of increasing consumer expenditure, the problem is likely to intensify – particularly for those on the bottom half of the income scale.
A 2013 study carried out by the University of Birmingham on financial inclusion showed that the real value of wages in 2012 had fallen back to 2003 levels.
In this year’s ‘Green Budget’, the Institute for Fiscal Studies confirmed that living standards have declined over the past five years, and the Office for Budget Responsibility, the Government’s own independent forecaster, confirmed in its recent budget report that living standards will not recover to 2008 levels until 2018.
The PPI mis-selling scandal has led to a collapse in trust and confidence in protection products – it is the biggest financial services scandal ever and it has affected every major bank.
TOXIC
PPI is seen as toxic and such policies have been withdrawn from the market by all but the very small, bespoke, specialist providers.
Due to this, and the lack of competition in the market, payment protection insurance has increased in cost and expensive income protection policies are an unwelcome additional cost for borrowers.
In 2013, CUNA Mutual carried out a UK-wide survey into financial insecurity in more than 2,000 households.
Its findings were stark: two out of three were concerned about losing their job; six out of 10 were anxious about their financial affairs; 20% would find themselves in financial difficulties within a month of losing their job and 44% claimed they were cutting back on heating, with 59% on food, just to make ends meet.
Other surveys confirm that the number of borrowers safeguarding new loans or income has collapsed to less than 1%.
Taking all those changes into account, the Treasury should conduct an immediate review of the state of consumer protection and choose a plan of action to close the protection gap.
AHEAD OF THE GAME
The Government must show leadership on this and be open to new ways of protecting borrowers.
With traditional income protection policy tarnished, what new models of loan protection can fill the gap?
Guidance was provided some time ago by the Financial Services Authority on a suite of transparent, fair and affordable lending policies, but it had little impact on the market.
However, this is not just about protection, it is about trust – and ensuring consumers feel supported by a transparent and ethical financial system.
In a recent survey, 70% of all respondents said they do not trust the banking and financial services sector. Loan protection can act as a form of stimulus to get lending going again.
WAIVERING
This brings me to the debt waiver system, which is relatively new to the UK but already running with a number of credit unions.
It has a long and successful track record since the 1930s in North America and was introduced at the height of the Great Depression to help try to restore confidence among the public in lending.
In 2013, the think-tank ResPublica recommended that the regulator fast-track the debt waiver and other similar products but nothing much seems to have happened.
The debt waiver system means the lender taking out the insurance and it becomes a feature of the loan – at no additional cost – providing coverage for accident and sickness.
In my view, that is a very good deal for the consumer.
If, as research from CUNA Mutual shows, 95% of mortgages are currently sold to customers without any insurance, there are far too many customers exposed to risk.
Challenges
The challenge is for the Government, the financial services industry and indeed all stakeholders to recognise the dramatic impact that the mis-selling of PPI has had on the market for protection policies; to quantify the loan protection gap and, most importantly, to challenge the industry – all those lenders out there – to take the necessary action to tackle the gap.
The three Credit Unions running with debt waiver already, and successfully, are Plane Saver Credit Union, Clockwise Credit Union and Scottish Police Credit Union, and CUNA Mutual are the first to offer it.
Debt waiver is something which is different; something everyone can have confidence in and it is truly tried and tested.
We cannot just sit back and let all protection initiatives be tarred with the same brush due to the shadow of the PPI scandal, because there are initiatives out there which will genuinely help the most vulnerable members of society.
The relationship between the Treasury and regulators is extremely important, and further action can, and must, be taken to get the industry to live up to its responsibilities and give customers not just a responsibly delivered loan, but protection for that loan should things go wrong.
