Five years on from the financial crisis, Britain’s economy has returned to growth but this remains lethargic thanks to the sheer scale of the recession.
Households remain financially squeezed, rising redundancies and spiralling living costs are a daily occurrence, and both consumers and small businesses – the cornerstone of our economy – do not have enough access to vital credit.
The coalition government has made attempts to address this by keeping interest rates low and by establishing schemes such as Funding for Lending and Help to Buy - but by themselves these initiatives are only part of the solution and there remains an appetite for credit that must be addressed.
A ground-breaking report presented to MPs last week, ResPublica’s ‘Risk Waiver: closing the protection gap and easing the flow of credit’, introduces our new, credible and ethical financial lending safeguard, ‘debt waiver’.
The report highlights the fact that the UK economy is losing almost £40bn a year due to a reduction in the availability of loans to consumers and Small and Medium Enterprises.
According to ResPublica over the past five years there was a 58% decrease in UK credit supply to consumers and small businesses.
This has in turn affected consumer spending and business growth, resulting in a substantial decrease in the UK’s GDP. The paper projects the loss to the GDP from the contraction in lending between 2007 and 2012 to be worth approximately £193 billion – and concludes that we can’t let this happen again.
The report also concludes that consumers, the “hidden growth engine of the UK economy” have been somewhat overlooked – in 2011, consumer spend accounted for nearly 65% of UK GDP.
Current estimates released by the Bank of England show that household credit availability is still 55% less than it was in 2008 and even though the availability of credit has increased over the past year demand has outpaced supply.
Since the crash, increased deposit requirements and tighter mortgage conditions have drastically reduced the number of new home purchases and mortgages taken out by first-time buyers and the rate of new loan activity is still almost half what they were in 2007.
The concerning risk and big issue in the UK now is the growing protection gap – the number of people who currently have loans but are not protected or insured from loss of income bought on by sudden unemployment, injury or ill health.
At CUNA Mutual, we surveyed more than 1,000 people across the UK and discovered that 42% would find themselves in severe financial difficulty within one to three months if they lost their income.
Of those, on average 17% would be in trouble within the first four weeks of unemployment, and 83% of UK residents do not have an insurance policy in place to cover loss of income due to unemployment, accident or sickness, revealing the extent of how vulnerable we are.
Just one in 10 UK residents feels secure in their job and half do not have savings to fall back on should they become unemployed.
A telling 44% say they are cutting back on heating and more than half of the population – 59% - are cutting down on food to save money.
The launch of the Green Paper, held at Portcullis House, introduced debt waiver to an audience of experts and industry insiders and it was agreed that we in the lending industry have to find a way to provide credit to businesses and consumers in a manner that credibly protects both lender and provides a safety net for households.
Over the past three years CUNA Mutual has developed debt waiver for the UK market. Pioneered in the US and stemming back to the last great economic crisis in the 1930s, it has been widely adopted there by big lenders including the Navy Federal Credit Union, one of the nation’s biggest lenders, with currently in excess of $35bn, in loans.
In its recommendations, ResPublica calls for debt waiver to be fast tracked by the industry, by both lenders and insurers, in a credible, sustainable and ethical way. It recommends that we review best practice from the US to ensure effective adoption.
ResPublica believe that, similar to mortgages in Canada, it should be made compulsory for lenders to provide some form of credit protection and safeguards on certain loans.
If this is rolled out then we can begin to make a difference. A step change is needed to give lenders the encouragement they need to broaden lending and appropriate borrowers the belief to re-enter the market.
Debt Waiver looks like it’s the right type of program to help lenders do precisely that.
