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Lenders Demand More Support from FCA Ahead of Consumer Duty Rules as Demand for Loans Increases

Research from the AI-powered transaction analytics firm, Fuse, has found that 32 per cent of lenders have seen an increase in borrowing defaults over the last 12 months. The firm’s research suggests this trend is likely going to increase as 42 per cent of 18-34 year olds will need to borrow money in the next six months to get by.

In its new report, Fuse finds that young people are struggling the most during the cost-of-living crisis, especially in terms of credit reliance. Over four in 10 (43 per cent) 18-34 year olds are reliant on credit to pay for everyday expenses and a similar number. However, lenders have rejected almost one in three loan attempts (31 per cent) in the past year due to failed affordability checks. Sixty-five per cent of lenders warn that this rejection rate has increased compared to the previous year.

The rising proportion of rejected applications has sparked concern that these potentially vulnerable borrowers may be forced to turn to higher-cost or illegal credit options. Recent research from Fair4All Finance revealed that over three million people have borrowed from illegal lenders in the last three years.

It is vital that mainstream lenders are able to accurately evaluate the financial situation of prospective borrowers. They must ensure customers have access to affordable credit options during the cost of living crisis – a time when they are likely to be most in need. Without this, many of the UK’s vulnerable borrowers could be at increased risk of longer-term debt.

Preparing for new Consumer Duty

Lenders are going to have to change their standards of support when the Financial Conduct Authority‘s (FCA) new Consumer Duty rules become effective on 31 July. In addition to clearer support standards, lenders must also provide consumers with protection to promote good outcomes.

Lenders must ensure that they equip themselves adequately to deliver the support that consumers desperately need. However, over half of lenders (55 per cent) admit to not being ready for the incoming rules. Two-thirds of lenders (67 per cent) claim there hasn’t been enough support from the FCA regarding the implementation of the new rules.

A key aspect of providing support to borrowers is to leverage more effective insights into borrower vulnerability and affordability. This allows lenders to identify those at financial risk, at a much earlier stage.

Products, such as Fuse’s Health Signals, have been designed to support lenders meet the upcoming Consumer Duty requirements. It provides risk and compliance teams with greater insights into areas of vulnerability. This is in addition to predicting arrears risk and monitoring the impact of financial products on their customers.

Providing personalised credit products
Sho Sugihara, CEO and co-founder of Fuse
Sho Sugihara, CEO and co-founder of Fuse

Sho Sugihara, CEO and co-founder of Fuse, comments: “It is hugely concerning that defaults are spiking – with the cost of living showing little signs of easing, the situation seems set to only worsen for many. Reliance on credit is on the rise and there are potentially millions across the UK who are at real risk of falling into long-term debt and being excluded from mainstream credit options.

“In order to more accurately analyse borrower affordability and vulnerability, lenders must ensure that they are fully utilising a wider range of insights which can not only protect borrowers from defaulting but also unlock access to personalised and more appropriate credit products.

“The new Consumer Duty rules will require many lenders to consider new approaches to support borrowers and take a more outcomes-based view throughout the affordability process. However, Consumer Duty is likely to just be the tip of the iceberg. The financial system is in immediate need of an overhaul to create a fairer, more inclusive model with vulnerable borrowers at its heart. In order for this to happen, lenders need to utilise insights into borrower vulnerability to help them identify points of need before it is too late.”

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

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