A decade on from the global financial crisis, and much of the devastation witnessed in the great recession has been forgotten. Some of those working in today’s financial sector were not even in employment when a cluster of the world’s biggest banking brands collapsed.
Recent innovations in technology, favourable changes to regulation and a flurry of new market entrants have created a “feel good” vibe in the modern-day banking sector. But this sugar high has come about against a backdrop of low interest rates, ease of access to new products and government enthusiasm for challengers to the traditional lenders.
While these things are undoubtedly positive for the consumer, there is a more difficult conversation to be had within the industry.
The past decade has seen a radical shift in the lending market landscape, with challenger banks and lenders from non-traditional backgrounds now occupying a sizeable chunk of the mortgage market. In the cold reality of the weeks immediately after the credit crisis, lenders had initially adopted the strictest of underwriting criteria, but these standards have since been relaxed. Growth in competition between lenders has also pushed participants to ease these criteria still further.
Favourable market conditions have enabled new lenders to flourish, while consumers have been aided by the Bank of England’s decision to stimulate the economy through low interest rates.
According to official Bank of England data, interest rates have been below 2% since December 2008. However, just 18 months earlier, rates were as high as 5.75%. This environment of higher interest rates is now an alien concept to many consumers, and some new lenders have never experienced operating in such an environment.
At the same time, there has been sustained pressure on salaries, with the UK witnessing incredibly low salary inflation in recent years. According to a report by British charity Full Fact, the average real wage as at October 2017 was lower than it was at the same point 10 years earlier, with those in London and the South East witnessing the steepest falls in earnings.
The years ahead will provide at litmus test to the challengers in the market. When the current economic cycle comes to an end and consumers find themselves increasingly squeezed, lenders will require a very different skillset.
Priorities will cease to be technological innovation and app development and will instead shift to ensuring that borrowers are repaying their loans. This will require a different experience to manage defaults, scrutinise underwriting and develop products that enable troubled borrowers to move into alternative solutions.
The numbers of challengers and lenders that have entered the UK market over the past decade have attracted staff with extensive skills in areas that have allowed these businesses to scale up at speed. However, market conditions haven’t required staff recruitment in the vital areas required during a downturn.
Should an uptick in defaults materialise, it need not be disastrous for the challengers, but there needs to be recognition among the executive that different skills will be required. While entering into a mass recruitment programme for the skills required to handle rising defaults may be unrealistic, outsourcing does offer a credible solution.
Link Asset Services has considerable experience of handling loan books with challenged borrower profiles. The company even manages a number of legacy lender structured finance products that pre-date the financial crisis.
Such arrears cases have underscored the importance of active management. When these loans were originally written, it is unlikely that the lenders would have expected the debt to be around all these years later. Today’s affordability scoring techniques often prevent the debt being refinanced and, if these borrowers approach some of the newcomers to the market, it is likely they would not fit the criteria.
The past ten years has not only resulted in a change in the participants in the lender marketplace, it has also been transformative in lender behaviours. The financial crisis led the government, consumers and regulators to have much higher expectations of everybody in the industry.
A focus on conduct risk and borrower outcomes has replaced the historic religious following of stringent rulesets and inflexible methodologies. These days it is about doing the right things, the right way for the right reasons.
For businesses, this can be time consuming and there are limitations to the things that can be done to accelerate the application and re-evaluation process. But like it or not, today’s lenders have an obligation to support the borrower. Should economic conditions shift, it’s good to know that new lenders have more than one way to bolster their necessary expertise and see them through to when favourable conditions return once more.
Mark Davies - Managing Director, Link Mortgage Services
+44 (0)1473 283802