The UK economy is losing almost £40 billion a year[1] due to a reduction in the availability of loans to consumers and small and medium enterprises (SMEs).
However, a new loan safeguard which could build confidence in both lenders to lend and borrowers to borrow could potentially unlock billions in consumer spend, announced Think Tank ResPublica this week. The leading think tank also urged Government to influence state owned banks to act ‘for the greater good’ and lead the sector by adopting this safeguard.
Set for discussion at a House of Commons event this week, the new ResPublica report ‘Risk Waiver: closing the protection gap and easing the flow of credit’ identifies a new credible and ethical financial safeguard, ‘debt waiver’.
Respublica state that ‘debt waiver’ has the ability to overcome this current crisis of confidence following the PPI mis-selling scandal and in doing so, address the lack of available credit and the decline in the UK’s economic performance. This new ethical and transparent safeguard product is set to be launched by CUNA Mutual, the global credit protection specialist, this year.
According to ResPublica, over the last five years, there was a 58 per cent 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 c. £193 billion.[2]
ResPublica’s report also concludes that consumers are the hidden growth engine of the UK economy and they have been overlooked in the current financial crisis. Consumer spend accounts for 65 per cent of the UK GDP, and the cost of ignoring this consumer impact has led to a massive and needless reduction in the UK GDP according to the leading think tank.
In the wake of the PPI mis-selling scandal, consumer confidence in lenders, and lenders’ confidence in their borrowers’ ability to make repayments is at an all-time low. The Green Paper confirms that in order to kick-start the economy, lenders need to gain a renewed confidence in order for them to feel secure in lending, and this is best achieved by introducing a tried and tested successful protection product already available in the US and Canada – ‘debt waiver’.
What is ‘debt waiver’?
- Essentially the lender offers a ‘debt waiver’ facility to their customers which would be written/integrated into the loan agreement, guaranteeing that should certain events arise they would waive that loan instalment on behalf of the customer.
- The lender would purchase a business-to -business insurance policy to transfer this risk off their balance sheet, i.e. this is an agreement between two businesses.
- The result is a fair, ethical and transparent way of protecting those who borrow – primarily by shifting the onus onto the lender to indemnify their loan rather than the customer insuring their ability to repay in the event that they become unemployed due to sickness or redundancy.
Following the blanket ban on some PPI products caused by widespread industry mis-selling, 83 per cent of UK citizens are now without any protection against redundancy as a result of unemployment or sickness according to research undertaken by ethical insurers CUNA Mutual. This lack of protection has had a knock-on effect on lending according to ResPublica, as lenders become more averse to lending in the unstable job climate.
Phillip Blond, the paper’s author said: “This lack of protection has made lenders wary of lending to those who desperately need credit. Protection will both increase the demand and unlock the supply of credit that our economy so urgently needs- the two bailed-out banks should be influenced by Government to adopt ‘debt waiver’ – where they lead others will follow.
“Household credit availability is 55 per cent less than in 2008. Although the availability of credit has increased to 65 per cent of its 2008 level this year – demand for loans far exceeds this. Similarly- SMEs, the workhorses of the economy, are being denied opportunities for growth. Lending to the small business market has dropped by 25 per cent since 2008, and UK loan rejection rates are twice those of France and Germany.”
According to the ResPublica research, protection products are one of the best ways to ensure this confidence is provided, and products that have a long-standing success rate in countries such as the US and Canada, like the ‘debt waiver’, should be implemented as soon as possible.
Insurer CUNA Mutual, has been offering waiver products in the US for more than 75 years, and in July will announce its first waiver partnership with a UK financial institution.
Paul Walsh, CEO of CUNA Mutual concluded: “Although not everybody offering PPI was mis-selling it, everybody is paying the price of the widespread deception that went on – consumers, lenders, businesses and ultimately the UK economy. The time has arrived for lenders to proactively respond to their consumer’s needs and help them overcome their fears and address this inertia in the lending market. Many lenders want to offer a real solution to the ‘protection gap’ that would benefit and protect both them and their customers. We know, from experience, that the CM Waiver will provide that solution.”
The Green Paper’s forward was co-authored by Ian Liddell-Grainger MP and Heather Wheeler MP, and will be discussed at an event at the House of Commons on Wednesday 12 June 2013.
Heather Wheeler MP, who will be co-hosting the event with Ian Liddell-Grainger MP said:”Despite Government attempts to get financial institutions lending again, since the recession, almost all lenders have downsized their appetite for risk. But, across the UK, consumers and businesses are in dire need of credit, and without it innovation and opportunity for growth is stifled. Not enough has been done by lenders reacting to Government actions to find a solution to lessen credit risk and kick-start the UK economy – I believe introducing a debt-waiver product will do this.”
Ian Grainger-Liddell MP said: “We can’t force banks to lend, but in some areas small businesses are finding it near on impossible to borrow. LEPs are still unable to lend or create a meaningful, sustainable lending platform. I truly believe that this product is the future of lending and protection in the UK.”
The paper Risk Waiver: closing the protection gap and easing the flow of credit, identifies seven key recommendations for the Government to consider in order to stimulate lending- the most pressing of these was the re-introduction of protection products to the finance industry to plug the growing protection gap left following the PPI mis-selling scandal.
LENDING PROTECTION RECOMMENDATIONS:
- Close the protection gap: A review on the state of customer protection in credit markets be undertaken, develop an action plan to close ‘the protection gap’ and place a system of monitoring in place to ensure that consumers are never left vulnerable again.
- Encourage state-owned banks to innovate: Government should encourage both ‘bailed out’ banks- RBS and the Lloyds Banking Group- to lead their sector and act for the greater good by adopting new protection product innovations that safeguard credit, protect lenders and stimulate lending.
- Introduce compulsory loan protection: The Government should consider replicating reforms in the car insurance industry, making it compulsory for lenders to provide some form of insurance (this is already in place in Canada).
- A ‘kite-mark’ for safe insurers: The ABI or a similar trade insurance body develop a Code of Conduct for the selling and marketing of future protection products, and a kite-marking system developed in order for consumers to be able to identify trustworthy providers.
- ‘Debt waiver’ for small and medium-sized businesses: Government should convene a working group with LEPs and banks to develop a new way of assessing risk in small and medium-sized businesses should be developed. This would be the first step in opening up business credit to new products like ‘debt waiver’.
- Fast-track ‘debt waiver’: That debt waiver products similar to those long in use in the US be adopted by the financial industry. The FCA should further build on its guidance and endorsement of waiver, and complete a full scale review of the best examples of waivers at work in the US.
- Facilitate greater financial innovation: Regulatory testing of financial products which have a track record of success in developed countries should be fast-tracked by the FCA in order for consumers to be protected as soon as possible.