The looming cost of living challenge for UK banks


Inflation is set to leave average real pay 9 per cent lower than two years previously by next spring, the Resolution Foundation said this week, wiping out all pay growth since 2003.

Without government support, the think-tank sees another 3mn people being pushed into absolute poverty, defined as annual household income for a couple after housing costs of £15,781, taking the total to 14mn. 

The response from high street banks — at least earlier this year — was an uncomfortable one: this, largely, is not something affecting our customers.

To some extent, it was just a statement of fact. The UK’s high street banks are, in effect, utilities that have chosen not to deal with the poorest in society — the first and the hardest hit by soaring energy bills.

Such was the lack of immediate worry that NatWest, at its half-year results, made a £46mn cut to its impairment provisions, although it also noted the “significant uncertainty in the economic outlook”. Citizens Advice is reporting surging traffic to its cost of living web pages, with a spike in July. But while it is helping rising numbers of people struggling with energy bills, the demand for help on credit, debit or store cards has remained flat.

It is unlikely to stay that way. More than half of UK households are expected to be in fuel poverty by next year, defined as more than a 10th of income going on energy bills. Chancellor Nadhim Zahawi has said that people on £45,000 a year, which puts them within the top fifth of the pay distribution, will find this winter “really hard”, requiring government support.

Higher bills, and higher interest rates, will hit measures of mortgage affordability. The burden of rising energy costs on businesses, as well as the policy response required to tame inflation, could yet dent the strength of the jobs market.

The typical response for banks in a slump is to pull up the drawbridge: rising risk aversion and tighter lending criteria tend to mean more demand for alternative sources of credit. The trouble is that the market for non-standard or high cost credit has shrunk dramatically after the regulator cracked down on harmful practices, reducing the pool of options.

Meanwhile, the benchmark for judging how banks handle this downturn has changed since the financial crisis. “Customer expectations are rightly very different,” said one banker. Barclays was recently accused of cutting financial flexibility just as it was most needed, by axing unused overdraft facilities. The bank said it reviewed limits each year to ensure they were not more than customers could afford.

The regulator is on the prowl. The Financial Conduct Authority has written to bosses emphasising banks’ responsibilities and making a link to the forthcoming consumer duty, which aims to set higher standards for consumer protection. In June, it complained that some banks were not communicating well with customers, did not fully understand individuals’ circumstances or consider a range of tailored options to help them.

A looming question is whether this cost of living crisis should be tackled in a similar manner to the pandemic, where early intervention, flexibility and forbearance were deployed in spades.

The sector is wary, given how long energy prices could stay high. Fair4All Finance, a non-profit organisation focused on financial inclusion, is looking at how the pandemic response could work as a blueprint for a more creative approach in supporting customers, at a negligible cost to the banks. It is also pursuing pilot schemes for products like no interest loans or consolidation loans for customers in vulnerable financial circumstances.

One concern is that the pandemic created greater numbers of newly precarious consumers, with about 14mn estimated to have less than £100 in savings. Another is that the use of buy now, pay later could mask early signs of financial difficulties, a factor that is being watched closely by some lenders.

To date, the range of responses from banks appears to vary widely: from proactive engagement with customers, charities and regulators to a sense that it is not really their problem. It will be — and could prove hard to ignore.

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