Consumers could be forgiven for thinking that the past two years have been a case of jumping out of the frying pan into the fire. After the Covid-19 pandemic wrought havoc on global economies, the recent surge in inflation to a 30-year high has triggered a cost-of-living crisis in the UK.
Soaring energy costs, rising grocery prices and tax hikes mean that living standards – the amount of disposable household income – are on course to drop by 2.2% this year, according to the Office for Budget Responsibility. It marks the biggest drop in living standards the UK has seen since records began in the 1950s.
The findings paint a bleak picture for consumers, many of whom suffered financial hardship during the pandemic as successive lockdowns led to furlough, pay cuts and redundancies. TSB’s Money Confidence Barometer found that 82% of people have experienced an increase in the day-to-day cost of living. As a result, almost a quarter have been forced to dip into savings, while a fifth have changed their usual spending habits and behaviours.
The landscape is equally challenging for businesses. The pandemic has left many SMEs financially fragile, with significantly more businesses in debt than before Covid-19. Now, as they battle the latest crisis, the British Chambers of Commerce said half of businesses are cutting costs, while one in five are scaling back investment and, concerningly, 5% are considering ceasing trading. This begs the question, are high street banks and lenders doing enough to help customers and businesses?
Andrew Hagger is the founder of consumer site Moneycomms. He says: “So far, there hasn’t been additional monetary support from banks and unless there is some pressure from the government to do so, this is unlikely to change.
“Slogans in bank advertising include phrases such as ‘by your side’ and ‘we’re on your side’ but at the moment these sound hollow. The banks will tell you they have introduced budgeting tools in their apps and help you to track spending but as far as tangible initiatives such as cutting the near-40% interest rates on agreed overdrafts, not a whimper so far.”
In early 2020, the Covid-19 crisis prompted an unprecedented response from UK banks as the pandemic took hold. Banks were instrumental in implementing a raft of government support packages, including business loans, mortgage payment holidays, interest-free overdrafts and repayment holidays on credit cards and loans. It marked what many called a new era for banks, following the financial crisis of 2008.
But as retail customers and businesses face financial hardship once again, could it be too much for banks to contend with?
Pradeep Raman, digital director at savings software provider Finova, says: “For the banks we work with, the pandemic has not had a lasting impact on their ability to lend or offer support. It is a bank’s regulatory duty to take care of its customers, so it would not make sense for lenders to take on an attitude of maximum recovery in our current environment of financial uncertainty.” But the Bank of England has warned that high levels of debt among UK businesses can lead to risks to the financial system and banks could suffer losses if businesses struggle to pay back their loans. And in a message to its business customers, Natwest advises businesses to “be prepared for every eventuality and aware of the risks of overextension when borrowing in an environment conducive to rising rates.”
Finn Houlihan is managing director of wealth management firm Arlo Group and thinks that banks may be limited in the help they can offer. “While banks have offered some level of flexibility through holidays on loans and extended mortgage repayments, there is a limit to the flexibility they have to recuperate the borrowed money to avoid defaults of their own,” he says. For many business leaders, it appears the onus is on them to assess the type and levels of debt the business can sustain and make decisions accordingly.
Experts believe that instead of additional monetary support, banks are likely to focus on educational support and resources. Since the 2008 financial crisis, when trust in the UK banking system plummeted, banks have worked hard to win over customers and restore their reputation and many have introduced online money management tools and features to help increase customers’ financial understanding. For Houlihan, financial education initiatives will be key in helping customers navigate this latest crisis.
“While banks can only be so flexible with the relief programmes they create, there has been a real shift in terms of client service during the pandemic as part of a government push for education and open discussions with clients.
“Financial education, when combined with technology solutions such as open banking, can offer more long-term solutions for people to navigate their finances. This can help put more information into the hands of the consumer to help them grasp their financial situation better,” Houlihan explains. As an example, TSB said its Spend & Save and Spend & Save Plus current accounts include features that are designed to help customers better manage their money, such as savings pots that allow customers to easily put aside money and an auto-balancer feature which automatically transfers money from the savings pot into their current account should their balance fall below a certain level.
Raman says banks are proactively contacting customers to offer advice on their current expenses and alert them to potential future difficulties. Mortgage lenders, similarly, are approaching homeowners nearing the end of their fixed term mortgage to advise them of the best products available for their circumstances.
There is certainly greater pressure on banks to help customers who might be struggling. The Financial Conduct Authority called for stronger protection of “vulnerable customers” after its research revealed nearly 27.7 million UK adults display characteristics of vulnerability, including low financial resilience.
Anna Roughley, head of insight at the Lending Standards Board, says: “How any forbearance packages or support are designed and delivered is a matter for individual banks and lenders. How banks respond will depend on the individual customer’s situation. This should be done in an empathetic manner, understanding the stress and anxiety that can accompany money worries.
“Banks and lenders should review how they encourage contact from customers and question whether there are ways to improve this that may increase the likelihood of proactive customer contact.”
But for all the talk of a personal touch and greater financial education, there is still the concern that it will not be enough. Raman says: “While payment holidays haven’t been discussed at length yet, it would be good to see these reintroduced where necessary to avoid instances of unplanned loan defaults.” Meanwhile, Hagger warns: “Banks will face higher levels of bad debt and missed loan and mortgage repayments when the cost-of-living crisis really takes hold. The government has so far given a £150 one-off payment from council tax and the promise of a £200 loan to pay electric bills come October.” But he thinks these measures are purely papering over the cracks and inadequate to help consumers cope with surging inflation. “I think the government will be forced to do much more. And perhaps the banks may be roped in to help as part of a range of measures to see the country ride out this storm,” he says.