The country is preparing for a winter where most of us are getting poorer, many are considerably poorer. Inflation is expected to leave the average real wage 9% lower than two years ago by next spring, the Resolution Foundation said this week, wiping out all wage growth since 2003.
Without government support, the think tank sees a further 3million people pushed into absolute poverty, defined as the annual household income for a couple after housing costs of £15,781, bringing the total to £14million.
The reaction of the big banks – at least at the beginning of this year – has been uncomfortable: this, for the most part, does not affect our customers.
To some extent, that was just an observation. The UK’s big banks are, in effect, utilities that have chosen not to deal with the poorest in society – the first and hardest hit by soaring energy bills.
Such was the lack of immediate concern that NatWest, in its half-year results, reduced its impairment provisions by £46m, although it also noted “significant uncertainty in the economic outlook”. Citizens Advice reports an increase in traffic to its Cost of Living web pages, peaking in July. But while he’s helping a growing number of people struggling with energy bills, demand for help with credit, debit or store cards has remained steady.
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 tenth of income spent on energy bills. Chancellor Nadhim Zahawi said people earning £45,000 a year, which puts them in fifth of the earnings distribution, will find this winter “really difficult”, requiring government support.
Higher bills and higher interest rates will affect measures of mortgage affordability. The burden of rising energy costs on businesses, as well as the policy response needed to control inflation, could further undermine the strength of the labor market.
The typical response of banks in times of recession is to lift the drawbridge: growing risk aversion and stricter lending criteria tend to translate into increased demand for alternative sources of credit. The problem is that the market for non-standard or high-cost credit has shrunk dramatically after the regulator cracked down on nefarious practices, shrinking the pool of options.
Meanwhile, the benchmark for judging how banks are handling this slowdown has changed since the financial crisis. “Customer expectations are rightly very different,” says one banker. Barclays was recently accused of reducing its financial flexibility when it needed it most, by cutting unused overdraft facilities. The bank said it reviews the limits every year to ensure they are not higher than customers can afford.
The regulator is on the lookout. The Financial Conduct Authority has written to bosses to highlight banks’ responsibilities and link to the future Consumer Duty, which aims to set higher standards for consumer protection. In June, he complained that some banks were not communicating well with customers, not fully understanding individuals’ situations or considering a range of personalized options to help them.
A looming question is whether this cost of living crisis should be approached in the same way as the pandemic, where early intervention, flexibility and forbearance have been rolled out in spades.
The sector is wary given how long energy prices could stay high. Fair4All Finance, a non-profit organization focused on financial inclusion, is looking at how the pandemic response could work as a model for a more creative approach in supporting customers, at negligible cost to banks. It is also pursuing pilot projects for products such as interest-free loans or consolidation loans for customers in vulnerable financial situations.
One concern is that the pandemic has created a larger number of newly insecure consumers, with around 14 million estimated to have less than £100 in savings. Another is that the use of buy now, pay later could mask early signs of financial difficulty, a factor that is being watched closely by some lenders.
To date, the range of bank responses appears to vary widely: from proactively engaging with customers, charities and regulators to feeling like it’s not really their problem. It will be – and may prove difficult to ignore.
Are you having trouble managing your finances as the cost of living increases? Our editor Claer Barrett and finance educator Tiffany ‘The Budgetnista’ Aliche discussed advice on the best ways to save and budget as prices around the world rise in our latest IG Live. look at this here.
The looming cost of living challenge for UK banks