by Mark Dunleavy, senior vice president financial services, Software AG
Although it does not formally take over from the Office of Fair Trading until April 2014, the Financial Conduct Authority (FCA) has been quick out of the blocks to redefine the rules it wants to see in place regarding consumer credit.
Recently, it has announced that payday lenders will not be allowed to roll over loans more than twice, and will face tough restrictions on how many times they can to try to take cash from borrowers’ accounts. The new regulations, which will also come into force in April 2014, are designed to address problem areas in what the FCA describes as ‘high-risk short-term loans’.
For example, in response to the fact that some firms do not properly assess whether or not an individual will be able to pay back a loan, it will become mandatory for all lenders to do an affordability check on borrowers. This could make a big difference, especially when considering a recent government survey which found that one in five customers were not asked about their financial situation when they applied for a payday loan.
Some firms have encouraged multiple rollovers without taking into account a customer’s individual circumstances and under the new rules the number of rollovers will be limited to two. Similarly, some companies use continuous payment authorities (CPAs) to take money from customers when they can’t afford it and in future it will not be possible to use a CPA on more than two occasions.
Clearly, much of the FCA’s focus is on stamping out high profile examples of poor lending practices with regard to vulnerable consumers. However, while the headlines have concentrated on the impact this will have on short-term, unsecured ‘payday loan’ industry, the regulatory changes will apply to any credit transaction, involving credit cards, goods and services sold on credit, as well as providers of personal loans.
Empowering the business
The concepts of due diligence and risk management in financial services are well-established, with banks and other lenders adopting traditional tools and processes to analyse and understand each individual’s credit-worthiness.
Payday lenders meet the needs of a specific market and can legitimately charge a reasonable premium in offering loans linked to a higher level of risk. The FCA view is that this can be achieved – to the benefit of both lender and borrower – by adopting a similar approach to risk analysis. In doing so, the tougher regulations do not simply set a higher bar for compliance but also reflect best practice in providing a valuable service while protecting the interests of the consumer.
There are a number of key elements in developing a solution which delivers against the twin goals of regulatory compliance and providing a good customer experience.
First, it is essential to get visibility of existing processes – in this case, those linked to signing off a payday loan request – in order to make the changes required to meet new regulatory demands. This is important in improving the way in which existing products and services are delivered but also in creating dynamic ways to bring new products to market faster and more effectively.
There are two critical elements here. This is a business rather than an IT issue. Adopting the right tools will empower business managers to define the appropriate processes and then pass these on to IT for implementation.
At the same time, this creates the opportunity to embrace best practice from the outset in identifying and developing new processes.
Having defined the process, the next step is to create the business rules – a set of basic ABCs – covering customer details and whether or not they meet the firm’s loan criteria. Once again, latest software tools enable the business to own the process and then work with IT on effective deployment.
Combining big data, process and analytic solutions
The new processes and rules need to be run against data. In the case of a payday loan, for example, in which customer contact is typically via the website or telephone, a high volume of transactions demands rapid decision-making.
In a big data environment, this requires data to be rapidly aggregated and analysed from multiple sources, including existing customer information, credit ratings, evidence of outstanding court orders and even social media information such as the applicant’s Twitter or Facebook activity.
Data is also important in supporting effective sentiment metrics. Like other companies providing credit, payday lenders are concerned about the public image of their business and the broader sector. They want to know what customers think about the service they receive and, in the era of social media, encourage customers to share positive experiences as well as complaints about service.
To enable seamless change, all these elements must form part of a flexible open architecture that allows the business to adapt to evolving market conditions. For example, business rules will never be static and so will require continuous oversight and adaptation by the business.
Adopting stand-alone solutions to immediate pain points are likely to fall short of the ideal, whereas an underlying open architecture will allow the business to adapt quickly and easily to new regulations or market conditions.
For all companies involved in consumer credit transactions, the winners will be those who can effectively differentiate their offering through tailored, personalised customer interactions. And as customers, we will stay loyal to those businesses who know who we are and understand the challenges we face.
UK might need negative rates if recovery disappoints – BoE’s Vlieghe
By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.
Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.
Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.
Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.
“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.
“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.
Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.
Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.
Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.
Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.
Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”
“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.
By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”
Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.
“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.
($1 = 0.7146 pounds)
(Reporting by David Milliken; Editing by William Schomberg)
UK economy shows signs of stabilisation after new lockdown hit
By William Schomberg and David Milliken
LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.
The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.
A separate survey of households showed consumers at their most confident since the pandemic began.
Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.
The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.
Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.
Official data for January underscored the impact of the latest lockdown on retailers.
Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.
“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.
The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.
BORROWING SURGE SLOWED IN JANUARY
There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.
Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.
That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.
The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.
Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.
“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.
Some economists expect higher taxes sooner rather than later.
“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.
Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.
The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.
IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”
However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.
Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.
“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”
($1 = 0.7160 pounds)
(Editing by Angus MacSwan and Timothy Heritage)
Oil extends losses as Texas prepares to ramp up output
By Devika Krishna Kumar
NEW YORK (Reuters) – Oil prices fell for a second day on Friday, retreating further from recent highs as Texas energy companies began preparations to restart oil and gas fields shuttered by freezing weather.
Brent crude futures were down 33 cents, or 0.5%, at $63.60 a barrel by 11:06 a.m. (1606 GMT) U.S. West Texas Intermediate (WTI) crude futures fell 60 cents, or 1%, to $59.92.
This week, both benchmarks had climbed to the highest in more than a year.
“Price pullback thus far appears corrective and is slight within the context of this month’s major upside price acceleration,” said Jim Ritterbusch, president of Ritterbusch and Associates.
Unusually cold weather in Texas and the Plains states curtailed up to 4 million barrels per day (bpd) of crude production and 21 billion cubic feet of natural gas, analysts estimated.
Texas refiners halted about a fifth of the nation’s oil processing amid power outages and severe cold.
Companies were expected to prepare for production restarts on Friday as electric power and water services slowly resume, sources said.
“While much of the selling relates to a gradual resumption of power in the Gulf coast region ahead of a significant temperature warmup, the magnitude of this week’s loss of supply may require further discounting given much uncertainty regarding the extent and possible duration of lost output,” Ritterbusch said.
Oil fell despite a surprise drop in U.S. crude stockpiles in the week to Feb. 12, before the big freeze. Inventories fell by 7.3 million barrels to 461.8 million barrels, their lowest since March, the Energy Information Administration reported on Thursday. [EIA/S]
The United States on Thursday said it was ready to talk to Iran about returning to a 2015 agreement that aimed to prevent Tehran from acquiring nuclear weapons. Still, analysts did not expect near-term reversal of sanctions on Iran that were imposed by the previous U.S. administration.
“This breakthrough increases the probability that we may see Iran returning to the oil market soon, although there is much to be discussed and a new deal will not be a carbon-copy of the 2015 nuclear deal,” said StoneX analyst Kevin Solomon.
(Additional reporting by Ahmad Ghaddar in London and Roslan Khasawneh in Singapore and Sonali Paul in Melbourne; Editing by Jason Neely, David Goodman and David Gregorio)
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