More than five years since the worst economic crisis of our time plunged us into a recession, the economy is still struggling to recover with economic prospects not improving and risks remaining paramount.
Lower inflation should begin to ease household financial struggles but consumer spending will take time to recover, more so because of rising food and energy prices. The worst of the unemployment wave is behind us and many people with stable jobs are likely to be able to take on new credit – vital to the repair and future of the economy.
Ensuring affordability of credit is crucial as borrowers may be tempted to use credit to plug household gaps. After a steep decline between 2008 and 2009, volumes of new lending are becoming stable. With the possibility that scorecards are overestimating risk, now is a great time for lenders to revisit their models and determine if there may be room for releasing capital for additional lending. Careful planning and using stress test scenarios are vital in understanding the impacts of more severe economic outcomes and keeping regulators at bay.
Tightening compliance for lenders
Lenders are facing ongoing and tightening regulation, with some big changes this year. Hot on the heels of the Mortgage Market Review, there are further significant changes ahead. Risk to borrowers and the economy will be monitored even more stringently from April 2013, as the Financial Services Act comes into effect. The Financial Services Authority (FSA) will separate into three new components: the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the Financial Policy Committee (FPC).
The FCA replaces the current system, allowing a grass roots approach to regulation and ensuring conduct and market regulation is bolder and more engaged with consumers – putting their interests at the heart of credit decisions. Just like the FSA, the FCA will take action against lenders not conforming to the rules and will impose tough financial penalties for non-compliance. Consumer Credit regulation will also transfer from the Office of Fair Trading to the FCA in April 2014, bringing all consumer credit regulation under one body for a more consistent approach to consumer protection.
The right to use data
Data continues to be paramount to the success of businesses, as they reap the benefits of deeper insight into their customers’ lives and new types of data will have huge potential to form a complete picture, allowing better decision making for lenders.
A revision of the EU Data Protection Regulations published in 2012, would bring about one of the biggest changes to data protection regulation in a number of years. The ‘right to be forgotten’ stemming from the deletion of social media profiles, will ensure that if a customer opts to delete a record of their data, it is not simply stored for future re-activation. Concerns have been raised about the impact of this law if it were applied to credit reference agencies and Experian continues to lobby against this.
Big data, big possibilities
The big data concept has grown from the sheer volume and variety of data now available. The amount of data being shared and transported around the world, being almost unimaginable for most people. Traditional decision making struggles to keep up with the increasing pace of consumer life. Investing in new data sources can provide increased revenues by converting more applications into paying customers and reducing costs; by identifying risk early enough to take appropriate action.
Experian continually looks to further support decision making with new innovations like ExPin, the Rental Exchange and Payday loan data, aiming to keep lenders even better informed. If clients are able to link data from different sources they can make informed decisions, enhancing the customer experience and reducing risk. Conversely, lenders will find it impossible to meet regulatory, legal and other responsibilities if they are not properly informed.
Looking forward with optimism
Success is achievable even in poor economic conditions. If that success is achieved by intelligently reducing risk, increasing operation efficiencies or improving collection ratios; it will position our clients even better for a possible upturn. There’s no doubt that the year ahead presents many challenges to the industry, with slow growth and consumers becoming ever more demanding; but in being prepared we can face these changes together and make the best of the opportunities that will present themselves in 2013.
Managing Director of Experian’s UK&I Credit Services
Paul Vescovi commenced as Managing Director of Experian’s UK&I Credit Services business in March 2011 after spending 4 years as Country Manager for Experian Australia & New Zealand. Previous to his Experian role, Paul spent 5 years as a General Manager at Alinta (an Australian electricity, gas and water infrastructure company) and 8 years at PricewaterhouseCoopers Consulting which included overseas assignments in the US for 1 year, China for 4 years and Japan for 2 years.