A triple winter threat 

Inflation has hit 11%, the highest for over four decades. Combined with rising energy and food prices, it's clear that Christmas will be a time of little cheer for many. And as the latest research from the Office of National Statistics shows, the most vulnerable in society will see the greatest impact.  

According to ONS, The Consumer Price Index of housing (CPIH) annual inflation was 10.5% for low-income households and 9.1% for high-income households in the year to October 2022. Unfortunately, we know that lower-income households will feel the pinch most as a greater percentage of their income goes towards these costs. 

Jack Leslie, a senior economist at the Resolution Foundation, says the government must do more to close this cost-of-living gap between rich and poor: 

"Rising energy bills and rapid food prices mean that low-income households now face an effective average inflation rate of around 12.5 per cent, while in the cold winter months, the over 80s are already facing inflation rates of around 15.3 per cent." 

Temptation everywhere we look! 

With the bombardment of highly targeted Christmas ads on social media combined with peer pressure and the Fear of Missing Out (FOMO), many consumers will overextend themselves this Christmas. Recent SurveyMonkey research from Momentive found that more consumers are planning to go into debt to afford Christmas.  

The research looked at how consumers were planning to shop this Christmas. 77% of lower-income consumers (earning under £22,000 a year) said they were worried they wouldn't be able to buy the items they wanted. 14% of lower-income consumers said they're planning to go into debt to afford their Christmas shopping, with 10% of those earning between £22,000 and £50,000 also planning to do the same. 

Short-term gain equals long-term pain 

Buy Now Pay Later (BNPL) platforms have revolutionised consumer credit. They can support borrowers looking to manage their cash flow and delay or extend payments when used properly. As with high-interest loans, credit cards and store cards, debt charities are worried that consumers will take on more short-term debt than they can afford.  

Klarna and Laybuy now report users' payment history to credit reference agencies, potentially impacting their credit score and ability to obtain affordable future credit. According to a recent Times article, data from Citizen's Advice has found that half of 18 to 34-year-olds are taking out loans to make repayments. 

Consumers and lenders must take collective responsibility when offering or accessing extended credit options.  

Leading by example 

In March 2021, the Financial Conduct Authority (FCA) launched the Borrowers in Financial Difficulty (BiFD) project to ensure firms continue providing tailored support to struggling borrowers. With the ongoing pandemic and cost-of-living crisis, it's more important than ever that we support customers now and as the situation becomes more challenging in the months ahead. We must look to deliver the best outcomes for customers who need help.

The key focus areas outlined by the FCA relate to the following: 

• Engaging customers: encouraging consumers to engage earlier when facing difficulties    
• Effectiveness of conversations with customers: offering tailored support that takes into account individual circumstances, including those with vulnerable characteristics   
• Helping customers to consider and access money guidance and debt advice: effectively communicating the benefits and availability of money guidance and not for profit debt advice when appropriate   
• Fees and charges: making sure fees and charges are fair and support borrowers in financial difficulty. 

So, what can you do to support customers? 

Whether you're an FCA-regulated business, a retail business or offer services to clients, we believe the FCA guidelines are a great blueprint to follow. They'll help ensure that customers receive appropriate support that’s in their interests and takes account of their circumstances. It's a win-win for your business revenues, your reputation and your customers' financial and mental well-being.   

Five tips to help borrowers through winter and beyond:

1. Support them through payment difficulties by considering their debts and essential living costs. Consider an open banking API (Application Programming Interface) and self-service options to enable customers to pay what they can truly afford 
2. Ensure systems, processes and adequately trained staff are in place, with no inappropriate staff incentives for selling debt products 
3. Make sure characteristics of vulnerability are identified and understood by all colleagues. So, customers particular needs are responded to 
4. Signpost customers at risk to debt advice agencies where appropriate to avoid escalating problems and detrimental credit score impacts. Customers are allowed time to consider their options and, if necessary, seek debt advice before deciding on the support they need
5. Understand that some customers will be embarrassed to talk to a live agent, so make sure they can access support across different channels, online, by phone, text, or via a customer portal. 

Beyond the crisis 

The last three years have seen unprecedented times. We're a resilient nation and have weathered many economic, political and global storms before, and no doubt we'll do so again. A new ‘save now to spend later’ mentality is beginning to emerge. In the Autumn Budget, Jeremy Hunt outlined that next year's benefit and pension payments increase will be tied to inflation. He also announced the cap on energy bills will continue for a further 12 months but will rise from £2,500 to £3,000. We continue to look to our national and global leaders for economic growth and fiscal responsibility.  

A flickering light 

Following the budget, The Office for Budget Responsibility (OBR) predicts that the UK's recession will last about a year, with GDP (Gross Domestic Product) falling around 2%. That's a relatively shallow recession and shorter than the Bank of England warned of this month. It’s clear that times will continue to be challenging but there's a glimmer of light at the end of the tunnel. 

Sources

1. Four in ten worry they will be unable to afford Christmas (yahoo.com) 
2. Inflation and cost of living for household groups, UK - Office for National Statistics (ons.gov.uk) 
3. More Brits planning on going into debt to afford Christmas (momentive.ai)
4. UK’s international reputation damaged by mini-budget, says BoE governor; high inflation hits poorest hardest – as it happened | Business | The Guardian
5. How Buy Now, Pay Later works - Times Money Mentor (thetimes.co.uk) 
6. Borrowers in financial difficulty (BiFD) project – supporting those facing payment difficulties due to coronavirus – interim findings | FCA 
7. Autumn Statement 2022 summary: key points and changes at a glance (msn.com)