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In the Interest of Prudency 2 JUNE 2014

In the Interest of Prudency

This week Arum will be presenting at Money Advice Scotland’s (MAS) Annual Conference. In a joint slot with the Financial Conduct Authority (FCA), we will be delving into the new Consumer Credit regime – from the social context the new regime will be operating in, to how we deliver on what is expected.

As Money Advice Scotland celebrates its 25th Conference, this year’s event theme ‘Common Wealth’ is a significant topic for deliberation. While the economy is heading for its best year since before the financial crisis, many individual’s ability to fulfil their basic needs is still being affected in the current economic climate.

As a professional industry we need to be collectively agile in our response to these financial forces and at the MAS Conference hundreds of professionals will gather to debate and deliberate future risks. At the same time, the nine members of the Bank of England’s rate-setting monetary policy committee (MPC) are expected to meet and clash over the timing of an interest rate increase.

The FCA previously expressed its concerns about the risk posed to borrowers by interest rates, with lenders being urged to identify those most at risk and to have strategies in place to deal with these customers.

Following speculation over the last few weeks, the Bank of England will raise the prospect of higher interest rates this week as it battles to keep the economic recovery on track. Rates have been frozen at a record low of 0.5 per cent since March 2009 – an unprecedented situation that has helped borrowers while hampering savers.

But with the recession reportedly over, a rise is back on the cards. Higher rates will push up the cost of mortgage repayments for millions of households, but could bring relief to savers – who have lost out over the past five years.

Movements in interest rates affect overall demand as they determine the amount of credit and cash available to be spent within the economy and subsequently affect the rate of inflation.

Bank of England Deputy Governor Charlie Bean has also warned that the Bank could be forced to raise interest rates early to prevent a dangerous house price bubble developing.

He suggested that ‘three or five years out’, rates would settle at around 3 per cent – below the average of 5 per cent before the financial crisis but six times higher than today.

Asked about the UK housing market in a previous interview with BBC Radio 4, Bean said authorities were more worried about rising household debt than house prices per se, and the Bank’s financial policy committee could step in.

“Where the issues really start potentially being worrying is the accumulation of debt. So if there’s signs that banks are making loans to borrowers who may not be able to repay or we have doubts about … whether those households will be able to keep their consumption up if they borrow a lot, then they are reasons why the Bank’s financial policy committee might want to take some action to rein things back a bit.”

Finding equilibrium between these economic forces will be keeping the policy makers awake at night. The key for the Bank of England will be to find policies that stimulate demand without causing too much damage. Some prudent planning is required as there will undoubtedly be casualties in Britain’s indebted households.

The key for the industry is to ask ourselves “are we ready for the interest rate rise?” Are we prepared to assist and support the differing effects on various groups, including ‘hardship’ and ‘vulnerable’ groups? Are we taking the right ‘future proof’ measures now?

Peter Maguire is Director of Strategy, Operations & Training at Arum

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