Since the global financial crash in 2008 the economic, political and social climate of the UK has changed dramatically.
The financial crisis has changed the face of banking, bringing increased regulation and better customer understanding of the financial environment. In addition to widely expressed negative views of banks from the public, politicians and press, attributing blame and insisting on compensation and corrective action, two significant changes have emerged with far-reaching consequences for both providers and users of financial services.
The first, not surprisingly, is tighter financial regulation but the second is perhaps a little more unexpected – society, community and customer financial enlightenment. Customers now understand financial services better than ever before as well as its challenges, which include the conundrum of meeting increasing customer needs and expectations against a more restrictive back-drop of regulation and accountability.
Customers are crying out for a return to pre-crisis levels of credit provision while refusing to accept they had a part to play in the run-up to 2008. Meanwhile the Government takes steps to incentivise the provision of customer credit while imposing the strictest financial regulation on banks our country has ever seen.
Yet in attempting to prevent the perfect storm, are we creating an environment that will prevent people from having any choice at all?
The UK mortgage market offers a good example when considering this question. The MMR will come into force on 26 April 2014, providing a new regulatory landscape for mortgage lending in the UK and addressing the issues under-pinning the 2008 crash.
At a basic level, this means a more thorough assessment of a customer’s ability to afford a mortgage both at the time of taking it out but also for the life of the mortgage using a reasonable set of assumptions for the future.
Of course, when you first take out a 25-year mortgage, you do not know what life is going to throw at you for the next quarter of a century and so, in an ideal world, your mortgage will give you the freedom and flexibility you might need in the future.
If one assumes the 2008 problems were as a result of irresponsible lending: self-certification mortgages; 125 per cent LTV mortgages and loans without appropriate affordability assessment, one can infer that tighter lending controls will prevent a return to lending levels and practices seen pre-2008.
Contrast this desired outcome with customer calls for greater credit availability and Government schemes to incentivise lending like First Buy, NewBuy and Help to Buy.
The role of the responsible lender then extends beyond that of decision maker and credit provider, taking on customer accountability, playing both adviser and protector while still finding the best solution for each customer, not just best for now but for the duration of the mortgage. For some customers it might be a case of not right now rather than never.
Mortgage regulation is needed, as are solutions to potentially increase credit availability to all customers who can afford it. But the one-dimensional aspects of the MMR are at odds with Government incentives that risk creating an unrealistic customer demand and supply environment in the run-up to tighter regulation.
It is not that either or both of these strategies are flawed or conflict but to support both requires lenders and customers to think differently.
Customers need to take accountability and structure their expectations within what is affordable, while banks need to listen to customers, provide appropriate solutions and be prepared to say no when it is the right thing to say. Never before has true relationship banking been so essential to customer protection and advice.
Claims from lenders about always saying yes to customers plus often gimmicky products suggesting the unaffordable is attainable are not responsible ways of meeting the challenges we face and certainly not helpful for an industry trying to redeem past transgressions.
Building a solid two-way relationship with customers, built on mutual trust, understanding customers’ needs and providing solutions while enabling freedom and flexibility for future events is key to meeting customer needs and protecting customers.
Lenders have a golden opportunity to ensure transparency, fairness, choice and value and borrower protection through robust assessment and appropriate decisions.
This does not have to mean long, drawn-out processes, complicated products or ridiculous hoops customers have to jump through. It does mean appropriate disclosure, clear guidelines, great advice and saying no when no is the right thing to say.
Most importantly, it means listening to customers, building relationships with them while ensuring the mortgage they take provides them with the freedom to make the life choices they want now, or may want in the future.
Like an adolescent earning increasing parental trust as they approach adulthood, if lenders and customers can respond with a responsible new attitude, then, over time, we should expect mortgage regulation to evolve into a more multi-faceted, common-sense set of guidelines, principles and controls.
With regulation to ensure customers have the flexibility and freedom they need and deserve, lenders can make good decisions at a customer level and mortgage lending in the UK can keep contributing to sustained economic growth.
April 2014 is billed as a watershed for the mortgage market in the UK. However, for truly responsible lenders, passionate about customer fairness, freedom and protection, the watershed is happening now. Why wait?
Phil Cliff is retail assets director at Santander