The growth in consumer borrowing has set alarm bells ringing at the Bank of England. A benign interest rate environment has seen lending through mortgages, credit cards and personal loans increase substantially. But with significant risks arising from an uncertain political climate here in the UK, the start of negotiations for the UK to withdraw from the EU and global politico-economic risks from China to the Middle East, the Financial Policy Committee (FPC) has taken action to take some heat out of the market.

Supporting stability in financial services

To boost the resilience of the UK’s financial system, the FPC is introducing a number of measures, including:

• Requiring UK banks to set aside more money as a cushion against bad debt. The UK countercyclical capital buffer rate will rise to 0.5%, from 0%, with a possible further 0.5% increase in November.
• Bringing forward the annual stress test for resilience against consumer credit losses.
• Encouraging lenders to be more consistent and rigorous in their tests of whether new mortgage borrowers can afford repayments.

With the Money Advice Service claiming that 16m adults (40% of working age people) in the UK have less than £100 in savings, the lack of a buffer against a rise in the cost of borrowing could have a significant and catastrophic impact. Growth in consumer credit, particularly in the form of personal loans, car finance and credit card debt of more than 10% in the past 12 months, has prompted the FPC to warn against complacency from lenders.

Keeping pace with changing economic conditions

With the latest Monetary Policy Committee intimating a possible rise in interest rates later this year, consumer spending could be a casualty of the combined squeeze of falling wage inflation, rising interest rates and a stalled economy. And, where consumer spending takes a hit, business confidence often follows.

Whether your target market is the consumer or businesses, the tightening of lending conditions and the message it sends out about the general direction the UK economy is heading in, should encourage a review of your key messages and overall strategy. There are opportunities when conditions change, you just need to know where to find them.