A generation on the brink

Written by Iona Bain for inCOMPLIANCE® on Tuesday May 19, 2020

Lenin once said: “There are whole decades where nothing happens; and there are weeks where decades happen.” In recent months, we have watched the most significant global event since the Second World War unfold. And the consequences for the economy, financial sector and people’s money are still, frighteningly, unknown.

As the UK’s Young Money blogger, I am still trying to piece together the outlook for my generation – so- called ‘millennials’ – as well as for those generations that follow. But already, there can be no doubt that the economic fallout from COVID-19 will far eclipse that of the 2008 financial crash.

That was bad enough, especially for school leavers and those graduating around that time. Their employment prospects sagged, housing/living costs soared and wages flatlined. For all our (supposed) avocado brunches, millennials became the first generation, by most measures, to be poorer than the last.

The COVID-19 generation

But that will all pale by comparison when we finally survey the wreckage of the current crisis. Graduate recruitment hasn’t just dropped but fallen off a cliff: major employers (including banks such as Lloyds) have cancelled graduate placements in their droves.

Research from the McKinsey Institute has found that employees aged between 15 and 24 are twice as likely to face job instability during the outbreak compared with older workers.[1] The non-partisan Institute for Fiscal Studies has found a “remarkable concentration” of young people (as well as low-paid workers and women) in shutdown sectors, raising “serious worries” about the longer- term impact on inequality between generations, sexes and classes.[2]

Stable earnings with potential to grow are the sine qua non of personal prosperity. So talk of a ‘lost generation’ is not overblown. It is certainly hard to weigh up the risk to lives against the long-term damage, economic and otherwise, of shutting down whole swathes of the economy. Nevertheless,
I expect many smaller businesses will collapse. Younger workers deemed more dispensable than older, more experienced colleagues will lose their jobs, even when they come back from furlough.

Already, we are seeing younger people resorting to debt to a greater extent than older groups, relying on overdrafts and loans from family and friends to avoid the financial pinch.
A MORI survey found that a quarter of young people – that few! – have already needed to use up savings, compared with 13% of 35-54 year olds and 11% of 55-75 year olds.[3]

The fortunate ones will be able to move back home, temporarily or even permanently, to cushion the blow. The unfortunate ones will be pushed into chronic debt, bankruptcy and potentially years of unemployment, with all the psychological damage that entails.

“Jeez Iona, do you have to be so gloomy?” you may well be thinking. Trust me: I derive no pleasure from delivering such a bleak assessment. I genuinely thought at the beginning of 2020 that the bad times were behind us, with young people’s pay and living prospects finally starting to pick up.
I was even writing a book about how young people can get stuck into investing. Oh the irony!

But it’s vital that the financial sector prepares for the scale of the challenge ahead. Even if my worst-case assessment doesn’t come to pass, it will be to the benefit of the industry to think much more carefully about how to deal with a new generation of customers, uniquely vulnerable if not to the virus itself then certainly to its economic impact.

Lending with common sense

The last crisis was very much of the financial sector’s making. This one isn’t, but already it is testing the industry to its limit. It has to wrestle with staff shortages and the trials of home working like many other sectors, but with the added challenge of quickly administrating new, complex government schemes.

At the same time, it has come under enormous pressure from both the regulator and the public to suspend normal terms on everything from credit cards to savings. So it must deal with an immediate drop in repayments on debts, with a longer-term risk of more defaults, while people plunder their savings at no cost. Banks must also be seen to be ‘sharing the pain’ by forgoing bonuses and cutting pay at an executive level, particularly when several were bailed out by the taxpayer in their last hour of need.

Banks, like politicians, are now facing up to several unpalatable trade-offs. On the one hand, they must ensure that business interruption loans get to people before their livelihoods are destroyed. On the other hand, they must not sacrifice due diligence for the sake of speed, especially because taxpayers’ money is at stake. Millions, it not billions, lost to fraud in the final analysis would be painful to behold.

It’s crucial that compliance does not compromise rigorous checks, and ensures businesses are in a position to pay back what they owe. But now is the time for common sense as well as compassion. Reports of business being rejected based on the past six months of earnings doesn’t take into account the natural variability of turnover, whether that’s for seasonal reasons or the natural growing pains of a starter business.

I won’t claim to be a world expert on the ins and outs of compliance. But it seems there is a real risk of banks already blotting their copybooks by refusing to adapt and not taking the long view. If some loans go bad, too bad. Will it really be worth the reputational cost, the unnecessary loss of previously loyal customers and the wider economic damage of letting genuinely viable businesses fail?

The end of ‘all red, no black’?

The financial sector also needs to think carefully about the nation’s future relationship with products. Prior to COVID-19, the majority of consumers had no easy-access savings and an over-reliance on debt. This ‘all red, no black’ culture was partly fostered by financial institutions, which slashed savings rates and devised ruses to keep people borrowing for longer at costs they didn’t fully understand.

Repayment holidays on mortgages and credit cards may have been urgently required but they are far from ideal, both for individuals or lenders. There will be significant blowback from the raised repayment costs involved and questions about whether these have been properly explained to customers.

It will prompt serious soul-searching as to why so many used this last resort in the absence of easy-access savings. If we can harness auto-enrolment to get people saving for their long- term pensions, why can’t we figure out a way to do something similar for savings? Your pension is an infuriating white elephant in an immediate crisis. The sooner the financial industry grasps this, the better.

Reforms to overdrafts and credit cards were underway before the crisis hit, but some were more well thought-through than others. Now, the regulator and financial industry have a chance to revisit them and ask if they can be improved.

Authorised overdrafts are most likely to be used by 18-25 year olds, but on the whole would get more expensive over £500. Struggling young consumers will need to have a fair interest-free buffer, for as long as they need it, before being helped back into the black more actively by their banks. Let’s hope we don’t see a cliff-edge effect after three months.

Time for a new beginning

Longer-term, we need to be sensitive to the effects of this crisis on young people with regard to housing costs. With high loan-to-value mortgages being pulled from the market, I fear a long-term slump in lending to younger people, which would slow down the housing market for all.

I’m also concerned that the immediate forbearance being shown by credit scorers may wear off, with tenants probably the first to be punished if they fall behind on rent. A new post-COVID lending regime needs to be devised that can weigh up the genuine risks of sub-prime borrowers against the extraordinary situation foisted upon blameless young people.

If banks do not rise to the challenge, there is every possibility that innovative disruptors will bridge the gap and eat at least some of the industry’s lunch. I’m already seeing new tools promising interest-free ‘income top-ups’ for a monthly fee. FinTechs are launching a range of helpful calculators, business- to-consumer voucher schemes and interest-free loans.

There will be no winners from COVID-19, only those who survived it better than others. And that applies as much to the financial industry as its consumers. I won’t pretend to have all the answers, especially when the crisis hasn’t fully played out. All I know is that it will change the course of young people’s lives forever; they will inevitably be more financially vulnerable than older, more settled consumers; and the financial industry will be judged on how it helped this group, more than any other.

The behind-the-scenes infrastructure must evolve quickly to keep up with these exceptional circumstances. It simply has no other choice.

For more on young and vulnerable groups, see ‘The BIG Compliance Festival 2020’, ICA’s digital conference experience.

About the author

Iona Bain is a writer, author, speaker, broadcaster and founder of the pioneering Young Money Blog; the first and only British blog dedicated to young people's finances. She is a regular presence on TV and radio, and is mentioned frequently in national and online press. https://youngmoneyblog.co.uk

References: 

1. McKinsey & Company - Safeguarding Europe’s livelihoods: Mitigating the employment impact of COVID-19, 14 April 2020 https://compassoc.org/ mckinsey-safeguarding Last accessed 19 May 2020

2. Institute for Fiscal Studies - Sector shutdowns during the coronavirus crisis: which workers are most exposed?, 6 April 2020 https://compassoc.org/sector-shutdown Last accessed 19 May 2020

3. Ipsos MORI - Financial impact of COVID-19 already being felt by Britons, especially younger generations, 7 April 2020 https://compassoc.org/financial-impact Last accessed 19 May 2020