High-cost consumer lenders and debt purchasers face additional “customer welfare” risk to their business models due to increasing regulatory focus on consumer protection amid the economic fallout from the coronavirus pandemic, Fitch Ratings says.
The UK government’s announcement on 2 February that “buy now, pay later” firms will be subject to oversight from the country’s financial conduct regulator highlights this focus.
Prolonged pandemic-related forbearance measures, such as moratoria on collateral repossessions, could lengthen collection processes for consumer lenders and debt purchasers, increasing the likelihood of costly litigation and weakening recovery prospects.
Fitch captures exposure to this risk with an ESG Credit-Relevance Score for “customer welfare” of 3 or 4 for most issuers in these sectors.
High-cost consumer lenders and, to a lesser extent, debt purchasers will be more affected than other financial institutions by tighter conduct regulation to protect borrowers in the wake of the pandemic.
Increasing regulatory risk, and the prospect of pressure on asset quality and earnings as borrower support measures are withdrawn, are reflected in Fitch’s negative sector outlooks for finance and leasing companies in most regions.
So far, however, negative rating actions have been limited. They have included actions driven by tighter lending rate caps and payment holidays for high-cost consumer lenders.
Lending rate caps can weaken lenders’ ability to adequately price risk, reduce profitability and undermine payment collection from older loans with higher interest rates. They can also drive lenders out of riskier segments and into competition with banks operating in lower-risk segments.
High-cost consumer lenders and debt purchasers’ ability to adapt their business models and practices to the heightened regulatory focus on consumer protection will be key to their credit profiles. Issuers in these sectors are predominantly sub-investment grade.
