A new ResPublica Green Paper

The latest ‘Green Paper’ from ResPublica, Risk Waiver: closing the protection gap and opening the credit flow, explores the potential for credit protection products to act as a form of stimulus and get lending going again.

Lending to UK consumers and businesses has stagnated over the last five years. The credit our businesses and households rely upon to prosper is simply not as available as it should be. We need Government and the financial sector to pursue a policy whereby lending can be increased to households and businesses without commensurably increasing credit risk in the economy.

This report analyses the suitability of credit protection products to both stimulate lending and safeguard loans. Specifically this paper will assess one particularly innovative protection product not currently utilised in the UK market – debt waiver.

Debt waiver products are common place in the US and offer a waiver facility to their customers that are written into the loan agreement. In this way the lender takes out the insurance on the loan rather than the borrower – avoiding the mistakes that led to the mis-selling and mis-marketing PPI scandal.

Shoring-up the credit market with protection products like debt waiver could be a good means of closing the ‘protection gap’, whilst at the same time encourage lending by mitigating the effects of excessive credit risk. Protection products like debt waivers could incentivise financial institutions to increase their lending and should be promoted by Government to facilitate their increased uptake.

The costs from not doing so are gargantuan. Recent figures suggest that the volume of lending to UK businesses and household has decreased by 56.8 per cent since the start of the financial crisis. Conservative estimates based upon calculations evidenced in this report suggest that this contraction in lending has cost the UK economy £193 billion.

Clearly, any easing of credit safeguarding by the wider use of protection products would have beneficial effects on economic growth and job creation. What is needed is for policy makers to adopt a clear and robust strategy for reducing credit risk in the financial sector.

Current Government attempts to increase lending to consumers and businesses are clearly failing. Providing protection on the loans lenders issue would shore up the beleaguered lending sector by creating an economy where credit is both widely available and inherently more secure.

This report is supported by CUNA Mutual Europe.