How can lenders successfully and responsibly deploy TFSME funds

Geraint Chamberlain

Geraint Chamberlain | Product Director

Geraint Chamberlain brings over 25 years of financial services experience, focusing primarily on consumer and commercial lending sectors. Geraint has a demonstrable understanding of the challenges faced by organisations in these markets which means that he is extremely well placed to assist Target clients in the development, launch and expansion of propositions. Geraint has worked with a large number of organisations in both the UK and mainland Europe.

The announcement in March 2020 that a Term Funding Scheme (TFSME) would be reintroduced to the UK, provides a welcome injection of stimulus into the lending market.

As with the UK Government’s reaction to the GFC in 2008, this response to the Covid-19 crisis attempts to protect SMEs and their contribution to the economy, as well as boost funding to households. The scheme incentivises banks to bridge this period of economic disruption with 4-year loan periods, helping to transfer the low base interest rate onto borrowers. The TFSME provides a low-cost funding source for qualifying lenders, at or near the record low level base rate (0.1% as at March 2020).

Originally, the scheme set up in response to the GFC was due to end in September 2020, when lenders were preparing to pay the loans back to the Government, either through an increase in deposits (unlikely with such low base rates to contend with) or a reduction in operating costs to free up some cash.

The outbreak of Covid-19 and the impact it will have on the global economy, has required further intervention from the UK Government to help boost the economy, in a bid to protect jobs, especially in SMEs. Other measures included in the rescue package from the Chancellor include £330bn in loans, £20bn in other aid, a business rates holiday, and grants for retailers and pubs.

This new Term Funding Scheme (TFSME) and the accompanying Interruption Loan Scheme demonstrates there is a significant level of Government support available. The supply of funds isn’t a problem. However, the question is, how prepared are lenders to be able to issue funds safely, accurately and quickly.

Robust affordability checks, so critical to responsible lending, can take time. These low rates, and an influx of funds will mean increased competition in the lending market, so time is of the essence.

There is a major operational challenge facing all types of lenders, to responsibly deploy funds to those who need it, especially when dealing with legacy systems and processes.

Demand for funds is likely to peak to unprecedented levels, following not only the Covid-19 outbreak, but also devastating flooding across the UK, and the Brexit transition period. Such episodes of extreme change haven’t been seen for a generation, with fluctuating interest rates and uncertainty becoming the norm. The financial services sector simply isn’t used to such a pace of change. It’s traditionally quite slow paced and steady, cycling through regular boom and bust phases.

And it’s not just the release of funds that is being overhauled to support the country through this turbulence, also payment holidays and other measures across the customer journey are in place to try and create buoyancy.

During this time, it’s critical that lenders use forbearance to treat their customers fairly in very challenging circumstances. However, by using forbearance in delaying debt payments, this may cause future debt problems that need to be managed carefully. Revised payment schedules in a period of temporary and short-term financial difficulty should be appropriate for the borrower, and those revised terms be communicated accurately and in compliance with regulations.

Lenders have a duty of care to be able to provide appropriate support for their customers at all times. The need to safeguard and protect customers, using an integrated, enterprise level approach is key:

Operational Resilience

Operational resilience all about how you react, respond and learn when things go wrong. And when they do go wrong, do you know what your impact tolerance is? Have you identified which services are most important in your organisation? And outlined what actions you need to take to ensure you can continue to serve customers, safely and securely.

Capacity

Is your lending business able to quickly and easily scale up (or down) its operations to be able to handle an increase in demand? Will you be able to achieve SLAs and maintain customer service levels, when the demand for funds, robust checks and reporting requirements spike?

Training

If there is a sudden need for additional heads in your onboarding and customer service teams, how long will it take to get them up to speed? Will they be able to deliver at the required standard?

IT systems

A peak in demand for service will likely put a strain on often-creaky IT systems. Can your systems cope with more traffic? Will your security set up still be able to keep your environment safe and secure, even when under strain?

Culture

When things get tough, and operational resilience is tested, it’s essential that culture holds firm. There should be a socially aware and ethically conscious approach to vulnerable customers and those who may be finding it harder to pay. Lenders dealing with peaks in demand can’t afford to let standards drop when resilience is put under pressure.

Summary

What’s important about operational resilience is preparation.

Outsourcing such servicing to a specialist in lending operations is one option that will help lenders to deal with sudden peaks (and subsequent troughs) in demand. Such providers have the capacity, training and IT systems in place, ready to scale up quickly to support good customer outcomes, and are able to ensure quality standards are maintained even at the most demanding times. This flexibility and agility, coupled with robust forbearance, gives lenders a head start in this busy market.

Target is a leading provider of business process servicing and operational transformation for over 50 major financial institutions across the globe, including clients such as RBS, Barclays and Santander.

Our leading fintech platform manages assets in excess of £25 billion, enabling our clients to automate complex critical processing, servicing and administration of loans. Alongside loan servicing and software solutions, Target leverages deep financial domain expertise to advise on process improvement, due diligence, and regulatory compliance.

Target is a leading provider of business process servicing and operational transformation for over 50 major financial institutions across the globe, including clients such as RBS, Barclays and Santander.