The debate on the integrity of moneylenders has been circling around society for thousands of years; even the Bible makes reference to it. The German word for debt is “schuld” which is the same as for guilt, blame and fault, and as Bob Hope famously said “a bank is a place that will only lend you money if you can prove you don’t need it”.
Within this religious, linguistic and comedic framework, consumer pressure groups and latterly legislators have increased the volume and the frequency of the debate. At a meeting I had with a senior official in Brussels in 2013, it was stated quite categorically that “poor people should not be permitted to borrow money”. The implication of this was that the legislator would ensure that lenders would not be allowed to lend to “the poor”. I put both “poor people” and “the poor” in parenthesis deliberately because there is to my mind no workable definition of what it means to be poor. Nor does it explain why “the poor” should not be given access to credit, which could help them become less “poor”. Safe to say my
meeting did not last very long.
Clearly lending to someone who is too poor to repay a loan is a nonsense (as much for the lender as the borrower) but as that could cover a millionaire in Manhattan as well as a peasant farmer in India it is not very helpful. What is required is a more mature conversation that I think should revolve around the cost of credit, the way it is sold and, probably equally important, the way it is collected.
This may not satisfy all parties, as there are those who believe that making money from poor people is a sin in and of itself. This I have no answer for other than to say that provided the person taking the loan is fully informed and fully understands all the implications of taking it then it is hard to see it as a sin; a mistake possibly, but we all make
those. It is surely unethical to make excessive profit from the poor but it is just as unethical making excessive profit from the rich (providing the riches were justly acquired). The ethics of lending are not therefore around the word “profit” but around the word “excessive”.
What then could an ethical lender look like in an ideal world?
I would argue simply that it would be honest, straightforward, open, fair and, key to all this, it would have with integrity within its DNA. Such simple words do of course hide the complexity of delivering them in the real world.
At its best good lending smooth’s cash flow, absorbs shocks to family finances and helps build assets. At its worst it leads to a spiral of debt that is difficult to get out of and which some lenders compound by deploying brutal collections tactics and punitive penalty charges.
In general terms, the reality of lending is somewhere between these two. It is usually imperfect, often impersonal and
occasionally inhuman, but it is less likely to be institutionally or generically flawed than a decade ago.
10 years ago when I first started out in the financial services industry the focus was almost entirely on building a business model that maximized returns and optimized efficiency. The customer was a cog in the machine that created uncertainty and exhibited irrational behavior – the end game was to minimize the impact of these inconvenient actions.
Executive management focused on short-term profit, long-term cost control and based key commercial decisions on the assumption that smart algorithms and clever business models were perfect. Lending decisions were made using generalized rules that took little or no account of individual circumstances. It was generally held belief that it did not matter if a customer defaulted because the income derived from late and/or penalty fees would compensate for those that did not pay. It is not so long ago that a famous credit card company announced that late fees were its primary source of income.
As such there was not a culture of deceit or dishonesty; the integrity or ethics of the business were simply not issues that occurred to management let alone be discussed at any level within any organisation that I came across. In short there had not been much thought or emphasis put into how or why integrity should be at the heart of a lending operation.
This is, in my opinion, what led to the Payment Protection Insurance scandal in the UK, the huge issues surrounding payday lending and ultimately the 2008 banking crisis.
Much has changed since then; media coverage of the banks has turned them from an almost God-like status to one below Judas; regulators have vastly enhanced powers and greater autonomy; social media has made lenders indiscretions much more visible and at the same time has spread a greater level of understanding of the risks of getting into debt amongst consumers. Finally, there is evidence that lenders themselves have got the message and are genuinely trying to change the way they treat customers. They are putting their hands in their pockets to invest in more customer centric products and importantly the way these products are marketed and how customers are treated before and after they have been sold a loan.
This has resulted in much clearer sales messages (though there is still more to be done here), more flexible products that meet genuine needs and vastly more intelligent credit scoring systems that make lending decisions more accurately. Ultimately of course all of these measures are balanced to ensure that the lenders are still profitable. Whatever systems are in place they are still prone to human intervention and if the human who is doing the intervening is not doing so from an ethical perspective trouble will be around the corner.
Take the example of payday lending which has come under scrutiny recently. As a business model it is not per se unethical (unless you have a blanket disapproval of lending money). It becomes unethical if the cost is disproportionate to the risk being taken by the lender or if the lender does not take sufficient care in ensuring the borrower is able, willing and understanding of the cost and the nature of the loan he or she has taken on. Getting these elements in balance, to deliver fair products is critical to ensuring a sustainable relationship between lenders and their customers. Many payday lenders failed spectacularly in getting anywhere close to achieving this balance and many of these no longer exist.
From my experience, much of what was, and to an extent, is still wrong with the industry comes back to culture, and critically how the culture is incentivised (if at all) and the levels of compliance around these incentives.
Most incentives still focus on shareholder return, sales growth and similar management metrics. Progress has been made in lengthening the time lapse before incentives are paid, but this in itself is no guarantee of ethical decision-making. Some organisations are building ethical testing into job interview processes and others into ensuring employees go through regular ethical tests. These help, at the very least, to ensure employees fully understand what a company expects
and as such is a welcome step forward. However making ethical lending a part of the organisations DNA is a much slower process and will probably require many to accept lower returns on capital than they currently enjoy. This should not be because they are not be able to lend to “poor people” but because the capital investment required to lend appropriately to them, allied to the enhanced support structures surrounding their aftersales service, will add substantially to their cost bases.
There will inevitably be a human cost within the industry as oldstyle managers find themselves increasingly unable to function in the new world. Some of these will be high profile leaders such as Fred “The Shred” Goodwin at RBS for whom few tears will be shed. There will be many more at the frontline of finance who have great track records who will need to be weeded out and replaced by people who have ethical approaches within their own DNA and can therefore imbue their organization with their values. This is a much more difficult and painful process.
Assuming, and it is a big assumption, that the industry is fully committed to achieving a deeply rooted ethical approach, the delivery of these changes needs to be rewarded at least as well as the more traditional measures of performance. To date there is little evidence of this happening on a systematic basis.
In conclusion, I do not believe that lending is generically an unethical activity.
Any product, whatever the model or target customer that is over-priced, poorly sold or aggressively collected can be classed as unethical and lending is no more, or less, prone to this challenge. All of these issues can be, and many already have been, addressed within the credit industry. There is growing evidence of it taking its responsibilities more seriously and this can only be welcome news for consumers. There remains a risk however that the high profile changes that have been seen are no more than window dressing and as soon as something comes along to divert attention the old ways will return.
The industry and its overseers (which include its customers) need to maintain the pressure and ensure the current momentum towards embedding integrity into the industry is accelerated to ensure it is not merely paid lip service.