The head of the UK’s top financial watchdog has sounded the alarm on rising levels of consumer and corporate debt as a result of the COVID-19 pandemic.
In a speech to senior bankers on Tuesday, Charles Randell said: “The pandemic has already exposed some stark truths. We have too much debt. We don’t save enough. When people do save, they are too often persuaded to buy unsuitable investments.”
Randell, the chair of the Financial Conduct Authority (FCA), said one in eight Brits have no personal savings and over eight million are already over indebted.
“It’s right that borrowers in difficulty have been able to defer their interest payments to see them through the short term,” Randell said. “But in the longer term their debt burden will have increased.
“We need to tackle this legacy, but we also need to take this opportunity to look to the future and ask ourselves some fundamental questions about the role of debt and saving in our society.”
The regulator also raised the alarm over the huge amount of corporate debt being taken on by companies during the current crisis.
Figures published by the Treasury on Tuesday show over 800,000 businesses have borrowed £38bn ($48bn) in government-backed loans since March.
“It’s an inescapable fact that some of the debt that businesses have incurred in the crisis will turn out to be unaffordable,” Randell said.
Senior bankers have raised concerns about Bounce Back loans in particular, which are 100% government backed loans to businesses. Industry insiders estimated as many as 50% of the loans may go bad but banks are required to pursue customers for the cash before the government will grant any rebate.
Stephen Jones, the head of banking industry group UK Finance, said in a statement on Tuesday that companies “should carefully consider their ability to repay before applying” for Bounce Back loans or other forms of government support.
Randell said: “We can’t allow this to become a replay of the 2008 crisis where the treatment of some small business borrowers did such serious damage to people and to trust in financial services.”
Royal Bank of Scotland’s treatment of small business customers in the aftermath of 2008 became a scandal. Customers accused the bank of pushing companies into administration to make money liquidating the firms, rather than helping to turnaround the struggling businesses. An investigation by the FCA found “systemic and widespread inadequate conduct”.