Exclusive: ‘Age of reason’ – Paul Lindsay, free2 in “The Fintech Magazine”

Why do boomers have such a hard time getting unsecured loans when many have guaranteed pension income? The same question occurred to Paul Lindsay, so he set out to answer it with free2.

The cliché of the flat-capped pensioner tending his allotment, or the silver-haired couple spending weeks sipping wine on a cruise ship are just that – clichés.

The reality is that, while the number of over-55s in the UK is growing, they’re working longer, too. But while the demands on their money don’t go away, their financial options do, because banks are typically less likely to lend, the older people get.

Former chancellor George Osborne’s pension freedoms announced in his 2014 budget brought more flexibility for the over-55s seeking to access their pension pots. But what if you are one of those who aren’t enjoying pension freedoms and need a lump sum?

From June, older people have another option – new player free2 enters the market with an unsecured loan offering of up to £150,000 over a repayment period that can span 20 years. The London-based lender is walking where others fear to tread because it assesses creditworthiness based on the borrower’s pension income, which could include a final-salary pension, annuities and state pension.

Its loans are applied for online, with an artificial intelligence (AI)-driven decision engine assessing the applicant’s surplus income. Then, a final-stage phone call ensures the customer is bona fide, is clear about the implications of taking on the debt, and the product is right for them.

“If you’re over 55 and you want to borrow large sums of money unsecured, it’s extremely difficult, particularly if it’s over longer terms,” says free2 founder and chief executive Paul Lindsay.

“We talked to a few lenders and the main reason is that they lend against an existing origination process that is not geared up to deal with people over 55. They underwrite loans using a process created by the Financial Conduct Authority that is not designed for what they consider to be vulnerable customers, so they shy away from it. Instead, a lot of lenders in this market prefer to go down the secured route, particularly equity release.”

Right now, over-55s have even fewer choices. Twenty-three per cent more people than in the first quarter of last year triggered pension drawdown when the COVID-19 pandemic hit. But the average value of those pensions fell by 15 per cent over the same period – harder than after the 2008 financial crash. If ever there was a time for a better option, it’s now.

Just the start

Free2’s unsecured loan is the first of a series of products that will be aimed at over-55s. In May, the firm announced a securitisation facility worth up to £200million from NatWest Markets to fund customer loans, and junior debt funding of £105million from a European special situations fund to provide working capital and new customer loans.

Lindsay says the potential market for the unsecured loan product is £50billion, with a target demographic of 7.5 million people. The statistics underline the opportunity – the Office for National Statistics projects that more than 24 per cent of UK people will be aged 65 or older by 2042, up from 18 per cent in 2016. But they’re not idle and many will continue to earn income after state retirement age. ONS data shows that around 72 per cent of those aged 50 to 64 were working in 2018, compared to only 59 per cent in 1998.

Lindsay, who has worked in financial services since 1986, says there are any number of reasons why an older person would want a lump sum, not least because the bank of mum and dad is staying open for longer as younger generations are less financially secure. Many want to help a son or daughter onto the property ladder or pay for their wedding. And there can be valid reasons why a borrower wouldn’t want that lump sum to come from their pension pot. Tax is one, another would be the Money Purchase Annual Allowance, which puts a £4,000 annual maximum on money you can put into a pension once you’ve accessed your pension savings. And, of course, any withdrawal is eroding your long-term retirement income. Free2 borrowers must have any combination of annuity, state pension or company pension scheme to be considered for an unsecured loan but, for all of the above, Lindsay says funding a loan from guaranteed income could be a better option than liquidating savings.

“An unsecured loan could be a better alternative to taking your 25 per cent tax-free lump sum from a pension,” Lindsay says.

“In this unfortunate world we find ourselves in, there’s much more pressure on the bank of mum and dad. But another potential area of demand is people who took out interest-only mortgages, which need to be repaid by the age of 65. Instead of taking out another guaranteed product, if they’ve got pension income, our loan could be a better alternative.”

Interestingly, free2’s story did not begin with unsecured loans. The plan had been to facilitate a new secondary annuities market.

“In 2015, the then Chancellor, George Osborne, announced legislation to allow people who had bought annuities in the UK – prior to pensions freedoms – to be able to sell the benefit of that income into a cash lump sum,” Lindsay explains.

“What was interesting was that 43 per cent of the five million people who had bought them didn’t want to buy an annuity in the first place; it was just something you had to do at that time. I had worked in the industry a long time and I knew there was no business process to allow people to sell the benefits of their annuity. So, we spoke to the Treasury and created a platform that would allow the auction of these annuities.

“Fast forward a year, a new chancellor came in and the legislation was delayed. But there was still a huge consumer demand. So, we asked ourselves if there was a better way for people to generate a cash lump sum than selling the benefits of an income annuity, which would have been expensive and have tax implications. We realised we could simply lend people the money against their retirement income.”

The result of that thinking is the platform that’s going live now. So confident is free2 in the automated risk assessment process that, if the borrower dies during the loan term, the debt is written off.

Lindsay says: “We go through extensive steps that are more akin to a mortgage application process,to ensure that the applicant has the assets and the spare income from their guaranteed pension income to be able to fund a loan.

“The next thing we do, which is unique, is have a mandated telephone call to check the consumer understands what they’re about to enter into. This call is powered by a set of questions that are generated by our decision engine but are asked by a human.

“We’ve been working with a university psychology department that’s been looking at vulnerable customers and we’ve developed a process for generating sets of questions to assess someone’s cognitive status, or find out if they’ve been coerced or are involved in fraudulent activity. That’s part of our overall underwriting process – no one else does it and I think it will set a new gold standard for dealing with vulnerable customers.”

He’s dismissive of that other cliché that older people can’t handle technology and want to access their financial services through a branch: 96 per cent of free2’s target demographic already use online banking.

In time, the loan product will be marketed through independent financial advisors as part of inheritance tax planning processes, but the application will remain solely online with help available from staff via email or a phone call if a customer needs it.

“We’re targeting people who are financially savvy, so if they have a particular financial requirement for a lump sum as part of their financial planning process, we’re providing more choice than exists today,” says Lindsay. “A lot of choice for larger amounts of money is only secured, which doesn’t suit many people.

“It’s all about giving people more options in considered decisions. There are lots of financial products available to people under 55 that are not available to those over it – financial institutions are not thinking laterally about people in this age demographic and how to design a new process to be able to support them. So, we will develop a range
of products, over a period of time, that are designed specifically, and only, for them.”