Speaking at a Diversity and Inclusivity Finance Forum (DIFF) event, Dr Charles Afriyie, director at the Finance in Society Research Institute (FISRI), said the Bank of Mum and Dad was the ninth-largest mortgage lender, lending £9.4bn to property purchases in the last year alone.
He said that over half – 57% – of first-time buyers under 35 years of age needed financial support from their family.
“I want to suggest that that isn’t merely a simple feel-good family story. I believe it’s a symptom of structural fragilities that we have in the City and in our industry,” Afriyie said.
He explained that if 57% of new business “relies on the generosity and the mortality of a specific generation, baby boomers, then your pipeline isn’t really a market”.
“I believe it’s a hostage of fortune. Most of our businesses are underwriting a generation that is de-risked by family equity, but in fact, psychologically, the people we are underwriting are dislocated from the traditional path to financial independence.
“So, understanding these intergenerational perspectives isn’t simply a social exercise, it’s a core requirement for understanding how to make the best decisions going forward,” Afriyie said.
He called on the sector to “build bonds between generations” and commit to “objective inclusion”, so lending will be done on the “potential of the individual”.
“The Bank of Mum and Dad, I submit, is a finite resource, but the untapped talent of the intersectional borrower is an infinite market,” Afriyie said.
Different borrowers have ‘tailwinds’ and ‘headwinds’
Afriyie suggested looking at the Bank of Mum and Dad through two lenses: the theory of social reproduction and intersectionality.
Social reproduction theory suggests that social inequality is passed on due to the accumulation of economic, social and cultural capital, giving certain people more advantages than others.
Specifically regarding the Bank of Mum and Dad, Afriyie explained that this means that some borrowers have a “tailwind” as they can benefit from a cash deposit to buy a home, a network of people to consult when a deal “gets trickier”, and “familiarity with the rules that are not written… and the sense of entitlement to be in the room”.
“These three collective forms of capital come together [to] almost guarantee success to their recipients – in fact, regardless, seemingly, of their individual effort. When we look at our spreadsheets and our models, we aren’t rewarding the best effort – I submit, in reality, we are probably simply rewarding the tailwind,” he noted.
Afriyie said that if social reproduction theory gives borrowers a “tailwind”, then intersectionality regards the “headwinds” that borrowers may face, such as ethnicity, gender, disability and so on.
Upbringing creates ‘money scripts’ that impact borrower behaviour
Afriyie said upbringing “doesn’t only open doors and close certain doors for us”, but also creates a “set of cognitive blueprints, or money scripts, to think about money and wealth”.
He explained: “Those who are systematically excluded often see debt as a trap and not a tool, and this can often lead to forms of financial hypervigilance. This could be in the form of being wary and, where they can, saving excessively in low-yield assets like cash.
“On the other side, you can also have the phenomena of gifted deposit dissonance. This is where the borrower is gifted with the cash deposit, so they have the asset, but it is possible that they lack the psychological muscle memory of saving, and this can make them a unique behavioural risk in periods of interest rate hikes.”
Afriyie noted that if models, business culture and ways of thinking “do not account [for] and recognise these forms of money scripts, then we are not holistically assessing the risks and opportunities of our clients”.
He added that firms could set themselves apart and be “unique” by focusing on financial emotional quotient (EQ) or emotional intelligence.
Financial EQ is “your ability to recognise, understand and price these emotional drivers behind financial behaviour”.
“If you have high financial EQ, then your firm will be able to recognise that the self-made borrower is actually a high-value, highly resilient asset class because they have simply proven that they can survive in a system that was built for others.
“I want to challenge you to think about auditing the integrity of your possibly biased legacies. If your algorithms are trained purely on raw historical data, and your practices are only simply reproducing the structural means to wealth, then you’re only simply training your systems to maintain a single point of failure. So, it is time to move from a purely product focus to a psychological focus,” Afriyie said.
