Defining and addressing financial vulnerability in the United Kingdom: a data-driven approach to identifying and mitigating economic hardship

Financial vulnerability represents a precarious state where individuals face substantial risks of economic hardship due to restricted access to resources, volatile income, and high susceptibility to economic changes. The concept varies over time and across individuals and groups, creating challenges for financial service providers in prediction and identification. When prevalent on a societal level, it can hamper prosperity and hinder national productivity. Traditional tools for detecting financial vulnerability are often inadequate as they do not take into account individual circumstances.
The proposed fellowship seeks to address this challenge using a data-first approach. It aims to capture financial vulnerability by focusing on housing (mortgage and rents) and energy costs – two of the largest cost categories impacting UK households. It will exploit the effects of exogenous shocks on these costs to map how financial vulnerability evolves under the moderating influence of diverse demographic characteristics. These insights could then refine the offerings of financial service providers and adjust policy responses to prevent financial instability and increase resilience.
Current methods of assessing financial vulnerability, such as liquidity ratios, debt-to-income analysis, and credit scores, often make incorrect assumptions about income consistency, uniformity of consumers, and resilience to external shocks. Therefore, the fellowship intends to scrutinise housing and energy cost shocks and develop a more responsive, granular understanding of financial vulnerability over time.
The proposed empirical strategy involves merging the highly detailed proprietary financial transactions data from SDR’s FINDS, managed by the Smart Data Foundry (SDF) at the University of Edinburgh, with other non-proprietary datasets to characterise the moderating impact of unique demographic traits on financial vulnerability. The FINDS database provides pre-arranged access to anonymous,...