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Understanding the perspective of consumers struggling with debt and affordability – Mike O’Connor speech to FCA staff

13 November, 2014

"Last year, 500,000 people struggling with problem debt approached StepChange Debt Charity for help. This year we expect that number to reach 600,000.

We calculate that there are 2.9 million people in Britain struggling with acute problem debt. They are at the bottom of a wider trajectory of people struggling with their finances – the Money Advice Service estimate that there are 9 million who are over indebted. Many people may not be in debt today but are just getting by and are vulnerable to an income shock or to an increase in the cost of living. See our report “Life on the Edge”.

These 2.9 million people are showing 3 or more signs of financial difficulty – falling behind on bills or credit commitments, using credit to keep up with these commitments, using credit routinely to last until payday, making minimum repayments for extended periods of time.

Who are they?

People in problem debt are more likely to be families with children, more likely to be in full time work, to be aged 25 – 39, and to be on middle incomes.

Financial precariousness is widespread among the people one would expect the system to be working for.

Our average client income is around £1300 a month after tax – that’s very close to the national average. Around half are in work when they come to us – and others will have recently been in work until they lost their job.

How do they fall into difficulty?

They start with stretched household finances

Paying essential costs eats up the vast majority of our clients’ income – the average private rent is £800 a month, Energy bills and council tax likely to be over £100 each – very little leeway for people to save up money and build a buffer.

Very few of our clients had savings before they fell into difficulty. This lack of savings is a major challenge, not just for our clients but for the wider population. It is a serious challenge that our society need to address.

They rely on credit to cover essential items

A big part of the problem is that people end up reliant on credit for covering larger or sudden costs – a replacement fridge, fixing the car, paying a sudden bill.

Credit helps people manage these costs in the very short term, but the costs of interest mean there is even less money for people to put aside for savings or contingency if something changes or another cost springs up.

If clients use a hire purchase provider to buy white goods, they may end up paying four times as much as the high street price for that item. I understand why people do this, and why the market provides such services, but is it really right that the poor pay so much more?

Relying on credit for essential items means that many are always paying down credit, always have credit commitments alongside their essential bills. This means that if anything changes – a change in income, another sudden cost – they have less flexibility in their finances to cope.

They rely on credit as they adjust to an income shock

The majority of our clients cite a shock to their income as they key reason they fell into difficulty – more than 6 in 10 cite factors such as:

  • Unemployment
  • Reduced hours at work
  • Injury or illness
  • Divorce or separation

Yes, there are people whose irresponsible actions land them in debt, but for most people problem debt is the result of life events which could happen to any of us.

They turn to credit for a number of reasons to

  1. They have existing credit lines open, and can get the cash they need quickly and with certainty – especially if they are using their overdraft or a credit card to pay essential bills
  2. They are not aware they might be able to get help or relief from their creditors, and if they do try – they are unlikely to have much luck
  3. People are optimistic about their chances of building their income back quickly – the majority of our clients do not apply for additional benefits as they fall into difficulty, and those who do tend to wait months before applying for support.
  4. People don’t think they are eligible for benefits and other forms of support
  5. Many people have never claimed benefits before and don’t know how to go about doing it. Our Benefits checking service finds that our clients who are found eligible for more benefits are entitled to an average £104 a month.

Falling into a debt trap

When people use credit as a safety net to keep up with essentials on a low or reduced income, their debts can quickly spiral. It might look like a safety net but in reality it is a snare dragging people further into problem debt. Peoples’ finances are likely to be on a downward slope, finding it harder and harder to cope as their arrears and commitments mount.

People might start by struggling with their essential bills. If they can’t afford to meet their commitment and try and negotiate with their creditor, they might not get much help.

This will prompt some using credit to keep up with essential bills like rent or mortgage, council tax payments or energy.

But if people can’t afford their essentials without credit one month, they will struggle even more the next month with the same bills to pay, the credit to pay, and interest on top of it.

As credit commitments mount, and interest builds up, it can be harder and harder for people to get back on top of their finances.

They may soon find that their mainstream credit lines run out, and some may then turn to high cost credit line to keep up their minimum payments.

What kind of debts do people have?

The average unsecured debt we see amongst our clients is now below £16,000 per client – this has been in steady decline since the financial crash, as the nature of the debts that people have has changed.

We now see people on lower incomes with smaller, but harder to shift debts because more of them are essential living costs such as energy. The nut may be smaller but it is harder to crack.

Types of credit:

Around two thirds of our clients have credit card and overdraft debts, owing an average of around £9,000 on their credit card, and £2,000 on their overdraft.

Around a quarter have a payday loan – this number has risen fifteen fold since 2009.

A debt seldom comes alone – people tend to have multiple debts across different credit products. For example 70% of people with credit card debts have an overdraft debt.

Crucially, people with payday loan debts tend to have mainstream credit debts too – 60% have credit card debts, 62% have overdraft debts, and 45% have personal loan debts. This shows that the majority of people who end up in difficulty with payday loans have cycled through mainstream credit options before resorting to high cost credit.

The big trend we’ve seen since the credit crunch is the rise and rise of arrears on essential bills. We’ve seen almost doubling of the proportion of clients who are behind on electricity, gas and council tax in the last five years. The size of their arrears has also grown significantly. The average energy debt is now £1,000.

These trends are particularly worrying – when you consider the income profile of our clients. Those with little spare income who need to borrow to cover essentials will struggle to meet short term repayments of payday loans, and will find it hard to make back the arrears on essential bills.

What is the indebted consumer experience of financial services?

We find that our clients have typically poor experience of financial services.

Three quarters of our clients asked their creditors for help as they were falling into difficulty. But too few found that asking for help led to a real improvement in their circumstances.

  • Around a third got no help at all from any of their creditors
  • Only 15% got all their creditors to put on hold all enforcement action, additional interest and charges
  • The rest got a mixed bag of support and breaks from enforcement action and interest and charges

Not getting support from creditors made a bad situation worse for many of our clients:

  • 60% who did not get the help they needed took out more credit to try and cope with their debt – 21% took out a payday loan.
  • 29% said that a creditor’s actions prompted them to pay that bill and fall behind on other bills.
  • 28% said that the stress from debt made it harder for them to focus on applying for new or better paid work.

Indebted consumers have a generally bad experience of financial services providers, and understand that lenders’ actions have led to them falling into deeper financially

There is a vicious cycle at play. The actions of creditors can put people into further difficulty, building up debts as indebted consumers get the message that they won’t get help from their creditors.

Consumer behaviours

The key thing for all policy-makers to understand – whether financial services companies, regulators, government or charities – is how people respond in a time of crisis.

Insights from behavioural economics tell us a number of things about consumer behaviours when they are under stress:

  • People have short horizons as they calculate the risk of their actions
  • People are optimistic about their circumstances improving
  • People need straight-forward, certain options
  • Default options are likely to have a strong appeal

What does this mean in terms of credit and debt?

Using credit is a more simple and certain option

  • Having existing credit lines open – like overdrafts and credit cards – makes it easier for people to use those credit lines for spending, even if it isn’t sustainable
  • People are less likely to apply for support or more sustainable loans where they are uncertain about being eligible or that they will get the money quickly enough – this has implications for whether people try and negotiate with their creditors, and also whether they think they will get support they need from debt advice
  • They may find it challenging to navigate complex options – such as the piecemeal provision of welfare loans, charity grants and credit union loans. Say what you will about Payday loan companies but nobody can say that they do not offer a very easy and attractive front end, albeit that for too many it leads to serious problems.

People’s innate optimism about their circumstances reinforces their usage of credit

  • Optimism can make products like short term high cost credit appealing because it’s presented as easy to pay back in a short period of time –they think they can do it
  • Optimism may also stop people seeking debt advice – as many consider it a last resort and think they are able to get out of difficulty without help.
  • 1.7 million people getting advice, but there are 2.9 million people in problem debt
  • People wait too long before seeking advice: 50% of our clients waited a year to get advice

Once these behaviours are ‘locked in’ they reinforce credit usage further

  • If people come to see themselves “coping” when they use credit, this may affect their view of more sustainable options for dealing with their circumstances
  • People may worry that seeking debt advice or applying for welfare support might harm their credit rating, and therefore, their chances of getting credit to keep up their coping strategy

What does good look like for these consumers?

We need to learn from our understanding of consumers to make sure that people get good help as easily as they can, ensure that we’re helping build up their resilience to future shocks and changes, and ensuring that the regulatory framework does enough to protect people from destructive and unsuitable forms of credit.

Giving people better tools to cope with sudden costs and income shocks without resorting to credit

  • Ultimately, we need better savings policy so that people on low incomes are better protected from shocks to their income or sudden costs
  • The ISA policy – especially increasing the rate at which tax is relieved – do little to appeal to low and middle income consumers
  • The tax relief incentives are not very effective on lower income households who do not pay a significant amount of tax in the first place
  • Prizes, bonuses and matched savings are likely to be more effective at encouraging saving for this group
  • Policy needs to make saving a default option – whether through income-linked contributions, through Universal Credit, or as a part of pension auto enrolment
  • Research we are soon to publish shows that a savings buffer of £1000 will protect a substantial number of people from falling into problem debt.

And we need a better guarantee of protection for people in moderate difficulties

  • We are calling on government to introduce a new guarantee of support for people in temporary and moderate financial difficulty
  • There’s a gap in the debt solutions – only IVAs and bankruptcy come with statutory protection that all creditors must adhere to (in terms of affordable payments, freezing interest and charges and stopping enforcement action)
  • Tools that we use to help people with more modest debts – such as Debt Management Plans and Token Payment Plans – don’t have that protection – all it takes is one creditor to defect from the plan and people will be struggling with their commitments again.

Protecting people from the harm of destructive forms of credit

We believe action is needed to protect people from all kinds of ‘distress purchases’ that can see them falling into difficulty. This means:

  • Dealing with financial products that quickly escalate people’s financial problems – through unaffordable lending, high default fees and charges, etc.
  • Limiting the telemarketing industry’s pestering of struggling consumers with phone calls and texts encouraging them to take out high cost credit
  • Ensuring that the fee charging debt management industry does not take advantage of vulnerable consumers I am hopeful that the process the FCA is going though in authorising these firms will lead to far fewer people getting a poor deal.

The FCA has a key role to play in creating and enforcing stronger rules on all destructive forms of credit

  • We welcome the efforts of the FCA to regulate high cost short term credit
  • We would like to see similar principles applied to other forms of high cost lending that fall outside of the cap’s definition – overdraft charges can work out more expensive in some circumstances, and home collected credit, guarantor loans and other forms of credit are emerging as expensive, with some areas of poor practice when people are in difficulty.
  • The FCA is certainly sending a strong message, but these firms have proven themselves innovative and dynamic in finding opportunities to develop their business. Without proactive efforts, we worry that the FCA could end up on the back foot trying to limit the damage of the next big scandal financial product.

In the meantime, people on low incomes need more sustainable credit options

  • Credit isn’t the answer to every financial problem – there are many circumstances where any form of credit with interest will just see households get into further difficulty
  • But where people on low but steady incomes can only access higher cost credit, they will end up reliant on credit for a long period of time, not getting to the place where they can build up savings.
  • The sustainable options available are confusing and uncertain – every council has a different scheme with different eligibility rules for affordable loans, and each credit union has its own policies too. In some cases, particularly for local councils, this leads to extreme rationing of loans.
  • We should follow the lead of the Australian Good Shepherd programme, which pools a range of charitable, government and financial services support and funding, and provides access via mainstream banks and high street outlets.


The challenge facing the financial services industry in improving their offer to hard-up consumers is significant.  But the £8.3 billion social cost of problem debt is too big for policy-makers, the industry, the FCA and indeed society to ignore.

Debt is too complex and multifarious a problem for any one organisation or sector to address. A joined up approach is needed, and everyone must play their part.

The mainstream financial services industry must ensure it isn’t turning its back on lower income consumers in its products, and it must do all it can to get people showing signs of difficulty to get advice.

The FCA should keep on the ‘front foot’ with areas where there is still a disproportionate risk of people falling into difficulty quickly.

Finally, Government must step up its efforts to help people who’ve fallen into debt and prevent more families from falling over the edge.

StepChange Debt Charity will continue to develop grounded, implementable policy ideas, using our insight into people in problem debt, to inform debate among all interested parties, and make the case for the change that families on the edge badly need."

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