19 January, 2015
This is a transcript the speech delivered by Lord Wilf Stevenson of Balmacara, Chair of StepChange Debt Charity, at the Financial Inclusion: The Next Move Forward conference organised by City and Financial Global.
It seems to me that there’s been a bit of a lull in the Government’s approach to financial inclusion. It’s very good that this issue is receiving the sort of attention it ought to, from such a distinguished audience.
Let me start by saying that I although I am billed on the programme as a Labour spokesperson in the House of Lords, which of course I am, I should make it clear – as I have done to the organisers – that, at this particular point in the electoral cycle, it would not be good for my career prospects if I were to purport to announce today what my Party would do about financial inclusion.
In any case, a mere front bench spokesman in the Lords quickly learns that he or she has to defer at all times to the elected House, and to my Shadow Front Bench colleagues in the Commons.
So what I will be saying today are personal remarks. However, I am also the (retiring) Chair of StepChange Debt Charity, and one of the areas I have been pressing the Charity to develop is a “policy ask” of the major political parties as we head into the next General Election. And it this set of recommendations that I will be centring my remarks today.
So what I want to do today is give some background about what StepChange clients are telling us; link that to the impact personal debt is having on the wider economy; and end with some policy suggestions which StepChange will be feeding into the manifesto discussions in all parties. I will also be saying something about the Farnish Review which we understand is to be published shortly, as part of the Government’s response to the Treasury Select Committee.
StepChange is the UK’s leading debt charity, and last year some 600,000 people with serious debt problems came to us for help – up 20% on the previous year.
Our experience is that most people who experience unmanageable debt are also suffering with some other problem which contributes to, and exacerbates, their debt problem – such as a major shock to family life, job loss, illness or relationship breakdown.
But as the Joseph Rowntree Report this morning shows, many of our clients were already struggling with persistent low incomes at a time of rising living costs that left them unable to pay the rent, or the mortgage, their council tax, or the fuel bills, or put food on the table. As one of them said, the months seem to be getting longer…
And before seeking help from us, many had been trying to manage the pressure on their household budgets by using high cost credit, sometimes to pay for food and other essentials…a strategy that leads quickly to a downwards spiral of rising debts and deeper hardship.
Once people fall into problem debt, it gets harder and harder to get out.
They are in a debt trap, and the pattern is alarmingly similar for so many of the people we talk to:
- They start by using credit to pay essential bills
- That leads to bigger commitments next month
- They apply for new credit cards or bank loans
- They soon reach their overdraft and credit card limits – and charges and interest build up, exacerbating their overall indebtedness
- They turn to high cost credit which aggravates the situation, and by then they are in a hole from which they cannot escape
So our average client owes about £16,000 in unsecured debt to 7 or 8 different credit providers.
The good news is that this is down considerably from 10 years ago, when the average debt was nearer £25,000.
The bad news is that more of that debt is made up of unavoidable living expenses.
And consumer borrowing is increasing again, so we can expect to see problem debt increase.
Half of StepChange clients say they waited over a year between before getting advice, and being offered a solution to their problems. The longer people wait, the more intractable their problem becomes.
The effects of the debt trap are serious:
- Almost 4 in 10 StepChange clients consider that their debt problems have had a negative impact on their family relationships
- A third haven’t even told their family about their debt problems
- Three quarters say that worrying about debt problems had affected their sleep
- 43 percent say that it has affected their concentration at work, and some have lost their jobs.
It can take years to get out of the debt trap: most of our clients who have sufficient income to repay their debts on a non-statutory Debt Management Plan, will take 5 or 6 years to clear their indebtedness. And the fact that they have been on a DMP will affect their credit rating for several years after they have cleared their debts, something that could hamper their chances of passing the credit check for a job; or taking a rented flat; or getting access to sustainable, fairly priced financial products.
And of course while the debt trap is a tragedy for many millions of decent hardworking citizens, it is also drain on GDP, and a brake on economic recovery.
Recent research done for us by Baker Tilly proves that problem debt imposes significant costs on our economy. £8.3bn of costs.
- £2.3bn in job loss and low productivity at work as people struggle with their debts.
- £400m in job losses as small businesses have to let people go because the owner/entrepreneur can’t sustain their finances.
- £2.8bn in the costs of re-housing people who lose their home through debt or eviction.
- £1bn in mental health costs, which is all over the news today as a political priority.
And so on – costs of relationships breaking down, costs of children and older people going into care.
With our economy still re-establishing itself, surely this is £8.3bn bill is too expensive for debt and exclusion to be ignored as a clear economic priority?
As well as being a personal tragedy, debt acts as a brake on capacity and a brake on aspiration.
The prevailing economic strategy of consumer spending to fuel growth relies on people using credit. For some people this will be sustainable, but for far too many it is not.
And modelling by the Centre for Economics and Business Research shows that a second parliament of austerity and patchy growth will sustain the risk of lower income and more households falling into debt, which could further extend a sustainable economic recovery.
So what I have been arguing is that while there is a huge problem out there in terms of individuals experiencing problem debt, there is also a £8bn macro-economic problem which taken together require a new policy mix.
In the past much of the debate about financial inclusion has focused on getting people who are unbanked and outside the “system” into mainstream financial services. This is so that consumers are able to take part in society and take up opportunities otherwise denied to them. It will for example, mean that they do not find themselves paying more for their goods and services - the “poverty premium”. In this sense, products like basic bank accounts will make a huge difference to our clients as they try to get their lives together after being in problem debt. We welcome recent initiatives here.
But being included in mainstream financial services is not an end in itself:
- Around two thirds of StepChange clients in problem debt already have credit card debts and overdrafts.
- Our average client had a debt of around £16,000 to 7 or 8 providers
- Many people who turn to high cost credit have mainstream credit debts too…60% of our clients with payday loan debts also have credit card debts; 62% have overdraft debts
My point is that people who have been part of the mainstream in terms of financial services can easily fall into difficulty, and can then become deeply financially excluded, facing greater costs for every-day expenses.
So sustainable financial inclusion must also be about ensuring the mainstream financial services sector supports people to stay out of further difficulty when they fall on hard times.
Now, what can be done to help this broader definition of financial inclusion?
Savings can prevent people from falling into problem debt. New research for StepChange Debt Charity shows that 500,000 households would have avoided problem debt if they had £1,000 saved. Low income households in particular would see their chances of falling into debt reduced if they had ‘rainy day’ savings.
Better protection from arrears, charges and enforcement can help. 6 in 10 StepChange clients who had all of their interest, charges and enforcement actions paused after getting advice said their finances had stabilised.
Debt advice can make a significant difference in helping people pay down their debt and improve their emotional well-being. Of our clients:
- 8 in 10 percent said that their anxiety reduced
- Almost half said it led to family relationships improving
- A third of those who had been out of work said it made it easier to apply for a new job
- More than 8 in 10 of those in work said it made it easier to sustain their current job.
More suitable credit products can help people avoid difficulty. High cost short term products are poorly designed for the people who are using them, and the purposes they are using them for. Low income families need longer term, lower cost credit products to afford bigger ticket items.
We need a different regime to deal with unmanageable debts: we have been working with the Central Bank in Ireland to come up with a scheme that will work there to resolve their chronic problem of both secured and unsecured debts, and it is interesting how the debate there has matured relative to where we are.
Drawing these themes together, StepChange has set out some policy proposals in an Action Plan for how the next UK government can address problem debt to promote sustainable finances for the millions of families currently struggling.
StepChange’s proposal is to build short term savings into the pensions auto-enrolment framework.
Low income families aren’t saving because the incentives contained in the main savings policies just aren’t relevant to them – offering relief on tax doesn’t mean much if you do not pay much or any tax in the first place.
It is also hard for people with very tight incomes to make a positive choice to save when they have so many more immediate financial concerns. It’s also silly to get people to save when they’re getting such low interest on those accounts.
- The first £1,000 saved through pensions savings would go into a ‘rainy day’ savings pot
- Once this threshold is reached, all pension savings would revert back to the longer term pensions savings pot
- Using the NEST infrastructure, the savings pot would be transportable between employers, and people would hold onto it if they fell out of work too
- It builds on the success of auto-enrolment savings, where government and employer contributions match the savings.
This is very similar to what the CBI has proposed in a recent briefing on how employers can help their staff boost their savings. Hopefully we can build a new consensus across the political spectrum that getting the savings habit is key to resilient family finances and sustainable financial inclusion.
We need to improve credit products available to low income families so that they do not rely on high cost forms of credit like payday loans
- Where people are using credit to spread the cost of larger, essential purchases – a new boiler or fridge, or new school uniforms – they need products that are not going to get them into deeper difficulty quickly
- We need to address problems in the rent to buy market particularly for white goods, and electronics.
- Credit union loans, CDFIs, even government welfare loans provide relatively low interest forms of borrowing, but are not to scale
Successive governments have dabbled in different efforts to ensure low cost loans are available for people who need them
But despite these efforts the payday lending market grew to be worth £2.8 billion
Families need a sustainable, large scale, mainstream offer of suitable credit products for their needs
So we think the next government should look at:
- The kind of products that would be sustainable for low income households
- The scale of need for different kinds of product and the extent that these needs are being met
- The best way that Government can plug the gap in lending capacity for different types of products
- How sustainable lending for low income households can most appropriately be delivered
People with debt problems, need a guarantee of help if they seek advice and commit to working out a resolution of their problems.
StepChange is calling for statutory protection against interest, charges, collection and enforcement action when people get help with their finances to repay their debts.
This would entail:
- Following a budget assessment through debt advice, people would sign up to an affordable debt repayment scheme
- Statutory Protection from interest, charges and enforcement action would be put in place as long as people make their agreed contribution to their debts.
- This is modelled on the excellent Scottish system – the Debt Arrangement Scheme – and our clients tell us that if such protection existed in England and Wales it would have encouraged them to seek debt advice earlier; make them less likely to use more unaffordable credit as a way of coping; and less likely to suffer the stress that drives much of the harm debt causes.
This is an obvious, low cost, high impact solution. It gives people control, rewards responsibility, saves creditors the cost of pursuit and collection, and gets them a predictable rate of repayment.
Related to this we need to protect children from the harm caused by problem debt. We believe there should be a statutory code covering debt collection and enforcement standards where creditors and their agents are aware there are children in the household.
We need to put free debt advice on a steady footing
Timely debt advice is critical to helping people deal with their debts and get their finances back on track.
With 2.9 million people in severe problem debt, there are probably about 1.4 million people not getting the help they need. Additional funding could be raised by
- An additional levy by the FCA for example on high cost credit providers, whose loans lead to a disproportionate strain on the debt advice sector. A “polluter pays” principle.
- Encouraging all creditors including HMRC and Local Authorities to make contributions to debt advice charities where their customers are signed up to a sustainable solution to pay back their arrears.
- Increasing the funding available to cover debt charities’ costs of administering Debt Relief Orders. It costs individuals £90 to apply for a DRO. Nearly all that money goes to the government. Yet most of the work is setting up DROs is done by charities at a cost to them of some £10m each year. Why not recognise the reality that the charitable sector are best placed to provide the practical help people need and allow them to carry out the whole process and set the fee accordingly?
We need to ensure that insolvency solutions are fit for purpose
The consumer credit market has changed dramatically in the almost thirty years since the principal parts of our insolvency system were introduced in 1986.
As the credit market has changed, so too has the nature of problem debt in the UK, the profile of people who find themselves in difficulty, and the kind of debts they have.
But our insolvency options have only been updated in piecemeal ways, leaving gaps in protection and coverage, prohibitive fees, and a lack of flexibility around changing circumstances.
We want the next government to review the provision for insolvency take a targeted approach to updating insolvency solutions, so that they are fit for purpose for today’s needs and help people who have fallen on hard times return to financial inclusion.
We need a comprehensive package which encourages early action, protects those who sign up to a formal system to repay their debts, and which does not unreasonably penalise them for the action they have taken, by freezing them out of the credit system.
I fully accept that there is an issue here of moral hazard. However the status quo is not an option. Of course it is a difficult balance between enforcing debts - if you owe money and you can pay it back you should; and recognising that some people cannot pay their debts and it is in everyone’s interest that those debts are written off or as some people call it, “forgiveness”. The notion of debt forgiveness is not a woolly liberal one. There comes a time when pursuing someone for debt is simply not worth it for creditors. Banks write of Billions of debt every year – they often sell debt for 10p in the Pound, so there is a margin here…
But more importantly, it is in society’s wider interest, and good economics, to at least be prepared to consider how we can remove the debt burden from individuals and families. I am not suggesting that people should be easily forgiven their debts, and at StepChange I am proud that we helped our clients pay more than £360m off their debts last year.
But my challenge is, if people are doing their best to pay their debts, do we have the balance right in terms of forgiveness versus repayment? And are we penalising people too much and for too long if, for no direct fault of their own, they have fallen into debt which they simply cannot repay?
Finally, before I conclude I would just like to mention the review into the Money Advice Service the Government asked Christine Farnish to carry out. I understand that she has now reported and we expect to see a publication shortly.
I have high hopes of this Report, as Christine is much admired in this sector for her knowledge and sound judgement. I hope that she has felt able to be bold in answering the fundamental question about the future role of Money Advice Service in the financial inclusion and debt advice spaces.
I thought the Treasury Select Committee were right to raise questions about the role of MAS, and the subsequent arrival on the scene of the FCA as regulator of these areas has fundamentally changed the landscape. In my view MAS’s role now needs to change, so that it complements the work of the charities and not for profit agencies which work so effectively in providing debt solutions and money advice . It should not set out to do what others are better placed to do. After all the financial services industry already do a great deal of (largely unsung) work for their customers who experience difficulty in repaying their loans.
MAS cannot and should not be a quasi-regulatory body, since the overlap with the FCA is not helpful, and the rest of its work could and in my view should be left the existing bodies, working together directly with the Financial Services industry to provide a high level service to far more people. Changes in the present statutory position is required, if only because having a body with ill-defined powers, second guessing the experts, is a wasteful way of achieving progress in this area.
If MAS is to be retained in a slimmed down form, it might find a role in influencing financial services policy from the point of view of its financial capability and behavioural insights, complementing and supporting the excellent work done by the FCA’s Consumer Panel and others.
As I said at the start of my remarks, it is great that work is continuing on financial inclusion, and I have been delighted to be invited to join the Financial Inclusion Commission, which is about to publish a report, which I hope will carry a great deal of weight.
What I have tried to do today is link the impact personal debt is having on too many of our citizens, link that to the wider economy;. There is so much to be done to make sustainable financial inclusion a reality for everyone.
The challenge now is to build consensus about the need for real political commitment in the next parliament, addressing a wider consideration of financial inclusion, including problem debt. Action is required to make a difference to the millions of families struggling across the UK, and it would be good to think that we could trace the commitment to sort this out to this Conference today...