While an improving economy brings good news, confidence can’t spread to households forced to borrow to pay bills, worrying about spiralling bank charges, or the bailiff’s knock on the door. Households living with insecure work, low pay and rising living costs cannot build the resilience to weather shocks and plan for the future.
A sound and stable economy must rest on the foundation of sound and stable household finances. But too many households who are doing the right thing, working or looking for work, are unable to escape the risks that threaten to tip them into long term financial difficulty. Policymakers have focused on risks to macro economy, public finances and the banks – they also need a plan to address the risks faced by ordinary working households.
This election is an opportunity to change this. As a debt advice charity every day we see the devastating harm that debt causes in mental and physical health problems, broken families, lost productivity and wasted expenditure costs. We estimate that the harm experienced by households struggling with debt right now will cost UK society an estimated £8 billion. So there is a strong imperative for the new Government and new Parliament to act.
Based on our experience as the UK’s largest debt advice charity StepChange suggests a range of policies that will help struggling households now.
1. A breathing space scheme for hard pressed households
We know that getting the right help at the right time is crucial for people to recover from financial difficulties. Recovery is dependent on getting effective protection from three key drivers of worsening debt problems: further interest and charges that inflate debts; pressure to meet unaffordable repayments; and collection and enforcement action by creditors. Currently in Scotland, the Debt Arrangement Scheme offers such protection, but the same level of protection isn’t available in any other part of the United Kingdom.
So we urge Westminster to look at adapting aspects of the Scottish model to help those with debts. We are calling for a new statutory breathing space scheme that will provide:
- A period of protection against further interest, charges, collection and enforcement action for up to one year while people benefit from debt advice so they can stabilise their financial situation and start to resolve their debts
- Continuing protection from further interest, charges, collection and enforcement action where people are repaying their debts through a debt management plan
2. A better alternative to high cost credit
Despite stronger regulation of payday lending and support for the growth of credit unions, there are still 1.1 million people having to use high cost credit to keep up with the cost of everyday essentials like food, rent and household bills. The scale of alternative lending is still limited and the availability of no-interest loans and grants for the most financially excluded has reduced through cuts to the Social Fund and a local welfare system facing serious funding constraints.
Provision of affordable alternatives to high cost credit can be increased by:
- Government using its convening power to bring together investment and innovation to develop the reach of community lenders, other third sector affordable credit providers and accessible FinTech solutions
- Government introducing or underwriting the development of a new scheme for low and no interest loans and grants to help the most financially excluded who struggle to safely access any form of commercial credit. This could be achieved in partnership with commercial lenders and the voluntary sector, following the Australian example of Good Shepherd Microfinance that has helped over 100,000 people without access to mainstream credit avoid high cost lenders.
3. Action to tackle harmful credit
Policy action to tackle the harm caused by payday loans was welcome. But there are other high cost products still causing harm to struggling households. Charges for unauthorised overdrafts can be more expensive than a payday loan. Rent to own agreements can see hard pressed households pay more than double for household goods. Logbook loan borrowers can end up repaying substantial amounts and still see their car taken away. The next Government needs to address the harm caused by high cost credit used by financially vulnerable households through:
- Ensuring the introduction of an independent and fair cap on unarranged overdraft charges
- Extending the principle of a ‘total cost cap’ introduced for payday to other high cost credit products to protect borrowers from excessive costs
- Bringing forward legislation to bring logbook lending to modern standards of consumer protection
4. Help households build rainy day savings to protect against shocks
Our research found that 14 million people had an income shock in the last year and people who had income shocks account for almost three quarters of people in severe problem debt. Yet 14.5 million people do not have enough to put anything aside for the rainy day savings that could help protect them against shocks. If every family had £1,000 saved for a rainy day, our research shows half a million families would be protected from falling into problem debt.
We welcomed the Help to Save scheme for people on working tax credit and Universal Credit to build a savings buffer. More needs to be done to extend rainy day savings among the lower paid by:
- Action to ensure maximum take-up of Help to Save among those households that would be eligible
- Building a rainy day savings element into the pensions auto-enrolment framework with the first £1,000 saved being short-term saving and subsequent sums going into a pension
- Savers would be incentivised via tax relief and employers’ contributions
5. Significantly improve the conduct of public sector creditors
In a 2016 survey, StepChange Debt Charity clients said that public sector creditors were most likely to treat them unfairly. Half of respondents said they had been treated unfairly by bailiffs (collecting mainly government and local government debt). More than 40% said they were treated badly by a local authority creditor, and HMRC debt collection practices were rated no better than payday lenders.
We know that unfair creditor practices can drive people further into debt. Six in ten of those people that did not get the help they needed from their creditors went on to take out more credit to try to cope with their debt problems, while 29% said that a creditor’s actions prompted them to fall behind on other bills. We call on the next Government to significantly improve public sector creditor practices:
- Introducing an independent statutory regulator to provide standards and oversight of both individual bailiffs and bailiff firms. This should be accompanied by a free, clear, transparent and accessible complaints procedure.
- Introducing a statutory code for public sector debt collection to ensure that: Standards and oversight are raised to at least the level applying to consumer credit lenders – payday lenders operate to higher standards than public creditors.
- Public sector creditors do not pass anyone for enforcement who has been assessed as being in vulnerable circumstances
- Good practice guidance for the collection of Council Tax arrears is legally binding upon local authorities; including a requirement to evidence efforts to arrange an affordable repayment plan before pursuing people through formal enforcement action
The proportion of people we see with Council Tax arrears has grown significantly in recent years. People facing an unaffordable payment demand for Council Tax are almost three times as likely to borrow more money and almost 50% more likely to fall behind on other bills to try to meet that demand.
Households in debt suffer with mental and physical health. They struggle to find work and to get on at work. Their children have problems at school. A policy to tackle the blight of debt is a health policy, an education policy and an economic policy. A policy to tackle debt boosts productivity and supports the security and aspiration of people who feel they can’t get on in life despite doing the right thing.