Mike O’Connor, chief executive of StepChange Debt Charity, spoke at the personal debt summit in London on 21 January 2014. This is a transcription of his keynote speech.
Hello and a warm welcome to this personal debt summit hosted by the Local Government Information Unit and StepChange Debt Charity.
We are delighted to be working with the Local Government Information Unit and to have the opportunity to talk with local authorities about the problem of household debt. Today’s conference is about building our understanding of the nature and causes of household debt and how it affects people and communities.
We want to take this time to think about what we can do to bring about change, to help people struggling with debt now, and what we can do to prevent more people falling into problem debt in the future.
StepChange Debt Charity has been helping people find solutions to debt problems since 1993. We have grown to be the largest specialist debt advice charity operating across the UK. Last year 538,000 people used our telephone service or online debt remedy. Our free to client debt management plans are helping 145,000 people to make affordable and sustainable repayments to their creditors. In 2013, we helped people pay £338 million off their debt.
And we are still growing. Last year the number of people contacting us for help with debts increased by about 30% on the year before.
This is in part a result of our burning ambition to help more people who are struggling with debt, and we know that there are many more people who could benefit from our support. The latest research from the Money Advice Service suggests nine million people could benefit from help and we need to think creatively how we can reach them. As MAS showed the nine million people are not all the same and we need appropriate strategies to reach them. One approach will not fit all. We need to be more imaginative in how we approach them. We should draw on what we have learned from modern behavioural economics and not rely on what we have done up to now.
We know how debt can destroy lives – damaging health, breaking up families, entrenching poverty and terrible hardship. This creates significant external costs that fall on all of us.
We know that more than 40% of our clients spent a year or more worrying about their debts before seeking help – a time when debts can escalate into lasting damage.
We know that people under intense financial pressure will often use strategies that cause more harm in the long run. Using high cost credit to make ends meet; paying large fees to commercial debt management firms for poor quality advice; even going to illegal loan sharks.
So we are very pro-active in trying to reach out to more people earlier. Trying to get them to the right solutions before their debt problems can really take hold and cause serious lasting harm. We have been advertising our service in the broadcast and print media and we are working with more than 700 partner organisations, including lenders, utility providers, housing associations and charities that refer people to us for help.
We also need to think how we help get back on their feet after they have sorted out their debts. How do we help them avoid getting back into difficulties? What are the obstacles to establishing a more sustainable financial life and how can we remove them?
What we are seeing with debt right now
The growing number of people contacting us for help reflects a huge number of households struggling under intense financial pressure. Five trends and issues drawn from the experience of StepChange Debt clients in 2013 illustrates this well:
- Consumer credit remains a key part of the UK household debt story. The decline in consumer lending since 2008 has been accompanied by a trend where the average total unsecure debts of our clients has been falling – from £25,000 in 2008 to £16,000 now. Good news, but some six years after the onset of the credit crunch, this debt level still represents an unaffordable 96 per cent of our clients’ average net annual household income.
- At the same time we have seen a big increase in high cost credit use, and payday loans in particular - from two per cent of our clients in 2009 to over 23 per cent today. Over this period the average payday loan debt of our clients has grown to nearly £1,650 - more than the average net monthly household income of these clients.
- Around 60 per cent of our clients are in households where at least one adult works. But many are struggling to cope with lost income from wages of self-employment by a household member – around 43 per cent of the reasons given for debt problems relate to job loss or reduced income. Analysis of clients in 2012 showed 36 per cent of households where only one adult was in full time work had a negative budget, even after budgeting advice. For these households, work was not paying enough.
- And while much has been said about the squeezed middle and stagnant real income growth, the situation has been even bleaker for many people. Average household incomes have seen an absolute fall of 4 per cent since 2009, with falling incomes from employment the big driver.
- We are seeing a significant increase in the proportion of our clients in arrears with essential household bills.
i. 16 per cent of StepChange Debt Charity clients had council tax arrears in 2013, compared to 9 per cent in 2011.
ii. 10 per cent had electricity arrears and 7 per cent gas arrears, compared to 6.5 per cent and 5 per cent in 2011 respectively
iii. 11 per cent had rent arrears compared to 5.5 per cent in 2011
What’s coming down the pipe
The challenge we all face is dealing with problem debt, underemployment, falling incomes and acute budgeting problems. Whilst there are welcome signs of economic growth, the problems facing our clients do not seem to falling.
We commissioned YouGov to carry out a major new survey highlighting households’ vulnerability to financial difficulty in the UK right now. This found 15 million adults showing one or more of five early warning signs of growing debt problems such as:
- using credit to pay other credit commitments
- relying on credit to get through to payday
- falling behind with essential household bills
- being regularly hit with default charges
- making minimum payments on credit cards
Of more concern, three million showed signs of deep financial difficulty but only four in ten of these people said they would currently consider taking debt advice. That’s nearly 3,500 people in every local authority in England and Wales currently using strategies to cope with difficult household finances that increase their risk of serious and enduring harm from problem debt.
Debt Awareness Week
This is why we have launched a Debt Awareness Week this week, when many households are facing up to the gloom of post-Christmas bills. We are urging people to seek help before their debt problems become catastrophic. Fee debt advice is there for you and it will help you find a way to a sustainable, long term solution to financial difficulties.
We are very keen to work with you on this awareness raising mission. Local government, creditors and charities can all play a key part in encouraging early engagement with debt problems.
Much is being done here already. Many local authorities are working hard on strategies to deal with problem debt in their areas. StepChange Debt Charity’s largest office is in Leeds and we enjoy a good working relationship with Leeds City Council. We would love to see how we can help other local authorities to deal with problem debt on your patch. We think that there is much more that could be done.
So today is about sharing ideas and approaches to tackling problem debt. About working together to get effective help to financially vulnerable people before they reach a crisis point that becomes very much more difficult to recover from. In outline there are a number of questions that we believe need to be addressed to take this forward.
How can we get more people to free debt advice and how can debt advice agencies work most effectively with other agencies?
How do we help people who have been in debt establish more sustainable financial lifestyles and not just get into difficulty again, the revolving door syndrome?
How can creditors ensure that their practices are a part of the solution and don’t add to the problem?
What can local authorities do in particular – as a part of government, as social agencies and as creditors?
And what are the challenges for wider public policy? For instance :
- Will credit regulation be successful in breaking the link between conduct problems and debt problems?
- How can the Government help households through this period of low income growth?
- Where does welfare reform leave the need for safety nets that protect working households against debt?
StepChange Debt Charity will be working on some answers the questions throughout the year. We look forward to learning from your views and ideas today. I hope you all enjoy the debate and let’s see if we can end the day with actions to take.