In 2015 the Financial Inclusion Commission, of which I am a member, found that 8.8 million people were over-indebted. Our evidence shows the biggest cause of falling into debt is an unexpected change to income or employment status, such as redundancy or needing to take time off to care for a sick relative. Debt problems can happen to individuals across all walks of life, and across all income groups.
The latest figures on debt advice uptake from StepChange Debt Charity reinforce the crisis of indebtedness we uncovered last year, and show that debt remains a problem for people all over the country.
There are worrying trends among those seeking help: more are young, more are not in full-time work, and more are in rented accommodation. There is no archetypal person; the 594,053 individuals seeking help span the generations and come from across the country.
Following our evidence sessions, it was clear that the debt management landscape was in need of reform. The Commission made the following recommendations for the Government to consider:
1. Regulators should ensure payment mechanisms are responsive to the needs of all consumers
StepChange Debt Charity’s data shows that the proportion of clients with arrears in household bills continues to grow, with four in ten owing money on items such as council tax, rent and utilities. Our evidence shows that Direct Debits have been – and remain – problematic for people on low or unstable incomes, not reflecting the reality of their lifestyle. Moreover, financially excluded people pay a ‘poverty premium’ of £1,300 each year.
2. Introduce a debtor support programme for England and Wales
Modelled on Scotland’s Debt Arrangement Scheme, the Commission called for a new statutory debt repayment mechanism to protect those in need of support. The scheme should include enforceable breathing space, frozen interests and charges, flexibility for the debtor, a single regular repayment, integrated money advice and a common financial tool. It finds a balance between the debtor, who repays 100% of the outstanding debt, and the creditor, who recovers at least 90% of what’s due.
3. The FCA should examine the regulatory boundary between generic money advice and debt counselling
At present, this is imprecise and can be difficult to understand. For example, helping someone to create a budget is considered merely generic money advice (and therefore not regulated). But advising someone to act on a budget by reducing spending on non-essentials in order to prioritise debt repayments is considered debt counselling (and therefore regulated). As a result, some voluntary organisations are hesitant to provide money advice for fear they will veer into regulated territory.
Personal debt is not just bad for the individuals impacted and their families; it can have a host of negative consequences on the wider community, even threatening the nation’s broader economic stability. By coming together to find a solution to problem debt, we’ll be one step closer to achieving full financial inclusion in the UK.
This article first appeared on the website of StepChange Debt Charity.