A few weeks on from the UK’s biggest political decision and the rate of change hasn’t slowed down for a second. We’ve witnessed everything from a Prime Ministerial change, an opposition leadership contest and changing of the guard in front bench politics.
What does this mean for our economy longer-term? Well, it’s probably too early to say and the outcome of all this change will unfold over the next few years. One thing is for sure, it’s likely to present us with both challenges and opportunities.
So now I’m beginning to think a little closer to home, about the impact these changes could have on people living with financial difficulties and a few things stand out for me.
Firstly, the Governor of the Bank of England, Mark Carney, recently hinted that fresh stimulus measures are need to re-invigorate the economy, including potentially cutting interest rates1. This clearly has pros and cons. For people with variable rate mortgages this will be positive news and provide some additional relief. For consumers managing their financial difficulties through a debt solution like a Debt Management Plan (DMP) or an Individual Voluntary Arrangements (IVAs) – our data shows that 40% of people in IVAs have mortgages – it will help with sustainability and could enable them to increase their repayments. However, for those people living on income from pensions or savings their finances will be squeezed and they may be more likely to struggle.
Secondly, the pound has dropped against the US dollar which is likely to drive up inflation over time. For people living with or at risk of financial difficulties this may result in a higher cost of living and put them at greater risk of unmanageable debts. A recent survey by YouGov2 showed that ‘a third of middle-class people would have to borrow money to pay an unexpected bill of £500’. For people already managing their financial difficulties through a debt solution, could lead to an increase in broken arrangements.
However, this may be balanced by the news that the Treasury has abandoned targets to restore government finances to a surplus3 by 2020, as a result of the requirement for additional borrowing to ensure economic contraction, which could slow the rate of contraction of the welfare state and balance some of the impacts of inflation.
The Money Advice Service published research in March which highlighted that ‘one in six people in the UK is over-indebted, but less than one in five of them seek debt advice4’ and BBA retail banking statistics show that unsecured borrowing is growing at a rate5 of 6%, coupled with low wage growth and the contraction of the welfare state – all of which begin to place an even greater burden on consumers.
Research by debt charity, StepChange6, shows that 50% of people with debt problems tend to wait at least a year before seeking advice, so the most effective way to support consumers during these uncertain times is to look out for early warning signs. Creditors should act quickly to most effectively target their support at the people with the greatest need and put treatment paths in place which both reduce the chance of financial difficulties and provide repayment solutions which can be effectively managed.
So, what should creditors do to support their customers?
1. Use internal and external data to identify customers who are in or at risk of financial difficulties. Whilst your customer may be managing their credit commitment with you effectively, they may be struggling with others. Without reviewing external data the first thing you will see is a customer disengage and move swiftly through the collections and recoveries process.
2. Develop strategies for these customers by proactively engaging them to offer additional support. Taking action early gives your customers more options and simple action now can avoid longer-term problem debt which normally results in recoveries action. If creditors don’t engage and support their customers it is more likely that they will seek debt advice, including accessing personal insolvency solutions, this can often be the right solution for customers but at this point creditors only have limited control.
Richard Haymes is Head of Financial Difficulties at TDX Group
1. Pound falls as Bank of England hints at fresh stimulus measures, 30th June 2016 www.bbc.co.uk
2. Third of middle classes too short of cash to pay a £500 bill, 7th June 2016 www.thetimes.co.uk
3. Osbourne abandons 2020 budget surplus target, 1st July 2016 www.bbc.co.uk
4. Press release: One in six adults struggling with debt worries, 10th March 2016 www.moneyadviceservice.org.uk
5. May 2016 figures for high street banks, 24th June 2016 www.bba.org.uk
6. Waiting for debt advice www.stepchange.org