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How to reduce the debts of half a million families.

10 May, 2016


Mike O'Connor, CEO of StepChangeStepChange are challenging the financial services industry to help all UK families have a readily available cash fund of at least £1,000. By doing this we could reduce the number of families at risk of problem debt by approximately half a million.

Legal & General are responding to this challenge in a number of ways, including starting a debate on the need for innovative products such as ‘Quidcover’ and ‘Rainyday’ savings, which we believe would help the current generation to achieve this.

Every day people at Legal & General come into contact with customers who are struggling with debt. People often enquire how they can get much needed funds back from their savings or pensions or if they can cancel their life and home insurance premiums.

Mike O’Connor, CBE, who is StepChange’s CEO, explains what they are seeing and why the financial services sector can play a key role in the £1,000 challenge.

 


 

Eating catfoodHalf a million people need help

“Every day at StepChange Debt Charity we help families struggling with problem debt.  We are the UK’s largest debt advice charity with more than1,400 staff. Last year more than 500,000 people turned to us for free advice and solutions to their financial worries.

Our vision is a society free of problem debt. Alongside budgeting advice, we offer support on issues such as insolvency, benefits eligibility, affordable repayment plans and debt relief. Our dedicated vulnerable consumer team is there to offer a little extra help to those who need it.

Bringing about a society free from problem debt is a tall order and progress depends on partnership with others. Today, the number of people in severe problem debt stands at 2.6 million. We believe there are three areas we could address now that would have a transformative effect in improving financial resilience, boosting life chances and reducing the harm caused by problem debt:

  1. Savings

  2. ‘Breathing space’

  3. Sustainable credit

     

1. Savings

Nearly 22 million adults in Great Britain aren’t confident they’re saving enough to cope with a ‘rainy day’. They’re most likely to be young, have a low-to-moderate income and rent a home.

A lack of family savings leads to problem debt. A family is half as likely to fall into debt if they have £1,000 saved.

That’s why we at StepChange have challenged the Government and the financial services sector to set a target for all families in the UK to have at least £1,000 in accessible cash saving. If we met this target it would reduce the number of families at risk of problem debt by approximately half a million.

We’re pleased therefore that the Government has recognised the need for a savings scheme aimed at those on low incomes and recently announced a ‘Help-to-Save’ product open to anyone in work and in receipt of Universal Credit or Working Tax Credits.

However, ‘Help-to-Save’ alone won’t be enough. Government and the financial services industry can do more.

The Government could allow savers to build a rainy-day saving buffer via the pension auto-enrolment system. There are good reasons for using auto-enrolment as a basis for increasing accessible savings. For example, it contains that auto-enrolment ’nudge’ and a matching element, using inertia to deliver good outcomes while employer and tax contributions boost individual saving.

Financial services providers could develop accounts that allow low-income families to more easily access headline savings rates and offers, even if they can only open accounts with a small deposit and only pay in small, irregular amounts. Providers could also explore the use of innovative products such as prize-linked savings accounts, which allow families to win a reward when they deposit money.

Food and rubbish in bags

2. ‘Breathing space’

StepChange believe people in debt:

  • Need stability to help them recover from financial difficulty

  • Should not keep seeing their debts grow as they grapple with them.

At the moment, people in England and Wales who fall into financial difficulty might get some protection for 60 days, but that’s only for unsecured credit debts — the likes of credit cards or payday loans. It’s not available for household bills like council tax, gas and electricity. Either way, the 60 days isn’t long for people to recover control of their finances.

The only people in England and Wales who are guaranteed to get protection from interest, charges and enforcement are those who go insolvent. But insolvency is the right option for just one in five people who come to us for help.  Many can repay at least some of their debts with appropriate support.

It doesn’t have to be this way. In Scotland if people keep to their agreed payments through the ‘Debt Arrangement Scheme’, they get statutory protection from interest, charges and enforcement for a period long enough to see their finances stabilise,

We want people in England and Wales to have a similar statutory ‘breathing space’ protection.

This means that when people seek free debt advice, and we can see that they need help, they would automatically get interest, charges and enforcement on their debts paused while they try and sort out their finances. This would last for as long as they’re keeping to an agreed debt plan.

Housing estate

3. Sustainable credit

StepChange’s research shows four million people in Britain are regularly using credit as a safety net to meet everyday living costs, emergency costs and to cover one-off purchases.

Credit is an important way of dealing with financial challenges but using credit as a safety net can lead to problem debt:

  1. Credit products, like credit cards, overdrafts and payday loans aren’t designed to manage pressures on household budgets for a prolonged period of time. Doing this increases the risk of falling into financial difficulties

  2. Some people who borrow regularly to meet essential costs struggle to access mainstream credit and find their only alternative is to turn to high cost lenders

  3. Some people are so financially vulnerable or excluded that no form of standard commercial credit would be safe and suitable for their situation, even if provided by community lenders

However, there are solutions to address this unsustainable situation:

For a start, we at StepChange want the Financial Conduct Authority to work with lenders to look at how lending practices and product features can be better governed, so that they meet the needs of people who are more vulnerable to financial difficulties.

In the longer term, we’re also asking policy makers to look at alternative microloan schemes modelled on those that have been successfully rolled out in other countries. For example an Australian scheme called the Good Shepherd Microfinance, backed by the government and major banks, provides affordable loans and other products to the most financially excluded. We think this model could work well in the UK.”

Legal & General has partnered with StepChange, who have critiqued our own processes when dealing with customers in debt and some of our savings products to build towards the ‘£1,000 challenge’. They have also been hugely valuable in training our front line teams in spotting signs of debt and helping us to signpost customers to step changes services.

 


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