Responsible Finance response.
Problem debt places a heavy burden on individuals and families. It can lead to people falling into a persistent cycle of debt dependence with an ever-growing burden of debt, triggering stress and mental health issues.
Recent research by the Financial Conduct Authority (FCA) found that 50% of UK consumers currently show one or more characteristics of potential vulnerability, and people within this group are twice as likely to have used high-cost credit in the last 12 months. Creditor tactics to recover unpaid debts can be relentless, and vulnerable customers often feel bullied into repayments they cannot afford.
There is a strong relationship between debt and mental health. The Money Advice Service has found that 21% of UK adults say they are drowning in debt and money worries, and 1 in 10 people with debt admit that mental health issues have made it difficult for them to manage their money. In a separate report on the economic benefits of debt advice, they found that it can provide up to £145 million in health benefits in the UK every year.
In 2017 the Conservative Party Manifesto committed to implement a Breathing Space scheme. The proposed scheme would mean that people in serious problem debt could apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks. In addition, individuals would (where appropriate) be offered a statutory repayment plan to help repay their debts in a manageable way.
People who suffer from problem debt should seek debt advice as early as possible to help them deal with their debts and return to a stable financial footing. This government proposal is designed to encourage consumers to access the help they need.
The proposals are based on the Scottish “debt arrangement scheme” (DAS).
On behalf of our members, on 16th January Responsible finance submitted a response to the call for evidence.
Responsible Finance welcomes the government’s proposals, but we call for not-for-profit responsible finance providers to fall outside the remit of the Breathing Space scheme due to their social objective. Including them in the Breathing Space scheme would disrupt the range of support that they provide to their customers.
Responsible finance providers give finance and financial capability support to consumers and microbusinesses that are often low-income or can experience vulnerability. They treat customers fairly and aim to generate positive outcomes for their customers throughout the lifetime of the loan.
Responsible lending also means not approving a loan that will make a consumer worse off, and directing that individual to appropriate support. The industry exercises forbearance when consumers encounter difficulty repaying their loan, and work with the individual to establish a new repayment plan where necessary.
Responsible finance providers signpost loan applicants who exhibit high levels of debt and existing customers whose circumstances change leaving their debt unsustainable to debt advice. As such they already employ Breathing Space practices, so in order to maintain this current good practice and ensure their sustainability, a blanket Breathing Space should not apply to them.
Responsible Finance member Wessex Resolutions provides a free, impartial money and debt advice service called Wiser£money alongside their lending for people experiencing poverty, hardship and financial exclusion. Every customer who proceeds through their advice process has a financial statement compiled to inform their choice of debt strategy, and help to choose a sustainable, and appropriate course of action.
In their experience as a creditor and debt adviser Wessex Resolutions has found the positive impact of offering their clients a Breathing Space, which results in:
- Better communication with individuals;
- Sustainable and appropriate debt solutions;
- Reduced collection fees;
- A better understanding a financial difficulties, meaning better lending decisions;
- Reduced write-offs of bad debt.
The main recommendations in Responsible Finance’s consultation response are that the Breathing Space scheme should:
- Not apply to responsible finance providers, who lend responsibly and already employ their own Breathing Space schemes. And who’s business sustainability could be jeopardised if the statutory Breathing Space proposals applied to them.
- Be applicable to all consumers in financial difficulty who have demonstrated they have taken steps to manage their debt, and be approved upon request if a client is liaising directly to resolve a debt problem, or working with a debt adviser.
- Freeze all interest, fees and charges throughout the Breathing Space on eligible debt. If a Breathing space agreement is granted, there is no additional collection work or costs on the creditor’s part.
- Include provision for the creditor(s) to provide a statement of the balance due. This will enable the individual/debt adviser can compile an accurate financial statement and seek an appropriate debt solution.
Our full response can be read here.