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Getting the future focus right in debt management

Posted on May 12, 2016

Kevin-Still

The FCA risk outlook for 2016/2017 confirmed that the recovery from the 2008-9 recession has been relatively slow with real earnings remaining below those before the last recession. Real wage growth is weak and consumer spending growth appears reliant on the accumulation of debt. The latest Bank of England Credit Conditions Review seems to support this. With inflation and interest rates expected to remain low then this would appear attractive to many consumers that outwardly appear creditworthy, especially where government policies seem to be increasingly shifting responsibility for financial planning to individual consumers. The FCA are working with the Money Advice Service (MAS) to restructure a slimmed down money guidance body charged with identifying gaps in the financial guidance market and commissioning providers to fill these gaps to ensure that consumers can access the debt advice and money guidance they need.

MAS confirmed in March that 1 in 6 adults in the UK are over-indebted, but only 17% seek advice. This equates to 8.2m indebted adults and the service was targeted with doubling the number seeking advice from 1.4m to 2.8m. How is this capacity gap going to filled and what is the profile of the people needing this assistance? Debt as a percentage of income is projected to rise, both secured and unsecured liabilities. A key risk identified in the FCA plan is a future rise in interest rates that may make it harder for borrowers, including those already in payment difficulties, to repay. If credit conditions tighten this can leave higher risk consumers with very limited options. This was also reflected in the credit card market study.

There has been a drive across the credit industry to improve the identification and handling of vulnerable customers. DEMSA and its members have been working with industry experts and the free- to-consumer debt advice providers to develop a debt adviser guide for frontline staff to deal with these challenging situations. MAS research into paid for debt management services identified that many users of commercial services did so because of an immediate need to deal with their debt problems. Many had taken some time to decide to take action, but when they did they wanted immediate access to a service provider. This is a key component of a paid for service and it is, therefore, imperative that commercial firms are able to identify particularly vulnerable customers and sign-post them to the most appropriate service provider as the first point of contact.

The StepChange 2015 yearbook highlighted that 75% of the consumers that they engage with are not homeowners. The demographic of customers using the services of DEMSA member firms is different and the proportion of customers that are homeowners with regular income reflects this. The age profile is heavily skewed to those households where the bill payers are over 35. Two of the groups that are likely to require forbearance coming out of recession are homeowners subject to interest rate rises and those suffering major changes in circumstances, like critical illness which affects all segments of an ageing population, which was also highlighted in the FCA plan. Shortfalls in pensions and no exit vehicle for interest only mortgages may haunt many consumers who have worked all of their life.

Filling a gap

Commercial debt solution firms are well placed to deliver the immediate client engagement that is vital for effective debt management for key demographic groups. Thorough customer reviews of more complex household finances to assess the on-going suitability of a debt solution are crucial. We see many customers in a DMP taking out further credit once the original debts age off their credit file. Increased equity also needs monitoring, especially where enforcement action may result in charging orders. With the resources and training invested by the commercial debt solution firms in the new FCA-regulated world, client engagement can be delivered to suit the target audience, which may include the necessity of financial advice as well as debt advice where assets are involved.

At the DEMSA Annual Conference on 9 June, we will be focusing on better engagement by the debt advice sector with consumers, creditors, key service providers and regulators. Designed to bring key figures from the consumer credit industry together to discuss the latest developments within the sector, the conference will pay particular attention to the challenges of helping vulnerable individuals in financial hardship.

Kevin Still, MCICM, CEO of Debt Managers Standards Association (DEMSA)