A debt market still strongly impacted by COVID-19
As the country emerges from the third national lock down it is still probably too early to understand the full economic impact with significant creditor and government support measures in place, but coming to an end soon. Mortgage payment deferrals are due to end on 31 July, credit card payment holidays of up to three months can be applied for up to 14 July and furlough ends on 30 September. This combination will likely be the largest single economic event, expected to push many into a debt position.
This article will share with you some of the key topics of debate across the debt sector with a particular focus on the debt advice and solution sector including regulators, telling the story of the complex needs of the people and businesses of the UK who owe money to government.
As you will see from some of the key updates, the pandemic hasn’t impacted people and businesses evenly. Many have maintained or improved their financial resilience throughout the pandemic, whilst many face new financial challenges.
Credit and debt in numbers (as of 31 January 2021)
Average credit card debt per household
£2,009 (down 22.4% over the past year)
Level of outstanding credit lending
£199bn (down £2.8bn on the previous month's figure)
51% have started saving more each month
And 43% started paying off more debt
42% are finding it difficult to save or plan
Whilst 47% worry every day about finances
Increase in unemployment since January 2020
360,000 (11,000 more than the previous quarter)
Average increase in debt arrears since March 2020
£2,300 (among those who have fallen behind on bills or borrowed for essentials)
4.7m workers still on furlough
68% of employers from the accommodation/food sectors
We still strongly believe that public sector organisations can be better equipped to recover money over the next 12 months in a fair and efficient manner by focusing on three key areas:
- More effective treatment paths for customers in debt
- Increased capacity to handle arrears
- Greater use of data and insight
Debt market news
Reduced demand for debt advice impacts StepChange
Debt Advice Charity, StepChange announced ‘significant redundancies’ as they reveal the debt advice sector is not immune to the financial impact of COVID-19.
Despite initial expectations of a surge in demand for debt advice, continued support from both government and creditors, along with reduced spending has to date suppressed significantly the need for most people to seek help with their financial problems.
Despite the pandemic, fewer people sought help in 2020 than in 2019 and this continued into 2021. The impact on the charity is funding has been significantly reduced. Despite this, StepChange are still anticipating an increase in demand for debt advice once financial support packages are no longer available, in their statement they suggest:
“There are a number of factors that indicate that once the current measures lift and the underlying financial impact of the pandemic is realised we will unfortunately see a return to previous levels, and quite possibly a further increase, in the need for help. When and how much of this will happen is still difficult to predict, and depends significantly on upcoming government and regulatory policy actions, but with furlough finishing in September and the predictions around a return to “normal” by then we are expecting the demand for our help to increase later this year and early next.”
In the meantime, StepChange plan to commence restructuring and we will continue to keep you apprised of the impact in the debt advice sector. You can read the full statement from StepChange in full on the following page.
Insolvency volumes remain suppressed
Personal insolvencies dropped by 14% to 8,305 in January 2021 month-on-month and 21% lower than January 2020.
The number of new insolvencies reflect the current economic backdrop of COVID-19 including the financial support being provided by government and creditors. Corporate insolvencies fell by almost 40% in January 2021 over the previous month and were down by over a half on the January 2020 figure. We expect corporate insolvencies will likely increase once businesses impacted by COVID-19 reopen and reassess their commercial viability.
Britons worry finances will not recover as households count cost of COVID-19 one year on
Money Advice Trust finds 1 in 5 adults worry finances will not recover. With 1 in 8 having used credit to pay for essential costs such as groceries, bills and council tax.
One year on from the first lockdown, these findings confirm the financial effects of the pandemic have been felt far from equally. More than a quarter of people say they are better off financially as a result of COVID-19, almost a third say they are worse off.
Money Advice Trust are calling for a fairer and more affordable approach to collecting debts owed to central and local government.
StepChange Debt Charity’s Statistics Yearbook 2020
The latest yearbook from StepChange shows interesting insight into the users of their services in 2020:
- COVID-19 was the fifth most common reason for debt
- Pressures such as unemployment or redundancy, reduced income, lack of control over finances and health problems remain.
- Forbearance measures meant fewer people than normal went through full debt advice
Important update from StepChange Debt Charity
Below is unedited text from StepChange Debt Charity. It shows the short and long-term impact on the demand for debt advice and how organisations will have to adapt for the future.
“As an important and valued partner I wanted to make you aware in advance of some s significant changes we’re about to undertake in the Charity.
The last 12 months have been like no other for us all and the debt advice sector is not immune to the impact. When the pandemic first hit it was everyone’s expectation that there would be many additional people in the country who would experience significant financial hardship and require the services of both your financial support teams and the debt advice sector.
The unprecedented financial support from both the government and creditors, in all sectors, along with reduced spending has to date suppressed very significantly the need for most people to seek more substantial help. Indeed many people have actually saved more during the various lockdowns. However, we are still seeing the most deprived in society struggle significantly. There are also a number of factors that indicate that once the current measures lift and the underlying financial impact of the pandemic is realised we will unfortunately see a return to previous levels, and quite possibly a further increase, in the need for help. When and how much of this will happen is still difficult to predict, and depends significantly on upcoming government and regulatory policy actions, but with furlough finishing in September and the predictions around a return to “normal” by then we are expecting the demand for our help to increase later this year and early next.
Meanwhile we face a dilemma. We find ourselves in a position where fewer people sought help in 2020 than had in 2019 and this has continued into 2021. The impact of this on the Charity is that our core Fair Share funding, which is some 80% of our group funding, has been significantly reduced.
During 2020 we were supported by the government via the Money and Pensions Service with additional funding in order to maintain and in fact grow debt advisor capacity in the sector in anticipation of a surge in demand for help at the back end of last year that did not materialise. For StepChange the majority of that extra funding ceased in March 2021 and, therefore we’re faced with a continued significant reduction in income. The overall impact of reduced Fair Share and decreased government support is that we are currently receiving £300k per month less funding than we did in the first quarter of 2020 and based on the current volume of people seeking help this will decline by a further £150k over the rest of this year. This amounts to an annualised prospective budget shortfall of £6m and is increased by reductions in our subsidiaries who are also experiencing reduced volume.
Therefore, we are have decided to commence a restructuring of our organisation which will result in significant redundancies, including regrettably some debt advisors. We are, however, protecting our change and technical delivery resources so we can continue to transform our technical infrastructure and move more of our service offering online, which has become the majority’s channel of choice. Overall, once done, we expect to be able to help more people with fewer colleagues.
You are a key stakeholder and to be clear the purpose of this email is not a specific ask, but to inform you of our current position in advance of any wider publicity.’