The problemIn its 2017 Financial Lives survey, the UK Financial Conduct Authority estimated that 25.6m (50%) of UK consumers currently show one or more characteristics of potential financial vulnerability:
- Unsecured debt
- No cash savings
- No investments
- Inadequate pension planning
Vulnerability breeds a reliance on higher cost creditOur research indicates that there is a problem in the UK with many consumers reliant on high-cost credit to live day to day. Insufficient levels of financial literacy coupled with consumerism and a thriving sub-prime debt market is creating a generation of consumers who are financially constrained. A lack of understanding of how financial products work is exacerbating the problem.
The UK Market has:
- Record low levels of savings
- Below average rate of financial literacy
- 8 million people already in serious debt
For a significant proportion of individuals, the problem is the structure of their debt, rather than the amount of the debt. High-interest revolving credit repayment costs reduce disposable income and the ability to pay down outstanding debt amounts. The smallest unexpected cost can initiate dependency on revolving credit such as overdrafts, credit cards and payday loans. Any subsequent unexpected cost could easily take the individual into an Individual Voluntary Arrangement (IVA) or bankruptcy. Both have immediate consequences for the lending providers’ balance sheet, as well as negative long-term impacts on the individual’s credit rating.
The debt bubbleThe level of unsecured debt in the UK now exceeds £400Bn (TUC – 2019) – and this is continuing to rise. Insolvencies and bankruptcies are at the highest levels since the financial crash in 2008. www.moneyexpert.com/news/personal-insolvencies-highest-rate-8-years
StepChange handled over 300,000 new debt related queries in the first half of 2019 and the Citizens Advice Bureau is currently handling more than 2,500 new debt related calls every day. Sadly, by the time most consumers seek help - IVA or bankruptcy are the only options.