FCA research shows 12m UK adults are struggling with debt

The Financial Conduct Authority (FCA) is urging borrowers affected by coronavirus lockdowns to seek support from their banks, as its figures show 12 million consumers are likely to be struggling with bills or loan repayments.

The FCA research also found that the pandemic has hit the finances of ethnic minorities and young people the most.

The FCA is urging consumers struggling to make repayments due to the impact of coronavirus (Covid-19), to speak to their lenders about options available to them. The FCA has put in place a package of support for people in difficulty to ensure help is available after 31st October.

A survey of more than 7,000 people, conducted by the FCA during the Coronavirus pandemic, found 12 million people in the UK had low financial resilience, meaning they may struggle with bills or loan repayments. The data shows 2 million of those who are not financially resilient have become so since February.

Due to the impact of the pandemic, many of those who have experienced changes in employment and increased stress are now likely to have low financial resilience. These consumers are more likely to fall behind on payments. 36% of respondents who already had low financial resilience and had a mortgage said they are likely to fall behind on mortgage payments; 36% of those with loans or credit cards are worried about repayments on these, and 42% of renters are worried about falling behind on rent payments.

Almost a third of adults (31%) have seen a decrease in income, with households seeing income fall by a quarter, on average. Those from a Black and Minority Ethnic (BAME) background were more likely to be affected, with 37% of BAME adults taking an income hit. Whilst survey results show that BAME adults are more likely to have reduced working hours, those aged between 25-34 are the most likely, by far, to have had a change in employment as a result of the pandemic. This will affect the take up of debt advice with 19% of those aged 25-34 saying that they were more likely to seek debt advice in the next 6 months compared to 2% of those aged 55-64.

Sheldon Mills, Interim Executive Director of Strategy and Competition, said “We want to remind consumers, especially those who are newly in financial difficulty that lenders are able to provide you with support. There are options available to you which will reflect the uncertainties and challenges that many customers will face in the coming months. It is also important that households in serious financial difficulty seek debt advice for support.”

“We understand that many people will continue to live in financial uncertainty as the impact of the coronavirus continues. Our surveys have shown that younger and BAME consumers have been impacted more than others, with a large amount of the population already has seen significant changes to their financial stability since the start of the pandemic.”

The FCA has been working with firms to ensure support is given to consumers who are in financial difficulty as a result of coronavirus. The FCA says that it recognises that the increasing coronavirus related restrictions placed on a number of areas of the UK in recent weeks may lead to increased financial difficulty for some people. The guidance is designed to ensure that people can access tailored support that meets their individual needs, including taking account of local restrictions.

Support will be available both to those who have previously taken a payment deferral and those who are new in financial difficulty, taking into account the specific needs of vulnerable consumers. Firms should work with customers to provide support before they miss payments. Given that people may be impacted in different ways, firms should be flexible and offer a full range of shorter and longer-term options which are tailored to reflect their customer's individual circumstances. This could include:

• Suspending, reducing, waiving or cancelling any further interest or charges

• Permitting the customer to make no or reduced payments or agreeing a repayment plan.

• Tailored support is also available to overdraft customers who are struggling financially as a result of Coronavirus. Firms should also treat customers fairly – for example by not repossessing someone’s home when they are in lockdown and can’t access alternative accommodation.

The FCA says that for consumers who have previously taken a payment deferral, firms should offer a range of options for how the missed payments will be repaid.

The FCA says that it is important for consumers to be as open and transparent as possible with their lenders so that they can offer the most appropriate support. While these measures are designed to help during this difficult time, some may result in increased costs in the longer term so if a consumer can afford to continue making payments, then it is in their best interests to do so. Firms are required to be clear about the credit file implications of any forms of support offered to borrowers.

Responding to the FCA announcement James Fearnley, Corporate Policy and Propositions Manager at the Money and Pensions Service said: “It’s crucial that people who are struggling to make credit and mortgage repayments don’t suffer in silence, particularly those who have been hit hardest by the financial impacts of Covid-19 such as young people and people from BAME backgrounds.”

“From 1st November, people will no longer be able to apply for support measures such as payment holidays or deferrals so it’s vital that anyone facing difficulties contacts their provider to find out what further help they can offer. It’s important to remember that you don’t have to agree to a repayment arrangement if you can’t afford it – your lender must agree [with] what works best with you. Anyone worried about money in the wake of Covid-19 can use the Money Navigator Tool on the Money Advice Service website to find a way forward with their finances.”

Dame Gillian Guy, Chief Executive of Citizens Advice, said “This is further evidence that coronavirus has had a calamitous effect on people’s ability to make ends meet.’

“Our research shows that while protections for people struggling with household bills are strong in some areas, they are inadequate in others. This is particularly the case for council tax and rent, which are many people’s largest monthly outgoings.”

“With the finances of 12 million people now fragile, there’s a real possibility that new lockdown restrictions will force many people into debt this winter. ”

“It’s in the government’s power to prevent this [from] happening. By strengthening the support for those struggling with essential bills and retaining the £20 a week uplift to Universal Credit beyond the spring, they can make sure no one sinks into debt through no fault of their own.”

Aneesh Varma, Founder and CEO at Aire, said “The FCA’s research should come as no surprise. Our own research has shown that around six million people in the UK were already struggling to make ends meet prior to the pandemic, with the rising cost of living outpacing growth in wages.”

“The support packages put in place by the UK government have been for the most part a help. Credit where it’s due, consumers have responded more prudently to this downturn than in 2008. We’ve made fewer high-cost purchases and, for those who can, used this time to pay down debt, perhaps in anticipation of harder times to come.”

“For lenders, the problems are three-fold. First, the effect on borrowers is highly unpredictable, dependent on sector and on personal circumstance. If unemployment reaches 10-15% as anticipated, many more people will fall into financial difficulty. Underemployment will also be of longer-term significance as sectors return to normal, reducing disposable income and affordability for many more.”

“Aire estimates that the number of people in the UK missing one or more credit payments could increase from around 700,000 last year to over 2 million in 2020. Lenders can expect to see default rates continue to increase well into next year.  Most people who fall into delinquency can be rehabilitated with the right support and understanding of their current financial circumstances.”

“Second, the usual tools in place for lenders to assess their customers are no longer helpful. When financial situations are changing daily, traditional data sources are not useful indicators of creditworthiness or affordability, taking months to report [a] change or to record defaults. They’re just not dynamic enough.”

“Third, the regulator will quite rightly hold lenders to account over their treatment of consumers during this time. Lenders have a moral responsibility towards their customers – it’s not good enough for them to turn their back and brace for default. The regulator is right to push for better here. It’s how consumers are treated by lenders now – in a downturn – that will be remembered and, if done fairly, prized by consumers in the years to come.”