StepChange: an action plan on problem debt

1. Context
2. The study
3. Key findings
4. Points to consider

• Context
• The study
• Key findings
• Points to consider
• Full report

Context

Some 2.9 million people in Great Britain are in severe problem debt, with an estimated societal cost of £8.3 billion, and many more are struggling or at risk of difficulties. Problem debt creates stress and anxiety which stifles people’s aspirations for work and life, their contribution to economic and social growth and their children’s development. Six in 10 Britons believe that politicians should do more to help them stay out of financial difficulty.

This study was undertaken to provide a five-year action plan for the Government to tackle problem debt, offer families a means of becoming more financially resilient and help those struggling with debt to achieve sustainable financial situations. ‘Problem debt’ is not formally defined but is understood to mean unmanageable levels of and default on mortgage and non-mortgage borrowing, and encompasses arrears on household bills. An ISA (Individual Savings Account) is a saving account with a tax-free deposit limit of around £15,000 per annum.

The study

The study was commissioned by StepChange Debt Charity to provide an action plan for the new Government of 2015 to address the UK’s problem debt. The focus is on individuals and households in problem debt, and those at risk of it.

While the paper reviews a case for action on problem debt, including from (primarily quantitative) evidence from previous research and new analysis, the paper is predominantly cast as a white paper which sets out the key problems and the preventative and remedial policy solutions needed to address it. These are structured around: the role of precautionary savings; alternatives to the ‘credit safety net’ (StepChange, p8); expanding the scope of free debt advice provision; new legal protection for those with resolvable debts; protecting children from harm; and modernising debt solutions.

In doing so it offers some examples of good practice.

Key findings

• The role of precautionary savings:
  • 13 million people could not cover a quarter drop in their income from their savings and 500,000 households could have avoided problem debt if they had had £1,000 in savings.
  • Low-to-middle income households would be better served by tax relief on income than ISAs and they need to be helped to save by applying behavioural economics.
  • Solution: The Government should support all households to put £1,000 aside for a rainy day by exploiting behavioural insights.
• Alternatives to the ‘credit safety net’:
  • Six million people use credit to last until payday and three million use it to meet essential household bills. While credit offers the flexibility people need to smooth cash flow, pricing, design and delivery and the conduct of lenders makes high-cost credit problematic as a means of coping among those with low or unstable incomes.
  • There is low public knowledge of credit union and government welfare loans and there is a lack of capital for genuinely affordable credit products for low-income households.
  • Solution: The Government should develop a large-scale offer of mainstream, affordable credit products which enable people in a range of circumstances to borrow sustainably.
• Expanding the scope of free debt advice provision:
  • An estimated 1.4 million people who need debt advice are not receiving it.
  • There is insufficient funding for free debt advice and it is likely that this will become squeezed further as commercial providers leave the market. And debt advice is not sufficiently well understood for people to realise that it can provide the help they need.
  • Solution: The Government should raise additional funding for free debt advice, possibly through an increased levy on high-cost lenders. An estimated £100 million needed will be offset by a £3.1 billion saving in the social cost of problem debt.
• New legal protection for those with resolvable debts:
  • Help from creditors is crucial for helping many people struggling with debt to stabilise their finances and prevent debt deepening.
  • The effectiveness of debt advice is undermined by ‘gaps in the protection for people with temporary financial difficulties’ (StepChange, p14), including from interest, charges and enforcement action.
  • Solution: Statutory protection is needed to close the gaps and provide up to 12 months breathing space through the proposed ‘Extended Breathing Space Guarantee’.
• Protecting children from harm:
  • More than 2.4 million children live in households with problem debt. This can have long-term harmful effects on their education and life prospects.
  • Parents struggling with their bills often do not feel they are treated fairly by creditors (including the council).
  • Solution: The Government should provide a binding code for the recovery of debt which ensures creditors take into account the presence of children in households.
• Modernising debt solutions:
  • As the credit market has changed in the UK, so too have the characteristics, needs and circumstances of those who find themselves in problem debt.
  • Key problems relate to unaffordable access to debt solutions, gaps in eligibility between solutions, and inflexibility to changing circumstances.
  • Solution: The Government should improve the structure of debt solutions to ensure they better serve everyone in problem debt.

Points to consider

• Methodological strengths or limitations: Given the intended audience of the paper, it does not set out clearly the methods of data collection or analysis for the new evidence presented or consider the rigour or validity of the secondary evidence presented.
• Relevance: Despite some Government proposals, for example for the provision of tax relief on savings interest up to £1,000, the findings remain relevant and topical in relation to debt problems and debt advice provision in the UK.

Full report

Step Change: an action plan on problem debt - full report