- Context
- The study
- Key findings
- Points to consider
Context
The economic context is changing in ways that can make it harder for people to build and maintain financial resilience. For example, changes in the labour market have resulted in increasing numbers of workers being ‘self-employed’ where earnings can be variable and there are often overlaps between business and personal finances, which may make good money management difficult. Similar problems are experienced by a significant proportion of employees who earn wages that are low and vary from month to month (e.g. those on zero-hours contracts). Additionally, increasing participation in higher education funded by personal borrowing brings with it new challenges to building financial resilience in both the short and long term.
- Existing levels of financial resilience in the UK are low with many households having low or no savings to fall back on.
- About a third (35%) of households have no savings (Family Resource Survey 2014) and this rises to over 50% for those on lower incomes (£300 per week or less).
- Only 30% of households appear to have savings worth three months of their specific income.
- Households on lower incomes are more likely to have higher debt-income ratios and higher repayment-income ratios (BIS 2013).
- Research commissioned by the Money Advice Service (MAS) found that over the period 2006 to 2013, five million fewer people said that they make sure that have money saved for a rainy day. The proportions have dropped from 75% in 2006 to 63% in 2013 (Money Advice Service 2015).
- Financial insecurity reduces workers’ productivity. Research commissioned by StepChange estimates the social cost of problem debt at £8.3bn per year with £2.3bn of this cost due to job loss or lost productivity (StepChange 2014).
The study
The report explores the financial resilience in the UK, covering credit use, over-indebtedness, saving and budgeting and in the UK, focusing on three vulnerable groups:
- Self-employed workers, who are often subject to earnings that can vary considerably over time, and whose business and personal finances can overlap, causing money-management difficulties.
- Workers with low and variable incomes such as those on ‘zero-hours contracts’.
- Students in higher education funded by personal borrowing.
The study analyses various data sources and considers possible policy interventions and innovations to improve financial resilience in the UK, with recommendations for the government, Financial Conduct Authority (FCA) and other financial institutions.
Key findings
- Households with low levels of savings are more likely to use unsecured credit and more likely to experience difficulties repaying credit when they do use it.
- Although the medium-term benefits of saving are clear, many people find it difficult to save. Solutions could include auto-enrolment schemes and using the end of debt repayment to convert borrowers into savers.
- Self-employed people often use a personal current account to run a small or micro business and would benefit from a broader range of financial management tools. Fintech could offer some saving and budgeting solutions, with some specific examples given.
- 39% of full-time students had an overdraft (Student Income and Expenditure Survey 2011/12). Solutions include moving to monthly payment of maintenance/loan payments to facilitate budgeting (as in Scotland) and developing matched savings such as ‘Save to Study’ ISA.
- There is some evidence that the high-cost credit card market may be expanding, possibly in response to the contraction of the payday lending market. An estimated 5.6m credit card borrowers (nearly one in five of credit cardholders) are in some way financially vulnerable – either already struggling or at risk of problem debt. Interventions to protect the interests of higher-risk borrowers are needed at three points:
- debt advice and financial capability interventions to help those borrowers already in trouble;
- targeted interventions to help those at risk to avoid getting into problematic debt and to build financial resilience; and;
- the development of affordable, better-value credit options for those who are incurring very high borrowing costs on credit card borrowing.
- Recommendations are made to protect these high risk borrowers, including for the FCA to place a clearer duty on lenders to intervene to help borrowers with persistent debt problems and to improve lenders’ models for assessing affordability and borrowers’ ability to repay.
- Use of credit unions (£718m worth of loans in 2014) and Community Development Finance Institutions (£19m in 2015) is growing but payday loans are a much larger source of loans (£2.8bn in 2015). Development of Social Lending Bonds (SLBs) and an ethical lending marketplace (online platform connecting lenders and borrowers) could increase the supply of capital to community lenders.
Points to consider
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Methodological limitations: Draws primarily on official data sources, with sources clearly cited.
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Relevance: The research is timely and topical given the prevalence of debt in the UK and the changes in the economy and labour market.
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Applicability: The study is primarily aimed at influencing government policy, however it would also be of interest to those working in the debt and financial services sector.
Full report
Britains debt, how much is too much? Full report
