Harrington Brooks Quarterly Comment Let’s Talk About Debt July 2015
Harrington Brooks Quarterly Comment Let’s Talk About Debt
July 2015 A Shift in Consumer Debt
It’s been an eventful period containing a General Election, a Budget and the announced departure of Martin Wheatley from the FCA. And whilst official individual insolvencies are showing an overall decrease, forecasts from other influential bodies suggest that the consumer debt crisis maybe shifting from unsecured borrowing to arrears in priority bills. Here’s what’s been affecting our customers - Let’s talk about debt. Market Overview In total, individual insolvencies have generally been on a decreasing trend since 2010, decreasing from a peak level of 135,046 in the UK and Wales and from 22,998 in Scotland. In the 12 months ending Q1, March 2015, 1 in 478 adults (0.2% of the adult population) became insolvent. This is down from 1 in 455 in the twelve months ending Q4, December 2014 and the lowest rate since the 12 months ending Q1, March 2006. With one exception (Q2, April 2014), the individual insolvency rate had decreased each quarter since mid-2010, but it is still elevated compared with rates of less than 0.1% observed before 2004. In Q1 2015 total individual insolvencies decreased by 8.7% compared with the previous quarter and by 18.6% compared with the same period in 2014. IVAs comprised 50% of all individual insolvencies in Q1 2015, a substantial increase from 23% in 2004. The total number of households struggling to pay their debts is estimated to be 1 in 28.
Total Personal Insolvencies
Total Personal Insolvencies
Scotland 2006 to 2014
England and Wales 2005 to 2014 160,000
25,000
140,000
20,000
120,000
Total Individual Insolvencies
100,000
15,000
Bankruptcies 1
Total Personal Insolvencies
80,000
Bankruptcies
Debt Relief Orders 2,4
10,000
60,000 Individual Voluntary Arrangements 3
40,000
Protected Trust Deeds
5,000
20,000
0
0
2006 2007 2008 2009 2010 2011 2012 2013 2014
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Insolvency Service Quarterly Report – 29 April 2015. 1 Figures from 2011 Q2 onwards based on the date the bankruptcy order was granted by the court. 2 Debt Relief Orders (DROs) came into effect on 6 April 2009 as an alternative route into individual insolvency. 3 Includes Deeds of Arrangement. 4 The data for debt relief orders do not demonstrate a seasonal pattern. Seasonally adjusted data is identical to unadjusted data.
Figures for 2013-14 have been revised following validation at the end of the previous financial year. The increase in bankruptcies Q1 2008-09 was predominately due to the introduction on 1 April 2008 of (LILA) for people on low income and low assets. Source: Insolvency Service Quarterly Report – 29 April 2015.
Individual Insolvencies – England and Wales In April the Insolvency Service published its Q1 2015 Insolvency Statistics which showed overall falls for individual insolvencies compared to the same period last year. The data pointed to bankruptcy orders continuing to decline, though the service point to the introduction of Debt Relief Orders (DROs) in 2009 as a reason behind this. The number of DROs decreased for the third quarter in a row. Q1 of 2015 showed a fall of 5.1% compared to Q1 of 2014. Provisional figures on Individual Voluntary Arrangements (IVAs) also indicated continuing falls. There were 10,405 IVAs in Q1 of 2015, which was a 13.1% decrease compared to Q4 2014 and 23.5% lower than Q1 in 2014. From October 2015 creditors will find it tougher to force someone in to Bankruptcy. The current threshold of £750 is set to rise to £5,000. In addition the amount of debt covered for Debt Relief Orders, geared towards individuals who hold little or no assets, will also rise from £15,000 to £20,000.
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Harrington Brooks Quarterly Comment Individual Insolvencies - Scotland April figures released by Accounts In Bankruptcy (AiB) who administer insolvency in Scotland have shown a decrease in the total number of cases compared to the previous financial year. AiB revealed that the total number of bankruptcies, Protected Trust deeds (PTD) and DAS in 2014-15 is down 16.7 per cent from 2013-14. Total personal insolvencies, which include both bankruptcies and PTDs are currently at their lowest levels in ten years. The Money Charity, The Money Statistics- June 2015 also revealed: The average total debt per household, including mortgages was £53,790 in May 2015.
Outstanding consumer credit lending was £171.6 billion at the end of May 2015. Up from £160.9 billion at the end of May 2014. Total credit card debt in May was £61.7 billion or £2,311 per household.
231 people a day are declared insolvent / bankrupt.
UK banks and Building Societies wrote off £3.163 billion of loans to individuals over the four quarters to Q1 2015.
2,330 Consumer County Court Judgements (CCJs) are issued every day with an average value of £2,171. 48 properties are repossessed every day.
349 landlord possession orders are made each day.
A Shift in the Consumer Debt Crisis Even with these insolvency figures in mind there are some statistics that contradict the fall in personal insolvency and state of individual finances. The worrying statistic is that debts to banks and credit cards are decreasing as utilities and council tax arrears increase. Mike O’Connor, Chief Executive, Step Change - “Although the average amount our clients owe to consumer credit providers – such as banks and credit card companies – continues to fall, as it has for several years, there is a growing crisis facing families seeking to pay their priority bills”. In 2010, StepChange stated that gas and electricity arrears were 3.8% of the average unsecured consumer credit debt; by 2014 it was 7.8%. Now they report that two in five of their clients have arrears on priority bills; and over a quarter have arrears on council tax, mortgage and rent. “There is a concerning shift in the kind of debt problems people are getting in to. The mainstream debt problems of the credit crunch, from credit card loans, are morphing into even more troubling problems. We’re helping people who are struggling to afford a warm home, keep a roof over their heads or put food on the table.” Gillian Guy, Citizens Advice Chief Executive. The Money Charity’s April statistics show that on average: A UK household spends £3.10 a day on water, electricity and gas. Equivalent to over £94 per month. The average monthly rent for a two bedroom house in England was £595. In London this was £1,400 (135% higher). And energy bills are now 210% higher than ten years ago. StepChange Debt Charity July 2015: “Young people increasingly need help with priority debts, council tax arrears and utility bills. They’re struggling more than any other age group to afford these priority bills.” In general they reported that their clients now owe an average of £832 in council tax arrears, an increase of £157 since 2010.
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Harrington Brooks Quarterly Comment Council Tax Arrears Since 2010, StepChange Debt Charity has seen a 372% rise in the number of people they've helped with council tax arrears. Only payday loans grew faster as a client debt in that time. Eight in ten clients got in touch with their Council about the arrears, but a majority of them faced threats of legal enforcement or demands for unaffordable lump-sum payments from the Council:
62% of people had still been threatened with court action. 51% had been threatened with bailiffs. Only 25% were offered an affordable payment option. Only 13% were encouraged to get debt advice.
In February the Citizens Advice Bureau expected a 20% increase in council tax debt compared to the 2013/14 period. The CAB’s predicted trend is something which Harrington Brooks customers are already experiencing: In February 2015, OpenDoor, the in house legal service for existing customers, confirmed that high levels of customers were experiencing issues relating to council tax. The legal helpline deal with an average of 20 queries per day, from a total customer base of over 60,000 nationwide. In January 2015 they received 543* council tax enquiries by post and this almost doubled in February. In October 2014 OpenDoor also experienced a spike, with 945 letters received. *This excludes email and text communications from customers. Over 90% of Harrington Brooks’ FMP customer base of 48,000 currently requires OpenDoor to handle issues relating to council tax arrears. This covers bills that date back to 2006 and around 80% of these issues are at bailiff stage. It’s clear to see that the predicted trend is already starting to take shape. For customers on a financial management plan or IVA, council tax debts, for previous tax years, can be included on a debt management plan. However any council tax arrears for the current financial year, or that are in an arrangement with bailiff, cannot be included. Council tax arrears, for anyone entering in to an IVA, can be included for current and previous financial periods. Across the Harrington Brooks total customer base (FMP and IVA included), 3% have council tax debts on plan and 45% had a Payday Loan of some description. Read more here http://www.harringtonbrooks.co.uk/finances/council-tax-debts-overtake-credit-cards/ Decreasing Incidence of Pay Day Loans For Harrington Brooks the total managed debt has decreased predominately as a result of a number of Wonga customers being removed from plans, with the usual seasonal dip in January. The percentage of customers with a payday loan on plan was 45%, down on the financial year 2013/14. James Plunkett, Head of Consumer Policy and Campaigns at Citizens Advice tweeted in July 2015 “Our latest figures show that a 53% drop in payday loan problems in the last year since @theFCA took tough action”. Also in July 2015, Peter Tutton, Head of Policy at StepChange Debt Charity said: “The proportion of clients we are seeing with payday loans among their problem debts has fallen significantly, from 24% a year ago to 16% now”. Help to Optimise Income To help customers optimise their income Harrington Brooks offer a number of free services that can help boost the household income and make debt payments more affordable: Benefit entitlement checks which increased the disposable income of FMP customers by £69,855. The total amount we saved FMP customers by checking their utility bills and switching them to a more appropriate tariff was £453,759.
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Harrington Brooks Quarterly Comment The Impact of the General Election and 2015 Budget The much talked about General Election (May 2015) and Budget (July 2015) brought about changes to a number of benefits, tax credits and allowances that will impact a large proportion of our customer base: Tax credits and Universal Credit will be limited to two children, affecting children born after the 1 April 2017. For those that have a third child, there will be no financial support through benefits The annual household benefit cap will be reduced from £26,000 to £23,000 in London and £20,000 in the rest of Britain. Meaning a household can’t claim more than these limits in any year. The limit at which people start paying tax, the personal tax allowance, is to rise to £11,000 next year – this was already announced in a previous budget. The Government plans to increase this to £12,500 by 2020. Some will be hit with the new car tax regulations as from 2017, there will be a flat rate of £140 per year for most cars, except in the first year when tax will be based on the emissions that cars produce. Electric cars won’t pay any road tax. Existing cars won’t be affected – no one will pay more for a car they already own. The first MoT for a new car will be required when a car is four years old, rather than three. Home and car insurance premium tax is also set to increase from 6% to 9.5%. On a positive, the National Living wage will replace the Minimum Wage, set to be £7.20 per hour from April 2016 for people aged 25 and over. By 2020 this is planned to increase again to £9. st
The Citizens Advice Bureau provided a useful impact analysis report following the budget, highlighting a number of key impacts: The household benefit cap disproportionately affects households in high rent areas, women and ethnic minorities. The overall trend will be of smaller families being capped all over the country and very small families in high-rent areas being capped. Families who need four bedrooms to house themselves adequately will find that their housing benefit will no longer cover the cost of private sector rent in any part of the country. The impact analysis report estimates that 150,000 adults and 395,000 children will be affected by the £23,000 benefit cap, including those who are already capped at £26,000. And estimates that of the 87,000 households immediately affected by the lower cap, at least 35,000 or two in every five households, will be in rent arrears a year after the introduction of the cap. It also predicted that 30,000 households will struggle with essential living costs such as food, fuel bills and other priority debts. The report can be found at the Citizens Advice website. Economic Indicators Some of the other key questions raised by the Budget and Conservative re-election for our customer base have been around what may happen to inflation, unemployment and interest rates as any increases are all likely to affect the customer base adversely. Inflation, interest rates and the cost of living all impact our customers particularly as they live on tight budgets and often without any savings buffer. How are Harrington Brooks’ customers affected by these economic barometers now and in the future? Inflation as measured by the Consumer Prices Index dropped to 0.3% in June 2015, from 0.5% in December according to the Office for National Statistics. For our customers this means that there has been a fall in the price of goods and services they buy, meaning generally that their money should go further.
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Harrington Brooks Quarterly Comment UK Inflation Figures are from “This is Money”, published 30 April 2015 and updated 17 June 2015.
The rate of Retail Prices Index (RPI) inflation, which is calculated differently, also continued a downward trend, falling to 1.1%, down from 1.6%.17 Feb 2015. Cheaper fuel and lower energy prices brought the rate of UK inflation to a recordequalling low in January.
The Average Pay Increase has also jumped up in the first quarter of 2015 to 3.5% in July 2015. But the pay picture remained mixed, with wage freezes being imposed in parts of the manufacturing sector, while rises of up to 7% were being agreed by construction firms. Pay analysts Incomes Data Services said increases in private firms were running slightly ahead of those in the public sector. Public sector increases in April ranged from 2.9% for teachers in England and Wales to 4% for local government workers in Scotland. A minority of manufacturing companies were deferring pay reviews or freezing pay because of tough trading conditions, said the report. Interest Rates
UK Inflation Figures are from “This is Money”, published 30 April 2015 and updated 17 June 2015.
ONS Figures state that there was a fall in employment and a rise in Unemployment, when comparing March to May 2015 with the 3 months to February 2015. The Money Charity, The Money Statistics - June 2015 also revealed: The number of people unemployed for over 12 months fell by 600 per day. 1,222 people a day reported they had become redundant between February and April 2015. The number of UK households that have no Savings is 9.24 million. 4.9% is the average proportion of their post-tax income, including benefits, UK households have. The lowest since Q3 2008. The Money Charity – The Money Statistics June 2015.
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Harrington Brooks Quarterly Comment The Bank of England have potentially earmarked January 2016 when Interest Rates could be set to rise. “In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.” Mark Carney, Bank of England governor. The current rate of 0.5% has been in effect since March 2009, meaning the standard variable rate (SVR) for most mortgage providers is around the 4.99% mark. As a standard variable or tracker rate is usually a set percentage higher than the base rate, then an increase is likely to be reflected in your mortgage payment. As recovery continues it seems likely that rates will increase by 0.25% to begin with. Any further increases are likely to be based on how the economy performs. Over the last 20 years the average interest rate would be in the region of 4%. If we work on this figure then we could be looking at an increase of up to 2% in the years to come. How will this Affect Mortgage Payments? Let’s assume that the next rise, discussed as needing to ‘proceed slowly’, will be a rise of 0.25%. So the interest rate will be 0.75%. Here’s what it will do to mortgage payments: Rate 4.5%
Rate 4.75%
Rate 5%
Value £ 100,000
£556
£570
£585
150,000
£833
£855
£877
200,000
1,111
£1,140
£1,170
250,000
£1,389
£1,425
£1,462
Based on an average SVR being 4.5% increasing to 4.75%
While some lenders may absorb the increase others may only increase a small amount whilst selected lenders may increase payments by the full rate change. While the rate rise might be good for savers we suggest customers make provisions for a further increase later in the year. For those renting then Landlords may also be faced with these increased mortgage costs which could ultimately be passed on to tenants. Housing Costs Another change that came with the 2015 Budget was the way landlords can deduct any costs from their profit before they pay tax, translate to an increase in rental costs to cover those losses, it could mean that tenants nationwide suffer. 349 landlord possession orders are made each day.
48 properties are repossessed every day.
Savings Update In October 2014, The Money Charity declared that around 9 million households have no savings, while a further 3.4 million have savings less than £1,500. Around 41% of all UK households, have no savings. New regulations expected to be introduced by 2017 suggest that customers may be able to add some kind of savings element to their expenditure allowance whilst on plan, creating that much needed buffer for rainy day emergencies and to avoid unexpected incidents triggering a spiral of indebtedness. In Q3 2014, households saved an average of 7.0% of their pre-tax income. The savings rate is very low for most of the UK population. Any significant shifts in the economy could disturb the balance households have between income and expenditure. Without a buffer, when expenditure is higher than income, the outcome is a debt problem.
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Harrington Brooks Quarterly Comment What does this mean? Low income households are most likely to have only unsecured credit and a very high debt to income ratio. Middle income and high income households are better insured against financial difficulties as their debt to income ratios are lower and their debt portfolios consist of both secured and unsecured debt. Have low interest rates encouraged people to live in financial limbo, with low mortgage repayments increasing the amount of disposable income they have to spend? Source: IFS and StepChange How can we change things for the future? See our top tips http://www.harringtonbrooks.co.uk/finances/tips-for-the-future-budgeting/ which includes:
Don’t bury your head in the sand. Set a budget and stick to it. Pay certain priority debts first. Save more!
The Customer Landscape – Financial Management Plans (FMP) Criteria (% of FMP customers)
July to Sept 2014
Oct to Dec 2014
Jan to March 2015
May to June 2015
Aged 41 to 50 Aged 36 to 40 Married Employed / Self employed Unemployed Employment status not given
25%
26%
26%
26%
12%
12%
12%
12%
22% 66%
24% 70%
27% 73%
27% 71%
8%
9%
8.5%
10%
20%
15%
11.5%
12%
Total year ending 2014/15, Harrington Brooks provided 16,977 free advice sessions. Matthew Cheetham, CEO of Harrington Brooks: “Over the last quarter, Harrington Brooks has seen an 8% drop in the number of customers on our debt management plans. While the UK economy is performing well, a survey published by Sky in July 15 suggested that most consumers don’t feel any better off. An element of the reduction in debt management plans across the whole market and not just Harrington Brooks can be explained by payday lenders writing off customers debts. We are cautious about the debt outlook for 2015, but hope that continued economic growth will make this better for our customers. Interest rate rises are likely at some point in the future and that would create further pressure on households disposable income.”
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Harrington Brooks Quarterly Comment Our free benefit entitlement checks increased the disposable income of FMP customers by £69,855.
Total FMP customers as at the end of the Financial Year was 42,000.
The total debt managed was £808,460,714, down 12% on last year.
Telephone guidance was given to 28,882 customers.
Typically a customer’s average unsecured debt level (FMP and IVA) was £12,604 with an average 8 creditors per plan. We carried out 16,977 free advice sessions.
The top 30 creditors accounted for 71% or £324,457,840 of the total debt being managed.
16% of the total customer base reported themselves as unemployed.
9,962 new customers were taken on to a FMP.
47% of the total customer base was male.
Independent reviews at Trust Pilot rated the service at 9.6/10 based on 2,466 reviews.
Source: Management Information, Harrington Brooks customer base. Summary: The total managed debt at Harrington Brooks has decreased predominately as a result of a number of Wonga customers being removed from on plan, along with the expected seasonal dip in January 2015. Employees at the One Advice Group save using Manchester Credit Union with voluntary contributions deducted at source. Our #MoneySaving tips @Harringtonbks have been favourited, re tweeted and mentioned by British Airways, Virgin Trains, Aldi Stores UK, Wilkinson Stores and BlackCircle Tyres to name but a few. Every day we scour the news, social media, expert advice and shopping pages to provide customers with the best money saving tips and offers around. We post these top tips to the Harrington Brooks Facebook and Twitter pages for customers to read and share.
The One Advice Group, which includes Harrington Brooks, has been awarded Silver status in a recent Investors in People (IIP) review. We welcomed Kevin Mellor, Investors in People specialist, who interviewed 10% of the Groups employees to get an overall picture of our workplace – and asses the investment we have put into our people, processes and infrastructure. The Harrington Brooks office Taste Challenge revealed that 50% of our colleagues can discern premium brands over own label products, but when told that the five premium items from Tesco cost £8.73 with the own label variants costing £4.39, or 50% less the question changed emphasis – “Do you prefer these products based on taste or do you prefer them based on price?” http://www.harringtonbrooks.co.uk/finances/can-you-tell-the-difference-we-asked-our-colleagues-to-takethe-taste-challenge/ The Financial Ombudsman Service (FOS) released its annual review for 2014/15, detailing the complaints and new cases of financial products and services from people in the UK. In the review, complaints about payday loans rose by nearly half, while complaints about PPI fell by a half. With the number of PPI cases, which historically makes up the bulk of the Ombudsman workload, falling to 204,943 cases about payday loans rose by 46% to 1,157 compared to 2013/14. New cases regarding debt collecting also rose by 51% to 843.
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Harrington Brooks Quarterly Comment Corporate Social Responsibility at One Advice Group
During the year One Advice Group embarked on a CSR programme of Responsible Business which focused on supporting local charities, communities, schools and businesses. This work has culminated in colleagues across the Group achieving the following:
Through our partnerships with local schools we touched the lives of 250 children with our Financial Education for Future Generations work (including 10 youth job seekers). This has enabled us to build up partnerships with schools initially introduced to us by our constituency MP Mike Kane. We will build on this in 2015/16. We raised over £6,000 for our Charity of the Year, Forever Manchester. Donated £430 in Food Bank supplies to the local Tree of Life Centre Wythenshawe. 350 gifts for Key 103’s Mission Christmas, in which colleagues donated gifts for less fortunate children worth approximately £2,625. We also ran the first ever Mentor scheme with Business in the Community (BITC) http://www.bitc.org.uk/ to which we are now a Corporate Supporter and member.
10 mentors participated in BITC Mosaic programmes that helped Primary and Secondary Schools students, Ex Offenders and as part of the BITC Mosaic Enterprise Challenge, a national competition that helps students compete on line to start up and run their own virtual new business.
We also forged partnerships with Trafford and Manchester College and engaged in several careers fares and provided an additional 6 mentors for students, helping them with decisions about their future careers, job applications and introducing them to the world of work. In total we estimate that colleagues have provided over £8,000 in time, skills and experience via mentoring and volunteering schemes. Policies to reduce our carbon footprint also continue with such activities as car share, paper recycling and printer cartridge recycling.
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