Article26 Jun 2020

COVID-19 and the window of affordability to repay debts

The Bank of England reported on 2nd June 2020 that UK households repaid a record £7.4 billion of consumer credit in April this year* despite the financial hardship faced by many during the current COVID-19 crisis.

This news made me reflect on my experience of how debt affordability changed during the 2008 ‘credit crunch’, and how the current crisis compares.

Reflecting on the 2008 financial crisis

In the relatively stable economic environment prior to 2008, it was an acceptable educated risk for many people to use credit to increase their spending power, enabling them to invest in their lives, families and homes. Such credit included low interest, long-term balance transfers on credit cards and debt consolidation loans. 

The banking crash at the centre of the 2008 ‘credit crunch’, saw banks stop lending to each other, making it tougher for consumers and businesses to get credit.  This resulted in a significant number of people moving quickly from a position where they were able to meet their financial commitments to a position of problem debt. 

Support has been the difference in 2020, so far…

During the COVID-19 crisis, we’ve seen the UK Government provide significant financial support to people and employers, one example being furlough which has helped keep people employed and protected their incomes. 

Creditor forbearance put in place by many organisations has provided some short-term protection for some, as evidenced by a fall in demand for debt advice which in April was 40% lower than normal.

However, there are people, particularly the self-employed and workers in the ‘gig economy’, who have seen a similar impact on their finances to that which resulted from the ‘credit crunch’, especially with their income falling sharply. 

Impact of the 2008 Credit Crunch

The economic impact of the 2008 credit crunch continued over the subsequent 24 months, with increased unemployment and reduced incomes, where the profile of people with problem debt continue to change. 

Early on in the credit crunch, those with greater financial resilience they were able to rehabilitate more quickly, making larger repayments, realising assets and offering creditors one-off settlements. 

But in the decade after the ‘credit crunch’ this profile changed. As wage growth stagnated, and with the introduction of ‘austerity’, the profile of people with problem debt transitioned to those on lower incomes, those less likely to own a home and those more likely to be in receipt of welfare benefits. This population were less resilient and so were less likely to be able to pay off their debts quickly.

2020 unprecedented rate of change

Since the Bank of England report was published there have been a number of other economic indicators that demonstrate an unprecedented rate of change this time around. The effects of the lockdown can be seen in UK unemployment and payroll number statistics released by the Office for National Statistics (ONS) on 16th June: 

• The number of people claiming work related benefits continue to rise in May 2020 – up 126% to 2.8m**

• The number of workers on UK payroll falling 612,000 between March and May**.

The latest report from StepChange Debt Charity also suggests that an estimated 4.6m people have accumulated £6bn of arrears and debts directly attributable to the crisis***.

The window of affordability to repay debts

So far the statistics we are seeing show a disparity in the way consumers have been impacted financially by coronavirus, impacting their ability to repay debts. Consumer deposits saw a 140% increase in April as people put away more than £16 billion in savings *. This is against a backdrop of a huge reduction in debts being paid due to widespread payment freezes and many companies and public sector organisations suspending any debt collection. So, we could categorise consumers according to the level of impact they have seen so far:

• Adversely impacted – People seeing significantly decreased incomes through furlough, illness and/or loss of their job

• Marginally impacted – People experiencing a slightly decreased income, maybe due to furlough or lack of revenue for those who are self-employed.

• Financially un-impacted – People whose income has not changed but have seen a reduction in non-essential and travel spending, making them currently better off 

So, as debt collection begins to start up again, post lockdown, the most successful strategies will involve identifying which of these three categories a customer in debt currently fits in, and then applying the most appropriate treatment path on an individual basis.

However, the economic statistics referenced above, and the lessons learnt from 2008, would suggest that the ‘window of affordability’ will continue to change at pace as the full impact of the COVID-19 crisis on all of our economic futures rolls through. 

The FCA’s ‘Treating Customers Fairly’ (TCF) regulations will play a key part in maintaining the improvements in debt collection processes that we have seen since the 2008 ‘credit crunch’ so that FCA-regulated firms continue to respect the spirit of CONC and TCF. We already see an acceleration of these principles across none-FCA regulated sectors and government debt collection.

At Indesser, our commitment to treating customers fairly goes beyond FCA regulation as responsibility is built into our business. So we are well placed to help the public sector meet this challenge of collecting debt responsibly and fairly.

Richard Haymes Director, Consumer Affairs, Strategy and Market Development