Debt Management

DM 21

Written evidence submitted by the University of Bristol Personal Finance Research Centre (PFRC)

Summary

· Research evidence suggests that concerns about the quality of fee-charging debt advice services contrast sharply with the high quality found among the free-to-client services.

· However, public awareness of free-to-user money and debt advice services remains a significant problem, and would benefit from an approach modelled on the fee-charging debt advice sector in which TV and newspaper advertising and the internet have prominence.

· Severe financial strain, which is not necessarily evidenced in arrears, is currently an acute problem among households in Britain.

· People struggle to recognise the financial strain they are under and the risks presented by their difficulties and have little understanding of how advice services can assist them at different stages of the financial difficulties process.

· Research shows that customers are generally receptive to proactive offers of assistance from creditors.

· A joined up approach to money and debt advice services between creditors and free-to-user debt advice services is needed.

· Some people are deterred from seeking debt advice due to concerns about the impact of debt solutions on their credit ratings.

1. This submission is based entirely on empirical research evidence and is not based on opinion.

2. Our submission in response to the Managing Borrowing and Dealing with Debt: Consumer Credit and Personal Insolvency Review Call for Evidence highlighted relevant findings from a PFRC study of the fee-charging debt management industry (S. Collard, An independent review of the fee-charging debt management industry, Money Advice Trust, 2009). The review noted the difficulties individuals can have negotiating with creditors without the input from a professional third party. However, it also highlighted concerns about the quality and high cost of services provided by the fee-charging debt advice companies. It found that some clients cancelled their debt management plans and were in a worse financial situation now than when they first contacted the company. In contrast, earlier research found almost universally high quality of advice among the free-to-user debt advice sector (S. Collard, J. Steele & E. Kempson (2000) Quality assured: the quality of money advice services in the UK, Money Advice Trust and S. Collard & B. Burrows. (2002) Good, bad or indifferent? The quality of money advice in Scotland, Money Advice Scotland).

3. The research further underlines the importance of promoting public awareness of free-to-client money advice services. It highlighted the prominence of TV and newspaper advertising and the internet for finding out about commercial debt advice companies (Collard, 2009). In contrast, clients of free-to-user services most often found out through a referral from a friend or family member, creditors or other professionals (L. Day, S. Collard & C. Hay (2008) Money advice outreach evaluation: qualitative outcomes for clients, Legal Services Research Centre). This suggests that with support from Government and the Money Advice Service, there is scope for promoting better public awareness of money and debt advice services through advertising.

4. More recent research that PFRC has undertaken and which was not included in our earlier submission has evidenced the strain that households in the UK have been under in recent months. This includes not only those households who have fallen behind with their commitments, but also those who have struggled but nonetheless managed to keep up with their commitments. (A. Finney, 2010, The Genworth Index volume 4: Measuring consumer financial vulnerability and security in 18 markets. Genworth Financial; A. Finney and S. Davies (2011) Facing the Squeeze 2011: A qualitative study of household finances and access to credit. Money Advice Trust; and S. Collard (2011) Understanding financial difficulty: Exploring the opportunities for early intervention. Barclays.)

5. First, a survey of consumer financial vulnerability undertaken in 2010 found that 43 per cent of British households had experienced financial difficulties with their household bills or credit commitments at least sometimes in the past 12 months. This figure had increased from 31 per cent in 2007 (Finney, 2010).

6. Second, PFRC research for the Money Advice Trust highlighted the lengths that some households have gone to in order to cope with difficult and changing financial situations. The more extreme approaches included selling cars, pets and other personal goods, relying on friends and family to get by, and borrowing to repay other borrowing. Others included checking bank account balances daily, prioritising bill payments over all other things and fully drawing down savings. These strategies were often used to avoid falling into arrears, although they were not always sufficient to prevent people doing so (Finney and Davies, 2011).

7. The same study suggests that people have difficulty reading the signs that indicate the severity of the financial strain they are under. They also have little awareness of the advice services that might be available to them, or understanding of how these services might help them, at different stages of their deterioration into financial difficulties (Finney and Davies, 2011). Our research for Barclays found that customers are generally receptive to proactive contact from their bank to help resolve financial issues they have before they fall into arrears (Collard, 2011). Together, the findings highlight the need for a joined up approach between financial services providers and money and debt advice services to ensure that financial strain is detected and tackled at an early stage.

8. We note the proposal to improve credit reference agencies’ understanding of different types of insolvency procedure so that they can be better reflected in a debtor's credit rating. Based on evidence from our research we would strongly support this as a positive step towards improving debt advice take up. Our research indicated that concern about the impact of debt advice on credit ratings deterred households that were overstretched or in financial difficulty from seeking or taking advice (Finney and Davies, 2011).

17 November 2011