News Article

Consumer Credit

Falling Insolvencies - not necessarily a true picture of reduced Consumer Debt. Comment from DEMSA

By CreditMan Tuesday, February 2, 2016

Kevin Still, Chief Executive of DEMSA provides the following comment in response to the latest Insolvency figures for England & Wales.

“The continued fall in personal insolvencies – now at the same level as in 2005 – certainly reflects the impact that restricted access to consumer credit and tighter budgeting have had on UK consumers over the last few years. The reduction in the numbers facing unmanageable debt is good news for the UK economy as a whole, but there is still a need to provide access to support for those who do find themselves in financial difficulty.

“It is probably far too early to look at meaningful trends in the number of Debt Relief Orders (DROs) as I suspect that many advice agencies had identified clients that would become eligible for a DRO under the new criteria and processed them in Q4 of 2015. Overall though, there were 24,175 DROs in 2015, which was a 9% decrease compared to 2014 and the lowest annual total since they were introduced in 2009.

“DEMSA members represent firms that offer all-round debt advice and include the largest providers of personal insolvency solutions, like Individual Voluntary Arrangements (IVAs), and debt management plans. There were 39,993 IVAs in 2015, which was a 23% decrease on 2014, and the lowest annual total since 2008. Despite creditors being much more flexible in terms of levels of unsecured debt and disposable income levels, we have continued to see a decline in IVA volumes.

“DEMSA members manage over 300,000 debt management plans on behalf of indebted consumers, with a sizeable proportion of clients having assets (e.g. homeowners) or holding private landlord tenancy agreements and having regular non-benefit-dependent income. Debt levels can vary enormously and plan lengths are largely determined by the level of disposable income and the likelihood of changes in circumstances that may affect the on-going suitability of the plans.

“The transfer of consumer credit from the Office of Fair Trading to the Financial Conduct Authority has driven up standards of debt advice with a clear focus on assessing the affordability, suitability and sustainability of different debt solutions as well as ensuring that indebted consumers are aware of all their options in order to make an informed choice. This has also highlighted the necessity for consumers to engage in the debt advice process and to take responsibility for their personal finances in the short, medium and long-term.

“The introduction in 2016 of the Standard Financial Statement is likely to improve the consistency of assessing the true level of disposable income and expenditure against standards understood by both debt advisers and creditors. And DEMSA has actively engaged in a number of the Money Advice Service initiatives and research around better consumer engagement. This is not only at the initial point of advice, but during the course of a debt solution where changes in circumstances and regulatory reform can have an impact on the available debt solutions.

“At DEMSA we therefore believe the latest Insolvency numbers must be viewed with caution. Rises in cost of housing, travel to work costs and low wage increases continue to take their toll in terms of reduced disposable income without evidence of irresponsible borrowing. Demand for debt advice and a potential increase in personal insolvency levels could, therefore, still be a very real prospect for 2016.”