Tackling over indebtedness annual report

TACKLING OVER-INDEBTEDNESS Annual Report 2005

The DTI drives our ambition of ‘prosperity for all’ by working to create the best environment for business success in the UK. We help people and companies become more productive by promoting enterprise, innovation and creativity.

We champion UK business at home and abroad. We invest heavily in world-class science and technology. We protect the rights of working
people and consumers. And we stand up for fair and open markets in the UK, Europe and the world.


The Department for Work and Pensions (DWP) is responsible for
the Government’s welfare reform agenda. Its aim is to promote opportunity and independence for all. It delivers support and advice
through a modern network of services to people of working age,
employers, pensioners, families and children and disabled people.

IN ASSOCIATION WITH DEPARTMENT FOR CONSTITUTIONAL AFFAIRS

HM TREASURY

OFFICE OF THE DEPUTY PRIME MINISTER

DEPARTMENT FOR EDUCATION AND SKILLS


Contents


Foreword 5


Chapter 1 Executive Summary 7


Chapter 2 Introduction 14


Chapter 3 The Current Situation16


. The macroeconomic situation16


. Levels of over-indebtedness17


. Characteristics of those who are over-indebted22


. Types of arrears 24


. Those “at risk” of being over-indebted 25


. New research across the nations25


. Summary 27


Chapter 4 The Strategy 29


Chapter 5 Partnership Actions 31


. Poverty and social exclusion 32


. Financial capability and information34


. Access to affordable credit37


. Saving and asset ownership 39


. Responsible lending41


. Utility bills 44


. Benefits administration 47


. Debt advice 48


. Debt collection 51


. Debts to Government 53


. The justice system 55


Chapter 6 Implementation 57


. Action across the nations and with local government57


. Monitoring and evaluation58


. Conclusion58


Annexes

A – Summary of Action Plan 2005/06 59


B – Working Groups on Over-indebtedness:
memberships and terms of reference 68

C – Update on over-indebtedness research 72


Tackling Over-indebtedness Annual Report 2005

3

4
Tackling Over-indebtedness Annual Report 2005


Foreword


We are pleased to present the Government’s second report on tackling over-indebtedness.

The majority of the population continue to benefit significantly from credit arrangements. Consumer credit provides individuals with flexibility in how they choose to access the marketplace and manage their finances. Payment of bills after receipt of goods – for example in the case of utilities – is both practical and efficient. However, a minority of the population is experiencing difficulty due to
problem debt: 4% of the population above the age of 18 are in arrears for more than 3 months on either consumer credit or utility bills, and 5% of borrowers consider their repayments to be a “heavy burden”.

It is a year since we published “Tackling Over-indebtedness: Action Plan 2004”. In that time much has been done by Government, the credit industry, academia and consumer groups to support individuals in avoiding or escaping problem debt.

We very much welcome the evidence from across Government and
elsewhere which shows how seriously these issues are being addressed. Highlights include:

. the £120 million that the Chancellor pledged in the Pre-Budget Report to promote financial inclusion by increasing access to affordable credit and free face-to-face money advice;
. the Financial Services Authority’s (FSA) work in delivering the National Strategy for Financial Capability;
. the introduction of a stakeholder suite of products to encourage saving; . the successes of the illegal money lending projects which has already led to nine cases being submitted for prosecution;
. DTI’s work to introduce the Consumer Credit Bill to improve consumer rights and redress, strengthen the credit licensing regime and increase transparency;
. industry work to ensure proportionate data sharing;
. advice sector progress on delivering a step change in free debt advice; . the DCA’s Debt Position Paper and proposed Courts and Tribunals Bill which will improve consumer’s experience of resolving debt through the legal judicial system; and . the work of the DWP to drive up the standard of housing benefit and council tax benefit administration.
Tackling Over-indebtedness Annual Report 2005

5

Foreword


These actions will make a real difference in tackling over-indebtedness and the damage it causes to people’s lives. Progress across the whole range of actions is set out in Chapter 5 of this report.

We cannot afford to rest on our past successes. While over-indebtedness is not considered a risk to economic stability, there still remains much to be done. Over-indebtedness remains a major contributory factor to social exclusion and a bar to prosperity for all. It is a major impediment to improving vulnerable consumers’ lives: exacerbating the problems of child poverty and providing a barrier to employment.

For this reason, it is vitally important that we all continue to work together to combat the problems which cause, and are caused by, over-indebtedness. This report sets out challenging targets for the coming year.

Again, we would like to take the opportunity to express all of our thanks to the members of the Advisory Group on Over-indebtedness, which has so ably supported us over the last year, as well as all of the other people and groups who have contributed, in developing and implementing these strategies for dealing with the various aspects of over-indebtedness.

The Ministerial Group on Over-indebtedness

Gerry Sutcliffe MP

Department of Trade and Industry (Joint Chair)

James Plaskitt MP

Department for Work and Pensions (Joint Chair)

Baroness Ashton of Upholland

Department for Constitutional Affairs (Joint Chair)

Phil Hope MP

Department for Education and Skills

Phil Woolas MP

Office of the Deputy Prime Minister

Ivan Lewis MP

HM Treasury

6
Tackling Over-indebtedness Annual Report 2005


Chapter 1

Executive Summary


The challenge

1.1 A small but significant minority of the population continues to be severely
affected by problem debt. This can take the form of difficulty meeting
credit commitments or inability to pay household bills.
1.2 These problems, which we call over-indebtedness, are strongly associated
with social exclusion and unforeseen events such as redundancy,
relationship breakdown and ill health. Debt problems rarely exist in
isolation: many people face clusters of problems, of which debt may be
the main or simply a component part. Over-indebtedness has significant
costs for individuals, creditors and society as a whole1.
1.3 While the level of consumer credit borrowing continues to rise,
the macroeconomic situation is stable:
. the Bank of England states that the current level of borrowing is not
a threat to economic or banking stability2;
. employment is high and interest rates remain historically low; and
. the majority of people benefit from the use of credit.
1.4 The picture in relation to over-indebtedness is mixed:
. the number of borrowers who find their repayments a “heavy burden”
has not changed significantly over the past 10 years, and fell slightly
in 2004;
. the number of individuals in arrears is low and static;
. calls to some debt advice agencies have risen, which could indicate
a worsening problem, or that individuals are recognising problems
earlier and accessing advice when they need it;
. while still being at a long term low, arrears on mortgages have started
to increase;
. personal insolvencies continue to rise; and
. the Bank of England has indicated that lending institutions and
individuals may be underestimating their long term vulnerability3.
1.5 Last July, the Government published its Action Plan for Tackling Overindebtedness4. For the first time, over-arching objectives were set out, roles
1 An analysis of the costs of over-indebtedness was set out in Annex C of “Fair, Clear and Competitive:
the Consumer Credit Market in the 21st Century”, December 2003, DTI

2 “Financial Stability Review”, December 2004, Bank of England

3 Op Cit 2

4 ”Tackling Over-indebtedness – Action Plan 2004”, July 2004, DTI and DWP

Tackling Over-indebtedness Annual Report 2005

7

Chapter 1

Executive Summary

and responsibilities defined, and policies for tackling problem debt across
Government and external partners were drawn together in one place. We
committed to report on progress annually, and this is the first such report.

The strategy

1.6 We need to tackle problem debt to meet the Government’s commitment
to social justice and prosperity for all.
1.7 Effectively addressing over-indebtedness means looking at both prevention
and cure. Maintaining macroeconomic stability is essential. In addition,
Government and regulators are working in partnership with industry,
consumer groups and the voluntary sector to:
. minimise the number of consumers who become over-indebted; and
. improve the support and processes for those who have fallen into debt.
1.8 In tackling over-indebtedness, our priorities are underpinned by two wider
aims: to create an efficient consumer credit market for all and to advance
equity in line with the Government’s wider social justice agenda.
1.9 The Government’s strategic priorities for improving the efficiency of the
consumer credit market are:
. an increase in levels of financial capability and awareness, alongside
more transparent financial literature, so that individuals can take control
of their finances and participate actively and effectively in the credit
market;
. the creation of a modern regulatory framework that encourages and
rewards vigorous competition, innovation, choice and enterprise, while
stamping out irresponsible and unfair lending practices; and
. a reduction in the number of debt cases having to be brought to court,
with improved engagement between parties leading to the earlier
resolution of debt problems. For those matters which can only be
resolved through the court, improvements in the efficiency and speed
with which cases are handled.
8
Tackling Over-indebtedness Annual Report 2005


Chapter 1

Executive Summary

1.10 Priorities for tackling over-indebtedness to promote social equity are:
. to reduce problem debt in low-income families with children, in
particular among lone parent families; and
. to reduce persistent over-indebtedness, by preventing short term
worries becoming long term problems, reducing the time it takes for an
individual to return to financial health, and addressing the issues which
keep people over-indebted.
Progress

1.11 Over the past year, we have worked across Government and with our
partners to deliver a demanding agenda. Last year we set out ten initiatives
which would be key to the achievement of the partnership goals.
Highlights of achievements and their impact are set out below:
. the National Strategy for Financial Capability initiative has begun the
implementation of pilot projects designed to improve people’s ability
to take control of their own finances. For example, the FSA and the BBC
have launched their on-line Financial Healthcheck5 which offers users
a qualitative assessment of their personal finances;
. in “Promoting Financial Inclusion”6 the Government set out a package
of measures to tackle financial exclusion. Increasing access to affordable
forms of credit is one of the key objectives of this work and, the
Government has announced a series of measures in this area;
. in April 2005 the Government introduced the Stakeholder suite of
simple, low-cost, risk-controlled savings and investment products to
help promote saving and asset accumulation;
. three sets of new regulations came into force over the last 12 months
which will improve transparency in consumer credit advertising and
agreements;
. the pilot project on tackling illegal money lenders has already led to nine
cases being submitted for prosecution. Victims have all been offered
money advice and some victims are now saving with a credit union;
5 www.bbc.co.uk/healthcheck and www.fsa.gov.uk/consumer/healthcheck
6 “Promoting Financial Inclusion”, December 2004, HM Treasury

Tackling Over-indebtedness Annual Report 2005

9

Chapter 1

Executive Summary

. the industry is committed to proportionate data sharing. All members of
the BBA and APACS have committed to full data sharing on credit card
and loan portfolios, where permission has been given, by the end of 2005;
. significant progress has been made towards the delivery of a step
change in free debt advice: the capacity of telephone advice has been
increased to deal with an additional 50,000 clients over the past twelve
months; Government and credit industry funding for the free debt advice
sector has increased significantly, for example £45 million from the
Financial Inclusion Fund; and the proof of concept for the new debt
advice gateway was successfully completed;
. the DCA Debt Position Paper, published in March 2005, places a strong
emphasis on the importance of providing better information and early
advice to debtors, with a view to improving engagement and thereby
avoiding unnecessary cases coming to court;
. in March 2005, following public consultation, DCA announced that the
proposed Courts and Tribunals Bill would be used to:
. reform the current court-based Administration Order system to
provide more effective support to those who want to repay their
debts; and
. introduce Enforcement Restriction Orders which would give a
breathing space to those who want to repay their debts and who
would be able to do so in a very short time.
The Bill will be introduced as soon as Parliamentary time permits;

. separately, the Insolvency Service has consulted on the proposed new
Debt Relief Order for those debtors who have no means of ever repaying
their debts and are unable to access any of the currently available debt
resolution procedures; and
. DWP is working with local authorities to drive up the standard of
housing benefit and council tax benefit administration. Whilst there is
some way to go before all local authorities are providing an effective
service, there have been significant improvements. In 2003/4 new claims
were processed on average 12 days quicker than in 2001/2.
10
Tackling Over-indebtedness Annual Report 2005


Chapter 1

Executive Summary

Priorities for 2005/06

1.12 Good progress has been made, but more needs to be done. The latest
research suggests that the strategy and priorities we set out last year are
sound. Over the coming year, we therefore propose further action to
address those priorities. We will also be looking at how to support joined-
up action at every level of Government and how we, as a Government,
handle arrears and overpayments. The action plan aims to tackle both
prevention and cure, to improve market efficiency and to increase social
equity. The priorities below are divided into prevention and cure; although
some contribute to all the goals.
Tackling Over-indebtedness Annual Report 2005

11

Chapter 1

Executive Summary

Objective 1: to minimise the number of consumers
becoming over-indebted:

. targets for the National Strategy for Financial Capability include:
publication of good practice research on how to raise financial capability
among young adults; launch of the on-line self-assessment “Debt Test”;
workplace and schools projects; and publication of financial capability
baseline survey results;
. to take forward the announcements made in ‘Promoting Financial
Exclusion’ aimed at increasing the supply of affordable credit, including
consulting on the case for and practicalities of extending Community
Investment Tax Relief to Community Development Finance Initiatives’
personal lending activities and on raising the cap on interest rates credit
unions can charge on loans;
. to support saving and asset building for all from childhood, through
working life and into retirement, while providing more help for those who
need it most, including through ISAs, the Saving Gateway, the Child Trust
Fund, the Stakeholder product suite and changes to the benefit system;
. the Consumer Credit Bill, which was not passed in the last Parliament
due to a lack of time, will improve consumer rights and redress,
strengthen the credit-licensing regime, improve regulatory powers
and increase transparency. This legislation is part of the 2005-2006
legislative programme;
. action to promote responsible lending including:
. investigating ways to increase the amount of data available for
making credit decisions;
. issuing a consultation on credit card cheques;
. continuing to monitor the impact of the illegal money lending
enforcement pilots; and
. encouraging more credit trade associations to apply for approval of
their codes of practice under the OFT codes approval scheme, and
for those who have already applied to continue to work with the
OFT to gain approval; and
. the DWP Service Delivery Agreement target to improve the average
speed of processing new Housing Benefit / Council Tax Benefit claims,
to be achieved by March 2006, is to reduce the overall processing time
for all Authorities by 10% and for the worst 15% of performing
Authorities to reduce processing time by 33%.
12 Tackling Over-indebtedness Annual Report 2005


Chapter 1

Executive Summary

Objective 2: to improve support and processes for those
who have fallen into debt:

. actions to realise the step-change in the provision of free debt advice
will include:
. a six-month pilot of the new debt advice telephone gateway
targeting Yorkshire and Gloucestershire will be launched in October
2005 to improve access to free debt advice;
. growth in telephone capacity from 191,000 clients helped at the
start of 2004 to 440,000 clients at the end of 2006;
. the projects to increase face-to-face debt advice and to research
outreach, funded by the Financial Inclusion Fund, will be launched;
and
. results of research into the cost-effectiveness of free debt advice in
generating downstream savings will be available by early 2006;
. DCA intends to pilot Pre-Action Notices in debt claims by end 2005.
DCA will complete pilots to test the cost-effectiveness of providing key
information about both the court process and the benefits and sources
of appropriate independent advice/assistance in delivering earlier
settlements by end-2006;
. new measures to assist the over-indebted, including the reform of court-
based Administration Orders and the introduction of the new
Enforcement Restriction Order will be taken forward such that they can
be introduced as part of the proposed Courts and Tribunals Bill as soon
as Parliamentary time permits;
. it is also anticipated that the proposed Bill will make provision for further
legislation to introduce a new Debt Relief Order, subject to the outcome
of the Insolvency Service consultation and the continued financial
viability of the proposed scheme; and
. to improve the management of debts to Government and the experience
of those owing money to the state, we will explore options for closer
working between Government departments, and will scope the issues
and options over the coming year.
Tackling Over-indebtedness Annual Report 2005

13

Chapter 2

Introduction


Over-indebtedness in 2005

2.1 The term over-indebtedness7 is used to describe debt which has become
a major burden for the borrower. For example, Citizens Advice defines
problem debt as when an individual is “unable to pay their current credit
repayments and other commitments without reducing other expenditure
below normal minimum levels”8. Other commitments can be rent, utility
bills and taxes.
2.2 A small but significant minority of the population continues to be severely
affected by problem debt. Over-indebtedness can be caused by, and
contributes to, social exclusion, financial exclusion and poverty. Our
research9 indicates that more than half of those who are over-indebted
have incomes of less than £7,500 a year; families with children, and in
particular lone parent families, are most at risk; and consumers are more
likely to be in arrears on household bills than consumer credit. Debt
problems rarely exist in isolation: many people face clusters of problems,
of which debt may be the main or simply a component part.
2.3 The costs of over-indebtedness fall on individuals, financial institutions,
other creditors, the Government and society as a whole10.
2.4 The Government is committed to social justice and prosperity for all.
Over-indebtedness presents a barrier to delivery of objectives across
Government, from tackling child poverty and social exclusion, to reducing
barriers to work, and encouraging appropriate saving and investment.
Therefore, to meet our commitments, cross-government action is required
to tackle problem debt.
2.5 In addition, co-ordinated action is required with partners outside
Government. Problem debt can only be effectively and appropriately
tackled by Government and the regulators working in partnership with
the credit and utility industries, the voluntary sector, consumer groups
and individuals.
7 There is no universally agreed definition of over-indebtedness and a number of similar terms are
used. In this report, over-indebtedness, problem debt and financial difficulty are used as synonyms.
Exact definitions are derived through statistical measures.

8 “In too deep”, May 2003, Citizens Advice

9 “Over-indebtedness in Britain: A DTI report on the MORI Financial Services Survey 2004”, June 2005,
DTI

10 Op Cit 1

14
Tackling Over-indebtedness Annual Report 2005


Chapter 2

Introduction

2.6 The partners’ approach to tackling over-indebtedness was set out for the
first time in our 2004 Action Plan11. The aim of the current document is to:
. present an updated analysis of the current situation, including detailed
new work on the characteristics of those suffering from over-indebtedness;
. report on progress over the past year; and
. present our strategic priorities and targets for 2005/06.
Over-indebtedness across the nations

2.7 While consumer protection and credit are reserved to the Westminster
Parliament, the Devolved Administrations have taken an active role in
research, policy development and delivery:
. The Scottish Executive sets policies to address over-indebtedness in
the wider context of financial inclusion. In January 2005, the Executive
published its Financial Inclusion Action Plan12 which, amongst other
things, sets out the key work being taken forward in money advice,
financial education and access to appropriate financial services;
. in Wales, the Deputy Social Justice Minister completed his review of
over-indebtedness at the end of December 2004. The review outlines the
evidence surrounding over-indebtedness in Wales, assesses the impact
of debt on individuals, communities and the wider economy
and the impact of over-indebtedness on Assembly Government policies
and strategies. It also identifies what is already being done to tackle
over-indebtedness in Wales and the UK and makes ten specific
recommendations for taking work forward in Wales;
. the Welsh Assembly Government has confirmed that it will accept all ten
of the recommendations which cover key areas such as Looked After
Children and the Child Trust Fund, financial literacy education in schools;
links to Communities First; consumer credit and debt advice. An Action
Plan will now be developed to take forward the implementation of the
recommendations; and
. in Northern Ireland, the Central Anti-Poverty Unit in the Office of the
First Minister and Deputy First Minister will oversee the development
and implementation of a new Anti-Poverty Strategy. Importantly, one of
the key strands of the strategy will be a focus on financial exclusion and
the causes, and issues associated with financial hardship.
11 Op Cit 4
12 “Financial Inclusion Action Plan”, January 2005, Scottish Executive


Tackling Over-indebtedness Annual Report 2005

15

Chapter 3

The Current Situation


The macroeconomic situation

3.1 The UK economy expanded by over 3% in 2004, above its assumed trend
rate and the fastest for four years. With businesses more confident about
global economic conditions, investment accelerated in 2004, having
already picked up in 2003, and underlying UK export growth was robust13.
3.2 More recently indicators of retail consumer spending have been slowing:
in the year to May 2005 retail sales grew by 1.3%, well below the average
of 6.2% in 2004. However, retail sales account for only a third of total
private consumption and the rest of private consumption –
the majority of consumer spending – has gained momentum through the
second half of 2004. Consumer confidence rose in late 2004 and in 2005
remains close to its highest level for two years.
3.3 Since August 2004, the independent Monetary Policy Committee of the
Bank of England has held base rates unchanged at 4.75%, close to historic
lows. Growth in household debt has continued to ease back, suggesting
that households may be adjusting to the effects of previously strong rises
in their borrowing commitments, which remain manageable. Moreover,
both household debts and assets have grown strongly over recent years,
and remain consistent with continued macroeconomic stability.
3.4 The UK economy is forecast to grow by between 3 to 3.5% in 2005 without
generating domestic inflationary pressures. However, growth is expected
gradually to ease back to 2.5 to 3% in 2006 as the economic cycle ends.
3.5 Global risks – notably exchange rates and the potential for an abrupt
adjustment to the world’s current account imbalances – will continue to
have a key bearing on UK economic prospects. On balance, the likelihood
of such shocks has diminished a little since the end of 2004.
13 This is discussed in “Financial Statement and Budget Report 2005”, March 2005, HM Treasury

16
Tackling Over-indebtedness Annual Report 2005


Chapter 3

The Current Situation

Levels of over-indebtedness

3.6 Reporting on the levels of consumer over-indebtedness is made more
difficult by the lack of a universally agreed definition of over-indebtedness
and the use of a number of similar terms, such as problem debt14 and
financial difficulty15. OXERA suggest an alternative definition of over-
indebtedness as “those households or individuals who are in arrears on
a structural basis, or are at a significant risk of getting into arrears on a
structural basis”16. In order to measure over-indebtedness, we are required
to make assumptions so that we can identify those for whom repayments
are a major burden and those who are in arrears on a structural basis.
3.7 The recent DTI report17 on a survey carried out by MORI Financial Services
(“the MFS survey”) showed that no one indicator perfectly captures the
current situation on over-indebtedness and to gain the best representation,
evidence from a number of different indicators must be used. Measures of
over-indebtedness may be objective or subjective. Objective measures of
over-indebtedness involve a threshold which is assumed to be
synonymous with over-indebtedness. Subjective measures of over-
indebtedness are also important and usually involve asking individuals
about the burden of their borrowing. This section uses evidence from both
type of indicator to report on the present level of over-indebtedness.
3.8 Growth in consumer borrowing has been particularly strong over the past
two years as a result of the stable macroeconomy. Whilst the growth in
secured borrowing has dipped recently, the growth rates of secured and
unsecured borrowing are still greater than that of income. As a result, total
borrowing to income ratio has continued to rise over the past 12 months.
14 Citizens Advice define this as those individuals who are “unable to pay their current credit
repayments and other commitments without reducing other expenditure below normal minimum
levels.” Op Cit 8

15 Professor Elaine Kempson, of the University of Bristol, defines this as people “who have fallen into
arrears with consumer credit commitments and those behind with paying household bills”, Op Cit 20.

16 “Are UK households over-indebted?”, April 2004, OXERA. Commissioned by the Association for
Payment Clearing Services, British Bankers Association, Consumer Credit Association and the
Finance and Leasing Association.

17 Op Cit 9

Tackling Over-indebtedness Annual Report 2005

17

18
%

%

Chapter 3

The Current Situation

80
60
40
20
0

8
6
4
2
0

Unsecured lending Secured lending

Source: Bank of England: LPMVTYO and LPMVTYI

Tackling Over-indebtedness Annual Report 2005

Jan-02

Mar-02
May-02


Jul-02

Sep-02

Nov-02

Jan-03
Mar-03


May-03

Jul-03

Sep-03

Nov-03Jan-04Mar-04

May-04

Jul-04

Sep-04
Nov-04


Source: ONS
Figure 2: 12 month growth rate of Net Lending
10
12
14
16
18
Total debt/income ratio (NNPP/4*RPQK) Secured debt/income ratio (NNRP/4*RPQK)
1994 Q1

1994 Q4

1995 Q3

1996 Q2

1997 Q1

1997 Q4

1998 Q3

1999 Q2

2000 Q1

2000 Q4

2001 Q3

2002 Q2

2003 Q1

2003 Q4

Figure 1: Total Household Sector Debt/Incomes Ratios

160

140
120
100



2004 Q3


Chapter 3

The Current Situation

3.9 The MFS survey carried out for the DTI has shown that the levels of
individual debt service have also risen with the levels of borrowing.
This borrowing is likely to continue at least in the short term as interest
rates remain relatively low and stable, and as employment remains high.
However, the evidence is mixed as to whether this increased borrowing
is causing increasing problems for consumers.
3.10 Evidence that the increased borrowing could be causing problems is
implied by the steady rise in personal insolvencies over the past two years.
Bankruptcies in England and Wales, sequestrations in Scotland and
voluntary arrangements by individuals have all risen over this period.
There are a number of factors which may have contributed to this trend,
including the increased levels of consumer borrowing and a reduction in
the social stigma attached to bankruptcy. However, it is not yet clear to
what extent each of these factors are responsible.
3.11 Bankruptcy law was changed in April 2004, as a result of the Enterprise Act
2002. It is too early to say what impact, if any, the changes to the law have
had on bankruptcy numbers. The Insolvency Service is presently
evaluating the impact of the Enterprise Act, and are examining: economic
modeling of business start-up rates; details of lending policies from a panel
of mainstream financial institutions set up by the British Bankers
Association; surveys of stakeholders to ascertain satisfaction levels with
the various provisions of the Enterprise Act 2002; and academic research
regarding corporate provisions.
Tackling Over-indebtedness Annual Report 2005

19

20
Source: Insolvency Service, DTI

Tackling Over-indebtedness Annual Report 2005

1997 Q1

1997 Q4

1998 Q3

1999 Q2

2000 Q1

2000 Q4

Total Bankruptcy Orders Individual Voluntary Arrangements *

Source: Insolvency Service, DTI
*Includes deeds of arrangement

Figure 4: Sequestrations in Scotland

0
100
200
300
400
500
600
700
800
900
1,000
'000s
1997 Q1

1997 Q3
1998 Q1

1998 Q3
1999 Q1
1999 Q3

2000 Q1
2000 Q3

2001 Q1

2001 Q3

2001 Q3
2002 Q2

2002 Q1
2002 Q3

2003 Q1

2003 Q4

2004 Q3

2003 Q1
2003 Q3
2004 Q1

2004 Q3
2005 Q1

0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
'000s
Figure 3: Individual Insolvencies in England and Wales (‘000s)


Chapter 3

The Current Situation


Chapter 3

The Current Situation

3.12 Evidence that the rising levels of borrowing are not becoming problematic
for consumers is given by recent research from the Bank of England, which
showed that the proportion of households that consider their repayments a
heavy burden in 2004 is both low and, at 8% of debtors, slightly less than
that obtained in recent years. The 2004 MFS survey produced a similar
result and also found that only a small minority (4% of the sample) had been
in arrears on a domestic bill or credit commitment for more than 3 months.
Figure 5: Trends in the burden of unsecured borrowing

percentage of debtors

80
70
60
50
40
30
20
10
0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Heavy burden Somewhat of a burden Not a problem
Note: Figures up to 2002 are calculated using the BHPS, 2003 and 2004 figures are from NMG Research
surveys
Source: BHPS, NMG Research and Bank calculations

3.13 The MFS Survey showed that a relatively small percentage (4%) of
individuals had been in arrears on their credit repayments or domestic bills
for more than 3 months. This tallies with figures from the Council of
Mortgage Lenders which show the level of mortgage arrears declining to a
record low in 2004. However, over the past two quarters, mortgage arrears
figures released from the CML indicate the first rise in mortgage arrears
since 1999, reflecting perhaps the rise in interest rates last year.
Tackling Over-indebtedness Annual Report 2005

21

Chapter 3

The Current Situation

3.14 Figures on calls received by various agencies providing debt advice are
often used to inform the debate on consumer over-indebtedness. However,
trends from such advice lines must be put into perspective before making
conclusions about the level of over-indebtedness. There are a number of
reasons for this but, most fundamentally, the difficulty lies in interpreting
whether a change in the figures relates to a change in the level of over-
indebtedness or a change in consumers’ awareness of the availability or
value of debt advice.
3.15 In the short term, the DTI will continue to monitor the situation through its
Quarterly Monitoring paper18, which summarises publicly available sources
to form a high level view of consumer over-indebtedness. In the long term,
the DTI is working with the Office of National Statistics to secure a
longitudinal survey of wealth and assets, which will give much more detail
in this area. The survey is currently in the initial stages of development.
Characteristics of those who are over-indebted

3.16 The recent MFS survey conducted for the DTI surveyed more than 10,000
individuals and confirmed several characteristics found by other surveys
that are associated with over-indebtedness. These characteristics are briefly
summarised below:
. Age: It is the younger and middle generations that seem to be having
the most problems. 25-44 year olds are significantly over-represented on
almost all over-indebtedness indicators;
. Gender: Women are over-represented on all types of over-indebtedness
indicator. This is most pronounced on the debt service to income ratios.
This could be explained by women’s lower average incomes and the fact
that women are more likely to be non/part-time working partners who
share their borrowing commitments with working partners, often due
to the greater effect of caring responsibilities;
18 “Over-indebtedness Monitoring Paper Q1 2005”, June 2005, DTI

22
Tackling Over-indebtedness Annual Report 2005


Chapter 3

The Current Situation

. Family type: The MFS survey shows that individuals or couples with
children are more likely to be over-indebted that those without children.
Single parents, though under-represented on the debt services
indicators, are significantly over-represented on the arrears and burden
indicators. This group accounts for 9% of the sample but makes up 31%
of those in arrears and 24% of those declaring their household’s
borrowing a burden;
. Ethnicity19: Individuals who classify their ethnicity as British are overrepresented on the consumer credit indicators but under-represented on
the arrears and subjective indicators. This implies that the opposite is
true for those individuals from ethnic minorities;
. Life changes over the past 12 months: The survey also shows that
those who have experienced a significant life event in the past 12
months, such as becoming redundant, getting divorced or having a baby
are over-represented on all over-indebtedness indicators;
. Housing Tenure: It is not surprising that people with mortgages make up
over 80% of individuals whose borrowing repayments are greater than
50% of income. Although they have higher debt-to-income ratios, they
do not appear to be having the same level of difficulties with their
borrowing as tenants. The data shows that renters, though underrepresented on the debt service-income ratios, struggle with their
borrowing repayments and domestic bills with both social and private
tenants being significantly over-represented on the burden and arrears
indicators;
. Income: As may be expected, those individuals in the lowest income
bracket are considerably over-represented on all indicators (other than
the number of credit agreements), with individuals in the higher income
bands only featuring on the number of credit commitments indicator;
. Savings: A lack of savings is associated with those having problems
with the repayments on their borrowing. Those with savings less than
£1,000 account for 54% of the sample but make up 89% of those in
arrears and 84% of those finding their borrowing repayments a heavy
burden; and
. Region: England was over-represented on all the over-indebtedness
indicators compared to Scotland and Wales with the exception of
arrears. This was the only indicator for which Scotland was overrepresented.
19 Survey ethnicity classifications selected to be consistent with the Census.

Tackling Over-indebtedness Annual Report 2005

23

Chapter 3

The Current Situation

Types of arrears

3.17 Respondents were asked if they had been in arrears on either domestic
bills or credit commitments both at the time of the survey and for more
than 3 months in order to identify those individuals who were structurally
rather than temporarily in arrears.
3.18 Of the total sample, 6% were currently in arrears on at least one credit
commitment or domestic bill and 4% had been in arrears for more than 3
months. Individuals were more likely to be in arrears on domestic bills than
credit commitments. This is not surprising because more individuals face
payments on domestic bills than credit commitments.
3.19 The most common payment to be behind on was council tax, followed
closely by rent, water and gas/electricity bills. Over a quarter (26%) of those
in arrears for more than 3 months had no credit commitments at all i.e.
they were in arrears on domestic bills only. Individuals were often not just
in arrears on one bill; 44% of those behind with rent were also behind with
council tax and 33% of those behind with gas/electricity were also behind
with water repayments.
Figure 6: Arrears on credit commitments and domestic bills

Type of Payment % of sample currently % of sample currently Average
in arrears on at least in arrears on at least amount behind
one credit commitment/ one credit commitment/
domestic bill domestic bill for more
than 3 months
Any payment 6% 4% £868
Gas/Electricity 1% 1% £181
Water 1% 1% £325
Rent 2% 1% £377
Council Tax 2% 1% £338
Credit Cards 1% 1% £1,494
Personal Loan 1% * £1,526
*Figure less than 1% and too small to be significant. This was the also case for arrears on Mortgage, Hire
Purchase, Car finance and other loan.
Source: DTI MFS 2004

24
Tackling Over-indebtedness Annual Report 2005


Chapter 3

The Current Situation

Those “at risk” of being over-indebted

3.20 Individuals and households can experience financial shocks at the macro
level, such as a change in interest rates, or at the micro level, such as new
expenses as result of having a child. Evidence20 shows that many
individuals become over-indebted due to the occurrence of micro events
which change their personal circumstances. Unfortunately, identifying
which individuals are vulnerable to over-indebtedness driven by micro
shocks is very difficult. It is possible however, to gain an understanding of
an impact of a shock at the macro level.
3.21 The impact of interest rate rises on mortgage holders has been looked at in
some detail by the Financial Services Authority21. They found that a one
percentage point increase in interest rates would cause 7% of mortgage
holding households to struggle with at least one form of credit, though not
necessarily falling behind with repayments.
3.22 The Citizens Advice Bureau reported in 200322 that a fall in income of as
little as 10% could induce problems for their clients who borrow. The MFS
survey investigated this hypothesis over a broader sample by simulating
the impact of a reduction of 10% in the income of all respondents on the
debt service-income indicators of over-indebtedness. The additional
number of individuals identified by the debt-service indicators was
negligible. The number of individuals with unsecured debt service in
excess of 25% of their gross income increased by 0.5% from 7.6% to 8.1%.
The number of individuals with total debt service in excess of 50% of their
income increases from 9.2% to 10.2%.
New research across the nations

3.23 In 2003, the Welsh Consumer Council commissioned a booster sample of
Welsh households to be added to the national survey for Great Britain. This
research23 found that:
. more households in Wales have active credit commitments (57%) than
the British average (47%);
20 For example, “Over-indebtedness in Britain”, September 2002, Elaine Kempson and Op Cit 9
21 “Financial Risk Outlook 2004”, March 2004, FSA
22 Op Cit 8
23 “Over-indebtedness in Britain: Welsh Survey Uplift”, September 2002, Welsh Consumer Council

Tackling Over-indebtedness Annual Report 2005

25

Chapter 3

The Current Situation

. a quarter of households in Wales had consumer credit commitments
amounting to more than 10% of their annual income, including 6% who
had accrued borrowings that were equivalent to over half their annual
income;
. one in seven (15%) households admitted to having a constant struggle
to make ends meet, while a fifth (19%) were experiencing financial
difficulties at the time of the interview (compared with 14% in Great
Britain as a whole);
. one in six (16%) households had fallen into arrears with at least one
of their financial commitments in the year prior to the survey – more
than one in ten (11%) had fallen behind with payments on household
bills; and
. six out of ten households (58%) had been struggling to avoid or manage
arrears for six months or more, while two in five (41%) had been
experiencing problems for a year or more (compared to 34% in Great
Britain as a whole).
3.24 From the above findings, combined with the fact that households in Wales
have lower than average earnings and higher levels of benefit receipt, the
Welsh Consumer Council report concluded that the effects of an economic
downturn (with higher interest rates and more unemployment) would
be likely to result in a more acute debt crisis in Wales than elsewhere in
Great Britain, it would affect more households and would take longer to
recover from.
3.25 The Office of the First Minister and Deputy First Minister (OFMDFM)
commissioned a module of questions on debt within the Northern Ireland
Statistics and Research Agency Omnibus Survey in March 2005. This was a
piloting exercise to test the feasibility and utility of asking a range of debt
questions and of obtaining a baseline on the extent of debt and over-
indebtedness in Northern Ireland. Analysis is ongoing and results will be
available in due course on the website24. OFMDFM have also included a
small number of questions in relation to debt in the Continuous Household
Survey (CHS) for 2005/2006. These questions will inform the possibility of
using the CHS as an information source in relation to debt.
24 www.research.ofmdfmni.gov.uk

26
Tackling Over-indebtedness Annual Report 2005


Chapter 3

The Current Situation

Summary

3.26 This analysis shows that, while over-indebtedness is not considered to be a
risk to economic stability, a significant minority of the population is
experiencing difficulty due to problem debt. According to the MFS survey,
across the UK:
. 4% of the population over the age of 18 – corresponding to some 1.8
million people25 – are in arrears for more than 3 months on either
consumer credit or utility bills;
. 5% of borrowers – corresponding to some 1.2 million individuals26 –
consider their borrowing repayments to be a “heavy burden”, and a
further 20% of borrowers consider their repayments to be “somewhat of
a burden”; and
. 31% of lone parents are structurally in arrears (while this group makes
up 9% of the sample), along with 64% of those with incomes under
£9,500 (45% of the sample).
3.27 The MFS survey highlights:
. arrears of household bills are more common than of consumer credit
commitments. This differential is more marked for lower income groups;
. significant life events, such as redundancy or relationship breakdown,
are associated with those struggling with debt; and
. analysis suggests that a 10% fall in income would only result in a small
increase (of 0.5%) in the proportion of the population with high debt
service to income ratios.
3.28 These results inform the strategy and actions set out in the rest of this
report.
25 Based on percentages from Op Cit 9 and population projections by the Government Actuary.
26 Ibid

Tackling Over-indebtedness Annual Report 2005

27

Chapter 4

The Strategy


4.1 Over-indebtedness has significant costs for individuals, creditors and
society as a whole27. We need to tackle over-indebtedness to meet the
Government’s commitment to social justice and prosperity for all.
4.2 For action to address over-indebtedness effectively, we need to consider
both prevention and cure. In order to reduce the costs of over-
indebtedness, we aim to minimise the number of individuals who become
over-indebted and to improve the support and processes for those who
have fallen into debt.
4.3 In tackling over-indebtedness, our priorities are underpinned by two wider
aims: to create an efficient consumer credit market for all and to advance
equity in line with the Government’s wider social justice agenda.
Efficient consumer credit market

4.4 The UK has one of the most advanced consumer credit markets in the
world, and a large majority of the population benefit from the range of
products which arise from a competitive system. However, elements of
market operation could be improved. Some improvements would help all
consumers in their day-to-day transactions, while both reducing the risk of
financial problems which all consumers could face following a major life
change and helping tackle such problems. Other improvements, while
providing the foundation for a fair and transparent market for all, will have
particular benefit for those on low income or in a vulnerable position.
4.5 Strategic priorities for improving the efficiency of the consumer credit
market are:
. an increase in levels of financial capability and awareness, alongside
more transparent financial literature, so that individuals can take control
of their finances and participate actively and effectively in the credit
market;
. the creation of a modern regulatory framework that encourages and
rewards vigorous competition, innovation, choice and enterprise, while
stamping out irresponsible and unfair lending practices; and
27 Op Cit 1

28
Tackling Over-indebtedness Annual Report 2005


Chapter 4

The Strategy

. a reduction in the number of debt cases brought to court, with improved
engagement between parties leading to the earlier resolution of debt
problems. For those matters which can only be resolved through the
court, improvements in the efficiency and speed with which cases are
handled.
4.6 Examples of policies supporting these objectives include:
. the National Strategy on Financial Capability;
. the Consumer Credit Bill and Statutory Instruments; and
. the proposed Courts and Tribunal Bill.
Social justice and prosperity for all

4.7 Action to tackle over-indebtedness is strongly linked with the Government’s
commitment to tackling poverty and social exclusion. Many of those with
long term debt problems are likely to be poor and socially excluded; and
the factors which are strongly associated with over-indebtedness, such as
unemployment, are also linked closely with social exclusion.
4.8 Problem debt has been identified as making a significant contribution to
child poverty28 and over-indebtedness can exacerbate poverty in working
age and later life. While older people are less likely to have problems with
debt, such problems when they arise can be particularly difficult to cope
with29. Savings and investment provide opportunity and independence
throughout life: over-indebtedness and financial exclusion are clear barriers
to acquiring sufficient savings.
4.9 In tackling over-indebtedness to promote social equity, the Government’s
priorities are:
. to reduce problem debt in low-income families with children, in
particular lone parent families; and
. to reduce persistent over-indebtedness, through preventing short term
worries becoming long term problems, reducing the time it takes for an
individual to return to financial health, and addressing the issues which
keep people over-indebted.
28 “Child Poverty Review”, July 2004, HM Treasury
29 “Do we have a middle-aged debt bubble?”, September 2004, CCCS and Age Concern

Tackling Over-indebtedness Annual Report 2005

29

Chapter 4

The Strategy

4.10 We are looking to develop cross-government targets to drive coherent
policy action. The targets will be finalised over the coming year alongside
the ONS Wealth and Assets survey, which will set the baseline and
measure progress.
4.11 Examples of policies supporting these objectives include:
. increasing access to affordable credit;
. the Financial Inclusion Fund projects on face-to-face money advice
provision and outreach pilots; and
. improvements to the administration of housing benefit and council tax
benefit claims.
30
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action


5.1 This chapter sets out the progress we have made against the action plan
published last year, and what further action we intend to take in 2005/06.
The aim of the action plan below is to present a coherent and
comprehensive policy response to the challenge of over-indebtedness.
A wide range of actions have been identified which contribute to the
achievement of the four aims: prevention, cure, improving market
efficiency and increasing social equity. The relative contribution of a
selection of policies to the four objectives is represented graphically in
Figure 7.
Figure 7: Contribution of selected policies to different over-arching
objectives

Increasing Improving

Equity Efficiency

Prevention

Encouraging
people to save
Social Market
Prevention of debt and
disconnnection from
energy utilities among
vulnerable groups
Increased
transparency
in the
consumer
credit market
Reform of
consumer
credit
legislation
Reform of
insolvency
and court
processes for
multiple
debtors
Improvements
in benefits
administration
Promoting access to
affordable credit
National Strategy on
Financial Capability
Responsible
lending: self
regulation
Step change in
the provision
of debt advice
Improved
management of
debts to government
Codes of
Practice for debt
collection
Enforcement Review
White Paper
Cure

5.2 In the 2004 Action Plan, we identified ten initiatives which were considered
key to the achievement of the partnership goals. Progress on these
initiatives is highlighted in the text below.
Tackling Over-indebtedness Annual Report 2005

31

Chapter 5

Partnership Action

Poverty and social exclusion

Introduction

5.3 Over-indebtedness is both caused by, and contributes to, poverty and
social and financial exclusion. People will almost always be financially
better off in a job than in receipt of benefit. But for many, there is a
concern that return to work may lead to instability of income which could
impact on credit arrangements and possibly the risk of greater
indebtedness.
Progress report and forward look

5.4 DWP has introduced policies to make work possible and to make work pay.
Through Jobcentre Plus, we are providing everyone of working age –
including people who are unemployed, lone parents and sick and disabled
people – with advice and guidance on the full range of support available to
help them move into work. More help is being provided for those who face
the greatest barriers to work. The minimum wage and tax credits ensure a
minimum income from work to help tackle the unemployment trap and
ensure that work pays more than benefits. Overall, the various New Deals
have helped over 1.2 million people into employment.
5.5 Direct Payment continues to be an essential part of the drive against
financial and social exclusion. All the main banks and the Post Office now
offer basic bank accounts (without overdraft or borrowing facilities) giving
customers access to a wide range of financial services that some cannot
access at present. Using a bank account helps jobseekers show employers
that they are job-ready and also allows people to make savings on many of
their bills by paying by direct debit.
5.6 The DWP Public Service Agreement target of paying 85% of benefit and
pension customers into a bank account by 2005 was successfully achieved
in December 2004. We are now working to meet the needs of the hardest
to reach customers, supporting a range of organisations in encouraging
the remainder as yet unbanked to take up the advantages of joining the
financial mainstream.
32
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.7 The Government’s strategy for older people is focused on tackling poverty
in old age. The measures include: the introduction of the pension credit
which targets help to the poorest pensioners; the State Second Pension
which will provide a more generous additional provision for people on low
and moderate earnings; and one-off payments for eligible pensioners will
help to ensure financial security in retirement and reduce the risk of falling
into problem debt.
5.8 Priorities for the Government’s strategy for older people in 2005/06 include:
. we will continue to maximise take-up of Pension Credit;
. increase take-up of the State Second Pension, including among carers
and the long term disabled;
. we expect approximately 11.7 million individuals in over 8 million
households to receive the £200 Winter Fuel Payments this winter;
. in recognition of recent high levels of Council Tax, we will make a one-
off payment of £200 to each eligible household with someone aged 65
or over; and
. a one-off £50 Age Payment for pensioner households with someone
aged 70 and over in receipt of the Pension Credit guarantee in
recognition of the fact that the oldest and poorest pensioners are likely
to be disproportionately affected by the rise in cost of living expenses.
5.9 The Social Fund is successfully targeting those families who are most in
need of access to affordable credit. Recent research30 found that Social
Fund customers were more likely to be lone parents, younger people and
tenants, and more likely to have a young child, a long-standing illness,
health problem or disability, as well as those with caring responsibilities.
They were also more likely than average to have debts and less likely to
have a bank account.
5.10 The Government announced in the 2004 Spending Review its intention to
abolish the “double debt” rule for Budgeting Loans eligibility, and lower
the highest loan repayment rate to a maximum of 12% of a claimant’s
benefits. The Pre-Budget Report announced that these reforms will be
implemented in April 2006. This amounts to an increase in funding for the
Social Fund loans scheme of £210 million over the three years to 2008-09.
30 N Finch and P Kemp, “The Use of the Social Fund by Families with Children”, July 2004, University
of York.

Tackling Over-indebtedness Annual Report 2005

33

Chapter 5

Partnership Action

5.11 An additional £90 million is being added to the Discretionary Social Fund
over the three years to 2005-06. Together, these measures will enable the
Social Fund to play a more effective role in helping those families most
vulnerable to over-indebtedness. The Government is continuing to
consider further reform of the Social Fund, in the wider context of its vision
for greater financial inclusion. The impact of the changes will be included
in the Secretary of State’s Annual Report on the Social Fund.
5.12 The Anti-Poverty Strategy for Northern Ireland was launched during 2005.
One of the key strands of the strategy is the introduction of a new priority
focus on financial exclusion which will reinforce the importance of
measures to increase the uptake of financial entitlements and reduce
indebtedness and financial hardship.
Financial capability and information

Introduction

5.13 Consumers who are not financially capable may have difficulty making
informed decisions about their money, savings, investments or insurance.
They may also be vulnerable to accepting bad advice, scams and
unforeseen financial difficulties, falling into over-indebtedness through
mis-management of their affairs. As consumers become more financially
capable and fully understand the basis of financial products, it is hoped
they will be better able to make a sound judgement about which products
to choose and thereby be less prone to mis-buy, or be defrauded.
Progress report and forward look

2004 Top Priority Initiative

5.14 The National Strategy for Financial Capability initiative is led by the FSA
and designed to improve partnership and coordination across Government,
the financial services industry and consumer and voluntary organisations
working to improve the ability of people to deal with their personal
finances. It covers education, information and advice initiatives and has
the long term aim of giving people the skills and knowledge they need to
make sensible decisions about their money, so they can take control of
their finances and demand better services from the industry.
34
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.15 The National Strategy for Financial Capability initiative is now moving into
a pilot phase during which a number of initiatives are being tested before
wider roll-out. In particular, there are pilot projects taking place in the
workplace and in education, as well as a number aimed at younger people.
Partners have been working on two on-line tools:
. in June, the FSA and the BBC launched their on-line Financial
Healthcheck31 which offers users a qualitative assessment of their
personal finances, suggests some high-level priorities and points them
in the direction of additional advice and information where that will be
useful; and
. a new on-line self-assessment tool called the “Debt Test” will be
launched in the autumn as a joint initiative of the FSA, BBC and the
credit ratings agency, Experian. Based on an analysis of the behaviour of
real borrowers, it is designed to increase awareness of the risks
associated with credit by offering a quick assessment of the likelihood
that the user will default on a credit commitment within the next year.
5.16 For 2005, Basic Skills Agency, FSA, and Toynbee Hall have developed
a personal finance handbook aimed at advisers, teachers and anyone
providing financial advice or education. The handbook includes a
straightforward guide to everyday financial products and services
presented in a factual, unbiased and non-brand specific way. In addition, it
is an essential resource for consumers to help them understand what
financial options are available and how to access appropriate products.
5.17 The Scottish Executive launched in March 2005 three projects to look at
ways in which financial education can be targeted at specific groups of
people: with Young Scot and supported by the FSA to provide information
and advice to all young people across Scotland out of school; with Citizens
Advice Scotland and six member Bureaux targeting specific vulnerable
groups of people; in Easterhouse in Glasgow working with community
organisations and colleges.
5.18 The teaching of citizenship has been a compulsory part of the secondary
school curriculum since September 2002. 14-16 year old pupils are already
taught how to use a range of financial tools and services, including budgeting
and saving, in managing personal money. DfES has asked the Qualifications
and Curriculum Authority, as part of the review of GCSE Maths, to consider
including financial capability more explicitly in the maths curriculum.
31 www.bbc.co.uk/healthcheck and www.fsa.gov.uk/consumer/healthcheck

Tackling Over-indebtedness Annual Report 2005

35

Chapter 5

Partnership Action

5.19 The statutory curriculum in Northern Ireland is currently being revised to
include a greater emphasis on the development of real world skills.
Financial capability will be a compulsory part of mathematics and will
introduce pupils to financial planning and decision making through
relevant topics such as credit and debit cards, student loans and mobile
phone tariffs. The revised curriculum will be introduced on a phased basis
from September 2006.
2004 Top Priority Initiative

5.20 The Government has introduced new rules to improve transparency in the
consumer credit market – to ensure that consumers are provided with both
the quality and quantity of information that they need to compare credit
products and to make the best choice before they commit themselves:
. new advertising regulations32, which came into force on 31 October
2004, establish the typical Annual Percentage Rate (APR) as the principal
comparator of credit products; provide a new single set of assumptions
to ensure that all APRs are calculated in the same way; and prevent
advertisers from hiding key information in the small print by requiring
key information about the costs of credit to be displayed together and
with equal prominence;
. new rules governing the provision of pre-contractual information to
consumers and the form and content of credit agreements came into
force on 31 May 200533. These Regulations will require lenders to
provide prospective borrowers with clear information about the costs
and other terms and conditions of a credit agreement – in a form that
they can take away and study – before they sign up;
. the Consumer Credit Bill includes new requirements for the provision of
post-contractual information to debtors, including annual statements for
fixed sum credit with a term of more than one year, along with
minimum requirements in terms of information about arrears, default
sums and post judgment interest; and.
. in response to concerns about the transparency of credit card cheques,
Ministers have announced that DTI will consult later this year on
proposals to prescribe the information that lenders must give consumers
about the terms and conditions applying to the use of such cheques.
32 The Consumer Credit (Advertisements) Regulations 2004

33 The Consumer Credit (Disclosure of Information) Regulations 2004 and the Consumer Credit
(Agreements)(Amendment) Regulations 2004 respectively

36
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.21 The Government is committed to conducting a review of the effects of its
changes to the rules on credit transparency after they have been in effect
for two years. Success criteria will include whether:
. credit advertisements are clear, fair and not misleading;
. enforcement authorities are more successful in enforcing compliance
with advertising regulations;
. consumers have a better understanding of the terms and conditions of
their credit agreements, including APR, default charges and early
settlement costs; and
. there has been a fall in consumer complaints about credit
advertisements and agreements.
Access to affordable credit

Introduction

5.22 Many low-income households rely on the alternative credit market, where
typical products have an Annual Percentage Rate (APR) of over 100%,
many times the APRs of standard mainstream products. The Government
is committed to ensuring that those on the lowest incomes have affordable
alternatives available to them. The Government has been working to
identify creative solutions to reducing the cost of lending and increasing
access to affordable credit, building on existing good practice.
5.23 The whole policy area of increasing access to affordable credit for those on
low income was identified as a 2004 Top Priority Initiative, with particular
reference to increased activity in the credit union sector, review of the role
of the Social Fund and/or the development of alternative models of
affordable credit provision.
Tackling Over-indebtedness Annual Report 2005

37

Chapter 5

Partnership Action

Progress report and forward look

5.24 The Pre-Budget report supplementary document “Promoting Financial
Inclusion”34 made a series of announcements to increase access to
affordable credit, particularly through measures to boost the coverage,
capacity and sustainability of the third sector. The third sector consists of
credit unions and community development finance institutions (CDFIs),
institutions already active in providing a source of low-cost loans to
financially excluded groups.
5.25 The Government is working towards a scheme where, in certain
circumstances, private and third sector lenders could apply for repayment
to be made by deduction from benefit where normal repayment
arrangements have broken down. The aim of this scheme is to reduce the
costs and risks of lending to vulnerable groups.
5.26 Subject to State Aids approval from the European Commission, the
Government will set up a growth fund for third sector lenders, from within
the Financial Inclusion Fund, to boost the coverage, capacity and
sustainability of the sector in providing an affordable source of credit for
the financially excluded.
5.27 The Government consulted35 on the costs and benefits of raising the cap
on interest that credit unions can charge on loans, in particular to ascertain
the likely impact on existing credit union members and the communities
they serve. It has also published a consultation36 on the case for, and
practicalities of, extending a Community Investment Tax Relief scheme to
investments in community development finance institutions’ personal
lending activities.
5.28 The Scottish Executive has been working with the European Commission
to develop measures to support the ability of credit unions to provide
products which meet the needs of the financially and socially excluded.
These measures include aid to ensure credit unions have adequate
infrastructure to deliver such services, funded on the basis of a service of
general economic interest (SGEI). The Scottish Executive received a
positive decision to these proposals in April 2005.
34 Op Cit 6

35 “The credit union interest rate cap: consultation document”, March 2005, HM Treasury

36 “Extending a Community Investment Tax Relief scheme: consultation document”, June 2005, HM

Treasury

38
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.29 Following receipt of the Scottish State Aid approval, the Welsh Assembly
Government is currently developing its own State Aid notification on
funding for credit unions which will be submitted to the European
Commission shortly. In addition, the Assembly Government, in partnership
with the Wales Co-operative Centre, will shortly begin work on the details
of a scheme to provide funding to credit unions in Wales.
5.30 Work on the preparation of new legislation to modernise the regulation of
Industrial and Provident Societies and Credit Unions in Northern Ireland is
underway and is scheduled for completion by April 2006.
5.31 The Financial Inclusion Taskforce will monitor the increase in provision of
affordable credit by third sector lenders and report to Government on
progress.
Saving and asset ownership

Introduction

5.32 Assets and savings provide opportunity and independence throughout life,
flexibility to adjust to unforeseen events and financial security in
retirement. Access to savings can reduce the likelihood of becoming overindebted. The Government seeks to support saving and asset building for
all from childhood, through working life and into retirement, while
providing more help for those who need it most.
Progress report and forward look

5.33 Over 16 million people now have an Individual Savings Account (ISA), with
over £160 billion subscribed since 1999. ISAs have a higher take-up among
both low-income groups and the young compared to TESSAs or PEPs,
which they replaced. These savings are supported by around £1.6 billion in
tax relief every year. The Government is extending the existing ISA annual
investment limits, of £7,000 with a maximum of £3,000 in cash, until April
2010.
Tackling Over-indebtedness Annual Report 2005

39

Chapter 5

Partnership Action

5.34 In addition to using tax incentives, the Government is investigating
matching savings of low-income groups in the Saving Gateway. In the
initial pilot established in 2002, the Government matched individuals’
savings pound-for-pound up to a limit, and provided tailored financial
information and education for participants. The evaluation report
confirmed that matching can encourage genuinely new savers and new
saving. A second, larger, pilot is now underway, to test alternative match
rates, different monthly contribution limits, the effect of an initial
endowment and the support of a wider range of community financial
education bodies.
5.35 In April 2005 Child Trust Fund (CTF) accounts became fully operational.
The CTF will promote saving and ensure all children have a financial asset
at age 18, regardless of their family background. It will also provide
children with practical financial education. All children born since
September 2002 receive at least £250 to invest in a long term CTF account,
and children from families on lower incomes receive £500. Children,
parents, family and friends will together be able to contribute up to £1,200
a year to each account, and there will be no tax for them to pay on any
interest or gains made on this money. The Government is consulting on
what further payments should be made into CTF accounts at primary and
secondary school ages.
2004 Top Priority Initiative

5.36 In April 2005 the Government also introduced the Stakeholder suite of
simple, low-cost, risk-controlled savings and investment products. The
suite includes a cash deposit account and a medium term investment
product, both of which will be available within ISAs, as well as a CTF
account and a revised Stakeholder pension. There is also a new advice
regime, Basic Advice, which the FSA finalised in November 2004.
40
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.37 The Government is committed to ensuring the benefit system encourages
households to save appropriately, particularly those on lower incomes.
From April 2006, the threshold above which savings begin to reduce
eligibility for Income Support, Jobseeker’s Allowance, Housing Benefit and
Council Tax Benefit will be raised from £3,000 to £6,000. The upper capital
thresholds for Income Support and Jobseeker’s Allowance will be raised
from £8,000 to £16,000.
5.38 Success will be assessed in relation to the Government’s objective to
support saving and asset building for all. The Saving Gateway is being
independently evaluated, and HM Revenue & Customs have put in place a
detailed long term evaluation of the Child Trust Fund. The ISA regime will
be reviewed in 2006 and the Stakeholder suite will be reviewed in 2008.
Responsible lending

Introduction

5.39 While arrears in household bills are more common than those on
consumer credit commitments, 10% of households cited “overcommitment” as the primary cause of their over-indebtedness37 and
growth in consumer credit borrowing remains strong. Government and
regulators are working with industry groups to ensure that legislation
provides an up-to-date regulatory framework for responsible lending, that
voluntary practice is driving up standards of best practice among the
majority of lenders who do behave responsibly, and that illegal lenders
are brought to justice.
37 Op Cit 20

Tackling Over-indebtedness Annual Report 2005

41

Chapter 5

Partnership Action

Progress report and forward look

2004 Top Priority Initiative

5.40 The Consumer Credit Bill, which was not passed during the last Parliament
due to lack of time, will update the legislative framework on consumer
credit to provide comprehensive protection for consumers within a fairer
and more competitive credit market. It will do this in a number of ways:
. it will enhance consumer rights and redress – by replacing the current
“extortionate credit” test with a test based on unfairness; and by
introducing more effective redress mechanisms through a system of
Alternative Dispute Resolution;
. it will also improve the regulation of consumer credit businesses – by
strengthening the licensing regime, to enable the OFT to tackle rogue
lenders; and by ensuring that borrowers receive clear information about
the credit throughout the lifetime of the agreement; and
. finally, it will ensure that appropriate levels of protection are in place –
by abolishing the financial limit on the regulation of consumer credit
agreements; and by giving the courts full discretion to rule on the
enforceability of agreements.
This legislation is part of the 2005-2006 legislative programme. The
Government is committed to conducting a review of the effects of this
legislation after it has been in effect for two years.

5.41 The Government published research38 into the way that interest rate
controls have worked in some other countries which found that they might
restrict the availability of short term low-value credit to higher-risk
consumers. The Government has therefore decided not to include
provision for an interest rate cap in the current shake-up of consumer
credit law; however, it will keep this issue under review.
38 “The effect of interest rate controls in other countries”, August 2004, Policis. Commissioned by DTI

42
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

2004 Top Priority Initiative

5.42 The DTI funded pilot to crack down on illegal money lenders has already
led to nine cases being submitted for prosecution in the pilot areas. A final
report on the pilot is due in September 2006. The Government will also
conduct research to map the extent of illegal money lending across the UK,
to report in summer 2006.
5.43 The FSA introduced a structural approach to responsible lending in the
Mortgage Conduct of Business Sourcebook, applicable to all lenders to
unincorporated small businesses and individuals secured by FSA regulated
mortgages.
5.44 The FSA started statutory regulation of the sale and administration of
general insurance and pure protection contracts in January 2005. The FSA
has committed in its 2005/06 Business Plan to undertake thematic
supervision work on payment protection insurance (PPI) to ensure firms
are meeting the required rules and standards. The thematic projects will be
completed by Autumn 2005.
5.45 The introduction of statutory regulation, means the consumer protection
afforded by the Financial Ombudsman Service and the Financial Services
Compensation Scheme will be extended to considerably more individuals,
if they have problems with the sale or administration of their insurance.
Central to the new regime is the provision of clear information about the
policy. Firms will also have a responsibility to ensure any policy they
advise the customer to purchase is suitable for the customer.
5.46 The credit sector has also continued to work towards raising standards of
responsible lending through self-regulation and collaborative action:
. the new Banking Code published in March 2005 includes revised lending
procedures, guidance on credit card cheques, the use of “health
warnings” on card statements to highlight the risks associated with
repeatedly paying the minimum repayment only, and a common
Summary Box detailing all the salient information in a credit card
agreement;
Tackling Over-indebtedness Annual Report 2005

43

Chapter 5

Partnership Action

. the Finance and Leasing Association (FLA) will update its Lending Code
in light of recent regulatory changes and is considering how best to
supplement legal requirements. Among other things, FLA is considering
code updates on responsible lending; consideration of over-
indebtedness indicators in lending decisions; providing approaches to
vulnerable consumers and those suffering from mental health problems;
and debt advice;
2004 Top Priority Initiative

. all members of BBA and APACS have committed to full data sharing on
card and loan portfolios during 2005. Lenders, credit reference agencies
and Government are working to increase data available for making
credit decisions and monitoring credit behaviour, including examining
the options for removing legislative barriers on ‘historic’ accounts
opened without a fair processing notice. DCA will improve the range,
quality and accessibility of information on debtors using the proposed
new, more flexible Register of County Court Judgements database. DTI
will work with the credit industry to develop best practice in intelligent
data interrogation;
. BBA and FLA worked with the Money Advice Association on a series of
seminars during 2005 to discuss the impact of mental health issues on
debtors and to identify best practice.
Utility bills

Introduction

5.47 Arrears on utility and other household bills are more common than those
on consumer credit commitments, and are more likely among low income
groups. In addition, multiple debts are a problem for a significant minority:
33% of those behind with gas/electricity were also behind with water
repayments.
5.48 In December 2004, 1.2 million electricity and 1 million gas domestic
customers were repaying debts to their gas or electricity supplier. The
average debts were £161 and £149 respectively, with the majority of debts
being under £100.
44
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

5.49 Increasing utility charges over the past year have highlighted the
importance of work being undertaken by utility companies and regulators
on debt prevention and management, particularly for the most vulnerable.
Progress report and forward look

5.50 DTI estimates that current gas and electricity price rises are likely, if not
confronted, to increase the number of vulnerable households in fuel
poverty39 by 200,000 between 2003 and 2005. DTI and DEFRA have been
working with key parties in Government, the industry and the voluntary
sector to mitigate the effects of price rises on all households, and
particularly the vulnerable. These include promoting switching supplier
and payment method, encouraging the introduction of “social” and capped
tariffs, improving take-up of energy efficiency measures and encouraging
individuals to sign up for benefits health checks from suppliers.
5.51 In March 2005, the industry announced its commitment to establishing a
fuel poverty “helpline”, accessible by individuals and intermediaries, that
would seek to remove customers from fuel poverty by providing them with
a range of appropriate measures. Work on the helpline is ongoing, and
involves all key parties. It is intended that the helpline should be in place
by October 2005.
5.52 The Trade and Industry Committee report on debt and disconnections in
gas and electricity supply was published in February 200540. It chiefly
contained recommendations for OFGEM and the industry. DTI and OFGEM
had previously made clear to the industry that better arrangements were
needed to protect vulnerable customers. The industry responded with
proposals on which it consulted in April 2004. The final arrangements,
published and implemented in September 2004, should ensure that, as far
as possible, vulnerable customers will not be disconnected in future.
5.53 In March 2005, Ofgem and Energywatch reported on the progress energy
companies were making on introducing debt prevention and management
initiatives41. The report showed that substantial efforts and progress had
been made by suppliers, but that much remained to be done.
39 Households that spend more than 10% of their income on heating are defined as fuel poor.

40 “Debt and Disconnection: Gas and Electricity Supply Companies and Their Domestic Customers”,
House of Commons Trade and Industry Committee, Fifth Report of Session 2004-5 [HC 297-1],
10 February 2005

41 The document ‘Preventing Debt and Disconnection – The Review’ was carried out by Sohn
Associates and is available on the Ofgem website at www.ofgem.gov.uk

Tackling Over-indebtedness Annual Report 2005

45

Chapter 5

Partnership Action

5.54 Government published its review on ways in which poorer households are
helped with their water and sewerage charges in December 2004. The
principal recommendations of the Cross-Government Review of Water
Affordability Report42 included the setting up of a pilot scheme to target
water affordability assistance to lower income households, extending the
list of vulnerable groups and asking Ofwat to review debt guidelines in
2006 to update and promote good practice by water companies.
5.55 The Affordability Assistance Pilot Study will offer targeted assistance to
help 1,000 households in the south west region to access advice on saving
water; undertake a benefits check to identify areas where entitlements are
not being claimed; check for eligibility under the Water Direct scheme and
Vulnerable Groups Tariff; and offer advice on debt management and
payment plan advice. Defra, in collaboration with WaterVoice South West
and South West Water, are currently working on the specifications of the
study with a proposed start date for later in the year.
5.56 All telecoms providers are required to have debt management and
disconnection procedures that are proportionate and not unduly
discriminatory. These procedures should give due warning beforehand of
any service interruption or disconnection. Ofcom is currently carrying out a
review of debt management and disconnection procedures as part of a
consultation on the Universal Service Obligation. Ofcom intends to set out
its conclusions from the review later in 2005.
5.57 BT currently disconnects over 800,000 residential customers each year.
Ofcom research has shown that many of these customers could avoid
disconnection if they were to take up BT’s range of social telephony
services, such as pre-pay and the Light User Scheme, but that most are
unaware that these services exist. Ofcom is urging BT to promote these
services more effectively.
42 “Cross-Government Review of Water Affordability Report”, November 2004, Defra

46
Tackling Over-indebtedness Annual Report 2005


Chapter 5

Partnership Action

Benefits administration

Introduction

5.58 Delays in processing new claims for Housing Benefit can lead to rent arrears
and debt, as well as causing an uncertainty which for many people can act
as a barrier to making the move into work. Despite an overall improving
trend, there is a wide variation in local authority performance nationally,
with some authorities still taking too long to deal with applications. DWP is
therefore concentrating efforts and resources on rectifying this situation,
working closely with the under-performing authorities to address the problem.
5.59 Improvement in the standard of housing benefit and council tax benefit
administration was identified as a 2004 Top Priority Initiative.
Progress report and forward look

5.60 Significant improvements have already occured in the time taken to handle
Housing Benefit and Council Tax Benefit (HB/CTB) claims. In 2003/4 new
claims were processed on average 12 days quicker than in 2001/2. The
average time taken to deal with change of circumstances cases has also
markedly improved.
5.61 A range of measures has been introduced aimed at continuing
performance improvement. This includes setting up a dedicated
Performance Development Team, continual monitoring – with remedial
advice and action where appropriate – and the publication of local
authority statistics quarterly to improve transparency and provide a focus
on accountability.
5.62 DWP’s Service Delivery Agreement (SDA) target to improve the average
speed of processing new HB/CTB claims, to be achieved by March 2006,