Understanding the impact of debt and tackling its causes
Understanding the true impact of debt
Mark Lovell, Executive Chairman of A4e, a company that delivers front line public services explains how debt impacts on lives and how the government anf financial services companies can help.
In 2005 A4e took its first steps in the debt advice market. We wanted to provide our customers free, quality assured services to help them overcome an issue that was increasingly becoming the dominant negative factor in their lives. Many of the people using various services across the business were struggling with debt and getting support managing their finances. In part, this was due to a lack of appropriate products and services but also due to a lack of capability in managing finance.
Our experience over the last six years has highlighted that, if debt advice is to have a long-lasting impact, it should not be delivered as a stand-alone, isolated service. It must be part of a wider, joined-up model capable of servicing multiple needs of the customer. To prevent vicious, repetitive cycles of over indebtedness and poverty, we need bold changes.
Traditional approaches to debt advice and the provision of financial products and services to people on low incomes are too narrow and linear. What outcome are we after? We want customers who are able to live without being dependent on debt- to develop self sufficiency in their financial behaviours and eradicate the wider problems associated with indebtedness. In my experience, there are two big issues to tackle.
Tackling root causes
We need to help people break the cycle of borrowing to manage paying off debt – focusing not only on the symptoms but also on the causes. Many advisers do wonderful work tackling each particular debt problem but many consumers repeat this pattern of behaviour, returning to advisers with different problems. Only by focusing on the root causes can the advice sector begin to deliver sustainable outcomes – i.e. ensure people become more financially stable and less likely to get into problem debts again in the near future.
To do this, we need to more effectively combine debt advice alongside building financial capability- supporting and equipping people with better money management skills tailored to their specific needs. This ranges from putting basic budgeting in place to educating consumers to be savvier when engaging with the financial services sector - getting savings from direct debit payments; top up 'jam jar' savings accounts; developing skills to source accounts or service providers suited to their circumstances.
A recent survey we conducted highlighted that 97% of our debt advice customers are on incomes below £14,500 – not much to live on in modern day society. As a result, 98% have no savings in place. Unexpected events tend to be a big cause of their problem debts. At one end of the scale this includes losing a job, separation or having an unplanned child. However, even small things can have a major impact when living on such a tight budget. I always remember the A4e customer who had to borrow a small pay day loan at four figure APR because her son’s school uniform and shoes needed replacing but, with no income coming in for 6 days, she had nowhere else to turn.
However, improving people’s capability to make better decisions and manage their money more effectively in the first place will be more difficult if the current supply of financial services to our customer cohort continues as it is. The poorest people in society should not pay the most for credit. They should not be excluded from accessing mainstream daily financial products that help effective money management. We need new ways to measure and assess credit risks that reflect the lives of people living on low incomes and we need to collect new evidence and data to develop services.
Addressing the wider impact
As I mentioned, the issue is twofold and as well as combating the root causes of debt, we need to address the wider implications of it.
Debt advice needs seamless links into clearly associated services of support that will prevent debt arising. We need to move to more effective prevention services as, often, issues manifest are unrelated to debt problems- if these were tackled earlier, a descent into crisis could be prevented.
A core part of addressing these wider consequences through more joined up services relates to the impact on well-being. Studies have long linked poor health and poverty. We know debt is a big factor in depression and other health related problems. In 2008, I commissioned an independent evaluation into one of our debt advice services - the findings are sobering:
• 83 per cent of our customers described themselves as being extremely stressed because of their debt problems
• 53 per cent were suffering from clinical depression with strong links made to their financial situation
• 48 per cent said their relationships were strained because of debt
• 33 per cent had said they had even contemplated suicide with a number referencing actual suicide attempts
• Over 90 per cent of the working age population in these households was unemployed and generational poverty & worklessness rife.
Such stark evidence requires a rethink of how we link broader support services together. My concern is for those people who deskilled in the recession, stayed in work but have mortgages and other debt obligations. As interest rates rise, these are the most at risk group of becoming long term unemployed and manifesting a range of other problems, the biggest of which will be indebtedness. In one of our services over 60 per cent of debt advice consumers were 'lower middle income' earners, a 'squeezed middle', with unmanageable debts averaging at over £12,000 per customer.
The debt advice and financial services sector must become better integrated - together with accessible health related services, housing support, family support, social services and welfare to work programmes. Access to these ‘holistic’ services should be through a unified, personalised view of the customer, not just simply passed from pillar to post in a complex referral and sign-posting network.
A clearer focus on joined up services and prevention is needed in this industry and from governments. Society will continue to bear the cost in so many ways if we cannot step up and address this challenge. If we can do this and address the root causes of debt then I am confident we can start to move forward.
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