The problems of debt and insolvency are escalating and over the past few months there has been a raft of articles in the national media regarding these issues.
According to latest government statistics, there were 26,072 personal insolvencies – which include bankruptcies and Individual Voluntary Arrangements (IVAs) – in England and Wales in Q3 2007, representing a 3 per cent drop on Q2 and a 5 per cent decrease on the same period last year.
However, in the articles I have read, a number of accountants and other financial commentators argue that these figures disguise the problems that are set to emerge in the consumer credit market, which will give people fewer means of combating debt.
These commentators forecast that the number of consumers becoming insolvent will soar next year, with a rising number of bankruptcies and a fall in the use of arrangements to avoid going bust. They also suggest that with the current turmoil in the non-conforming market, consumers are finding it harder to re-finance their way out of trouble, which may result in a fresh wave of insolvencies over the coming months.
Rises in credit card debt and repossessions are also both worrying signs that consumers are feeling the pinch and turning to unsecured borrowing to make ends meet. In its most recent analysis of arrears and repossessions in the housing market, the Council of Mortgage Lenders revealed that the number of mortgages in arrears of three months or more at the end of June rose to an estimated 125,100 – up 4 per cent compared with the end of December but 3 per cent lower than at the end of June 2006.
Taking responsibility
The lack of responsibility of some of the unsecured loan lenders and credit cards companies through their lending decisions and credit lines given has long gone unchallenged. Only now with the highlighting of these issues has it really become apparent. There is a massive amount of debt out there that cannot, and will not be repaid. It appears that going bankrupt is being used as an easy way out and no longer has the stigma attached to it that it once did.
Brokers and lenders are a key part of regulation and should ensure whatever is sold is being sold compliantly. However the consumer must also take responsibility, as it is far too easy to put blame on someone else – especially when there are increasing numbers of ambulance chasers trying to make a claim out of nothing.
I recently read a story on the MI website which epitomised current consumer attitudes. According to a recent study undertaken by Callcredit, 75 per cent of consumers do not believe they are responsible for over-indebtedness.
This is a frightening figure and it is time that borrowers took more responsibility. It will be interesting to see how the regulator helps to combat this issue through the Thorensen Report, which is aimed at raising consumer’s financial knowledge and wellbeing.
Generic Financial Advice
As part of the report, generic financial advice (GFA) aims to open up the sector and help consumers make the most of their options, with the provision of information driven by what advice is best for the client, rather than a sales process.
The cost of GFA is estimated to be around £40-£80million, to be met by the government and financial services industry, but aims to allow everyone the opportunity to get no obligation, clear advice on their finances.
Let’s hope this will help people become more financially aware and won’t see them bury their heads in the sand when things go wrong.
Regulation
Looking forward, more regulation is due in Q2 2008 and it will arrive in good time. It will provide secured loans with more credence not only to consumers but with mortgage brokers, who are seeing our market falling in line with theirs.
We need to continue to work hard with regulation and our trade bodies need to be more vocal to brokers – especially to those that don’t have their own compliance officers. I’m shocked at how many of the smaller brokers are not aware of the consequences of ignoring these regulatory guidelines.
Secured loans remain buoyant and the numbers seem to be increasing, even though some lenders have left the market, tightened their criteria or lowered commissions. New lenders have entered the market and as soon as the bigger lenders re-enter, I’m sure the rest will follow quickly.
Since September the market has been tougher and conversion rates may have fallen slightly, but looking ahead, I’m sure I can already see the light at the end of the tunnel. Let’s hope consumers will also end up seeing the light and soon.
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