Key findings from a national survey of household finances show that of the 3.7million households in the UK granted a bill ‘payment holiday’, over 6 in 10 are already facing financial difficulties and will struggle to repay their debts when these arrangements end. For many, these payment holidays will cease on 31 October 2020 – the same date the government’s job retention schemes end, leaving many facing job losses and crippling financial strain.
Calm before the storm:
There is little doubt that both payment holidays and the government’s job retention schemes have facilitated a period of relative stability, helping many to retain jobs and stay afloat financially. But an estimated 6.25 million households are still living on reduced incomes with heightened risk of financial difficulties. And many of these have agreed payment holidays with their creditors. Standard Life Foundation’s report, Emerging from lockdown, warns of a further financial storm for millions.
Of those households granted a payment holiday nearly half have no money in savings at all, and 46% them think it is very likely (26 per cent) or quite likely (20 per cent) they will experience a loss of earnings as a result of COVID-19 in the next three months.
Researchers questioned nearly 6,000 householders and found only a quarter of those who had a bill payment holiday had sought debt advice. Around 1.6 million households could need debt advice when payment holiday arrangements end. Should this level of demand materialise, debt advice charities will face a very difficult situation after the current payment holidays end this autumn. The report also found that although government has allocated funding for more debt advice, this would not be in place by the end of October when many are likely to need it.
Weathering the storm:
The report authors suggest that creditors of all kinds and their regulators need to be proactive in contacting their customers with payment arrangements coming to an end and ensure that they have a creative suite of sympathetic forbearance measures in place, reflecting the diversity of circumstances of their customers. The Financial Conduct Authority has recently published draft guidance advising firms on how to help mortgagors beyond the end of payment breaks. But at present there is little to no guidance on what customers with a payment arrangement on other commitments should do when it ends. Measures should include: income/expenditure checks to assess ability of borrowers to repay; flexible and lower payment arrangements; social tariffs (for utility providers); extending the lending period (for unsecured credit and mortgages), and where appropriate writing off debts. Under current circumstances enforcement action should be a last resort, used when these measures have failed.
At the end of July, one in six households (17 per cent) had their earnings supported by one of the governments’ job retention schemes. These schemes are also due to end on 31 October 2020, leaving around 3 million households expecting a drop in income. The researchers found that around a third of households currently supported by the schemes (31 per cent) were experiencing financial difficulties at the end of July – between four and five times the level among working households whose earnings had been unaffected by the pandemic. With this in mind, the report authors also recommend extending government support for workers in the hardest hit sectors, including those who have fallen through the safety net provisions.
Mubin Haq, CEO of the Standard Life Foundation, said:
“We are facing a cliff-edge situation at the end of October. Three million households have fallen through the cracks on the government’s job retention programmes. They will be joined by millions more when furlough schemes come to an end. This is happening at the same time as the vast majority of payment holiday measures come to an end, creating a perfect financial storm. Incomes reducing whilst outgoings are set to increase. Already nearly half of those on payment holidays are using credit to pay for food and other daily essential expenses.
Regulators and lenders need to rapidly consider how they will manage the situation from the end of October 2020 to avoid large numbers of households facing enforcement action, including families losing their homes. In addition, capacity on debt advice needs to be increased quickly; more debt advisors are needed but they will not be in place within the next few months, so interim measures should be put in place swiftly.”
Professor Elaine Kempson, one of the report’s authors, said:
“Creditors, including lenders, landlords and utility suppliers, need to be proactive as payment holidays come to an end and have a suite of forbearance and debt collection measures which match their customers’ ability to pay. One size will not fit all. But it is important to recognise that this is only part of the story. Like Germany and Norway, the UK Government should extend the job retention schemes, particularly for less skilled workers in hard-hit sectors of the economy.”