Changing attitudes toward debt
In the past, debt was something to be avoided. People would save up for what they needed and only take on debt as a last resort. Mortgages were the exception, but even those were approached with caution.
Nowadays, debt has become much more acceptable. Credit cards, personal loans, and other forms of consumer credit are now common. While this change has made it easier for people to access the things they want and need, it has also resulted in an increase in problem debt for numerous individuals. Many find themselves trapped in a cycle of debt that is hard to escape from. For a growing number of people, debt has become an unavoidable part of life, and their financial situation is worsening.
In this article, we’ll highlight the need for better collaboration in the sector, drawing on the insights from the recent report by MoneyPlus and Etic Lab, Problem Debt in the Cost of Living and Beyond.
We’ll examine the importance of cooperation, its impact on personal finance, and why there’s an increasing call for more effective strategies and regulations.
The growing debt crisis
The current state of personal debt in the UK is alarming. An increasing number of people are struggling to repay their debts, leading to significant financial stress. The stigma and shame associated with debt make it even harder for people to seek help. This is why better financial education and public information is so important – people need to feel empowered to manage their debts without feeling ashamed.
A YouGov poll from January 2024 found that 25% of full-time employed adults in the UK, around 10.8 million people, are showing at least one sign of financial trouble. Around 9%, or 2.8 million, are dealing with serious debt issues. Among those with problem debt in the UK, 52% have full-time jobs.
The role of creditors
Creditors, the people, and companies that lend money, play a crucial role in this situation. The Financial Conduct Authority (FCA) has introduced a new set of rules known as the Consumer Duty. These rules aim to ensure that creditors take better care of their customers’ welfare. It’s imperative for creditors to understand why people are struggling to pay their debts and find ways to help them.
By being more supportive, this can reduce the stress and anxiety people feel about their debt. It’s important for creditors to support their customers by providing clear and timely information about financial products and services to help them make informed decisions.
The importance of collaboration
The main point of this discussion is the need for better collaboration with the debt industry. This means that all different stakeholders in the debt ecosystem, including creditors, debt advice services, solution providers, and the Government, need to work together more effectively. The new set of Consumer Duty rules provides a framework for this collaboration.
When creditors build long-term relationships with debt advice and solution providers, they can create shared strategies for managing debt. This allows for earlier intervention, more flexibility, and pre-agreed measures that can be activated when needed. These collaborations can lead to lower costs, higher returns, and increased trust. Creditors can save time and resources by working closely with advice providers.
The role of regulation
Regulation is key to supporting collaborative relationships. New financial technologies, such as Buy Now, Pay Later (BNPL), highlight the importance of effective regulation. Currently, BNPL services are not yet regulated by the FCA, which means there’s a significant gap in protection for consumers using these services. This lack of regulation allows individuals to take on more debt than they can afford, potentially leading to financial distress.
Effective regulation ensures that every stakeholder in the debt ecosystem is motivated to cooperate for the common good, fostering a safer and more responsible lending environment.
Collaborative working practices
To put these collaborative relationships into practice, there are resources available to help. In January 2021, the Money and Pensions Service published an updated Strategic Toolkit for Creditors. This toolkit provides best practice principles for establishing and maintaining productive relationships between creditors and advice agencies.
The toolkit outlines core principles that creditors should follow to foster positive and constructive interactions with debt advice agencies. These principles are designed to ensure that both parties work together effectively to support individuals in debt.
One of the crucial elements of the toolkit is the development of effective referral strategies. These strategies enable creditors to direct individuals to appropriate debt advice services promptly, ensuring that those in need receive the necessary support and guidance without delay.
Additionally, the toolkit offers training modules and resources for creditor staff to enhance their understanding of the debt advice process. This training ensures that staff members are well-equipped to handle interactions with individuals in debt sensitively and effectively.
Addressing the debt crisis
The personal debt crisis in the UK requires a coordinated effort from everyone involved in the debt industry. Improved financial education, better public information, and reducing the stigma associated with debt are crucial steps in empowering people to manage their finances effectively.
Creditors, guided by the FCA’s Consumer Duty, must play a proactive role in supporting their customers.
