UK Problem Debt: Consumer Crisis or Efficient Market?

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1 For immediate release UK Problem Debt: Consumer Crisis or Efficient Market? 08 May The last decade has seen a major economic and social phenomenon in the UK: the huge growth of the consumer credit market. Benign economic conditions have encouraged and been supported by the growth in consumer debt. As a result, the total level of personal debt in the UK is now at an all time high, with 1.4 trillion outstanding. Buying on credit has become a way of life for many consumers. Being in debt has become largely de-stigmatised and part of day to day life. The good news is that most consumers manage their credit well. But debt does become a burden for a significant minority of consumers and this can cause anxiety and stress, as well as ongoing financial pressure, for the people concerned. Problem unsecured debt at 25 billion At TDX Group, we estimate that around 25 billion of UK consumer debt is problem debt, meaning that people are finding it difficult to manage. We believe that this debt belongs to around one million people, each owing an average of 25,000. Turbulence ahead? Whilst finding debt difficult to manage is a problem in itself, we believe that we are entering into a period of uncertainty and turbulence for both lenders and borrowers. Current economic conditions such as a slow down in house prices and an increase

2 in personal inflation, which offset any relief that might be gained from interest rate reductions, will lead to an increase in the number of people in financial difficulty. Furthermore, the recent credit crunch and stricter lending practices will have a substantial impact on the solutions available for people looking to manage their debts. It is highly likely that there will be fewer refinancing solutions such as remortgaging and homeowner loans available because banks and building societies have tightened up their lending criteria. This could mean that there could be a significant increase in the number of people taking out repayment plans such as IVAs and debt management plans. Distribution of problem debt solutions Debt solution Overall percentage of UK consumer debt solution market in 2007 Refinance/remortgage 58% Debt management plans 26% Bankruptcy 9% IVAs 7% Source: TDX Group Limited Sadly, our research shows that 90% of people taking out a debt solution sign-up with the first organisation they contact. Given that many of these companies only offer one type of solution or are biased towards those options, such as IVAs, which offer higher margins for them, many people risk choosing the wrong solution for their debts. This might help explain why we estimate up to 45% of individuals entering into an IVA don t complete them, with some 15% failing in the first year. This can leave the customer worse off because the fees paid to an IVA company vary from between 5,000 and 9,000, and these come from the debtor s repayments. These issues need to be addressed urgently as we expect strong growth for the debt management market during Thankfully, a number of initiatives such as the Straightforward Consumer IVA (SCIVA), which will improve standardisation and efficiency in the market and the Simple IVA (SIVA), which is likely to be introduced towards the end of this year promising a simpler, lower cost environment for insolvency practitioners, will make a huge difference in terms of the quality of service provided. Improving the landscape So what else can the industry do to improve this landscape? We believe that lenders will need to take on additional responsibilities to ensure that their customers

3 are receiving the right advice. Under the FSA banner of Treating Customers Fairly (TCF), creditors must ensure that customers are treated as individuals and are given sound advice. This may mean that banks need to be more proactive about identifying customers who are heading into difficulties, and should take steps to talk to them sooner about potential solutions. It could also mean that creditors need to find a way to more closely review proposals from customers trying to make alternative arrangements to repay their debts whether requested directly by the customer, or through a third party provider. Debt Management Plans set for growth We believe that one of the major areas of growth in financial difficulties solutions will be the Debt Management Plan (DMP), however, the debt management industry is in urgent need of reform if it is to successfully deal with this rise in demand. With the credit crunch cutting off access to refinancing solutions, and stricter criteria being imposed by lenders around the acceptance of IVAs, we expect demand for DMPs in 2008 to explode. But what concerns us is that the current lack of consistency in the DMP industry means that often these plans are not set up to succeed. Indeed, we predict that while the number of DMPs taken out in 2008 could double from 160,000 in 2007, to 320,000, one-in-four DMPs will fail in the first twelve months. However, we believe that success rates could be vastly improved if debt management companies and creditors worked closely together to formalise practices and procedures. Today, DMPs can create a lot of pain for all involved. Creditors often feel that they have little control over these plans and that the levels of breakage are too high. The plans can involve excessive paperwork, causing key staff to spend time on administrative tasks, rather than being able to work with the customer directly, or spend time analysing data to produce useful insights for future planning. The third party plan providers also suffer high breakage rates impact their business, and they face significant costs in managing the plan and in communicating with all parties. But most importantly, DMPs may not be offering the best solution for the consumer. A DMP may seem like the best option due to its lack of formality and the increased flexibility it can offer in terms of repayment timelines. However, with no requirement for the creditor to stop their collections activity, the customer may not feel any relief from the stress of their debt problem, despite having made efforts to reach an agreement and to make regular payments.

4 The case for change Demand for DMPs has grown exponentially over the past few years. But our concern is that it is still acting as a disparate industry. High breakage rates don t benefit anyone. Debtors often end up back at square one - or worse, creditors miss out on potential returns on their debt, and debt management companies lose their ongoing management fees. Formalisation of industry practices and procedures stand to benefit all parties as consumers are given better advice and enter into plans appropriate for their circumstances and the returns for lenders are improved. You can find out more about TDX Group s report, UK Problem Debt consumer crisis or efficient market? at Orders can be placed through info@tdxgroup.com. -Ends-

5 EDITOR S NOTES About TDX Group TDX, the UK s leading independent debt liquidation expert, provides banking, utility and government creditors with platforms, tools and services to optimise returns from their debt portfolios. TDX s UK hosted platforms for debt collection, debt sale and insolvency management are utilised by European and South American clients. With more than 4 billion of debt under management and 233 client portfolios TDX is wellestablished and renowned for delivering uplifted performance for clients.