Welcome to the March 5, 2020 edition of the Fair4All Finance “Research Round-Up”. This is where we summarise some of the recently published reports and academic papers that the team has been reading. Please email hanadi@fair4allfinance.org.uk with any reports or papers that you want us to consider for the next one!

Recently published reports

Journey into Distress Part I: A Study of the UK’s Troubled Borrowers

Financial Conduct Authority, January 2020

The study assesses the lives of people who find themselves in financial distress and identifies how they differ from those with secure finances. The aim of the report is to compare the financial pasts of those suffering from financial distress and those who are not, in order to isolate distinguishing differences. According to researchers, individuals were deemed to have entered financial distress if they met one or more of the following criteria:

• They reached 90 days (or a default) on any credit product or bill
• A County Court Judgement (CCJ) is issued against them
• One or more of their credit accounts was passed to a debt collector
• They were declared bankrupt

The report identifies four groups that make up the UK’s population of borrowers: mortgage-holders, standard-cost borrowers, high cost borrowers, and a final group whose only significant debts are their household bills. Approximately 12 per cent of the sample fell into financial debt during the period covered by this study. Looking across the sample, researchers find that those who go on to experience distress tend to share common characteristics six months prior to hitting problems: they are typically (1) younger, (2) lower income, (3) have a lower credit score, (4) have higher debt balances, (5) tend to hold more expensive forms of debt, and (6) have used up more of their available credit. Distressed debtors also tend to be disproportionately concentrated in major urban centres (London, West Midlands, the urban North West and North East and Southern Scotland). The proportion of the high-cost borrower group that entered financial distress was 18%—far higher than other groups. Household bills only types have the lowest rate of distress (5%) but they are likely to stay in distress longer (for 8.3 months), although high-cost borrowers are close behind them in this measure (7.8 months).

It is important to note that the patterns outlined are not necessarily causal. Read the full report >>

Journey into Distress Part II: The Profile of Debtors in Difficulty

Financial Conduct Authority, January 2020

Part II of the report takes a more in-depth look at the four groups of UK borrowers: mortgage-holders, standard-cost borrowers, high cost borrowers, and those whose only significant debts are their household bills. Researchers identify patterns that distinguish the distressed debtors from the non-distressed debtors within these groups, and outline indicators rationalising why some people become distressed and others do not. First, researchers find that for the standard-cost borrowers and household bills only groups, older users of high-cost credit are far less likely to suffer financial distress than younger high-cost borrowers. Interestingly, in these groups, those who fell into distress had fractionally higher income than those who did not suffer financial difficulties. Therefore, income did not help distinguish between those who fell into financial distress and those who did not. Second, the report highlights that, among those who fell into distress, mortgage holders and standard cost borrowers had substantial fungible (i.e. credit available or any kind of spending) unused credit—thus, they went into distress despite access to further borrowing. The report outlines potential explanations for why people behave this way:

• Unused credit may be insufficient to avoid distress (i.e. those with difficulty meeting mortgage payments),
• Available credit may be associated with high interest rates and charges likely to lead to greater trouble in the future,
• They wish to keep some spare capacity as a precaution against unavoidable future spending shocks,
• Borrowers are unaware of unexhausted credit limits,
• Credit files are only updated with some delay.

Third, similar to income, the pattern with total debt was not consistent. With standard and high cost borrowers and the household bills only group, those who went into problem debt had higher debt levels. However, with mortgage holders, those who went into distress had average lower debt levels. The report notes that a plausible explanation for this is that mortgage-holders who fall into distress likely borrowed less when they took out their mortgage because they were less ‘creditworthy’. Fourth, regarding geography, researchers find that there is a clear urban bias where those in all four groups who fall into distress are concentrated in urban centres. In the high-cost borrower group there is also a marked concentration in southern Scotland, and in the household bills only group there is also an above average concentration in southern England and the West Country. Read the full report >>

Negative Budgets: A New Perspective on Poverty and Household Finances

Jasmin Matin and Joe Lane, Citizens Advice, February 2020

The report highlights the growth of negative budgets among Citizens Advice clients. A negative budget is where a debt adviser assesses that a client cannot meet their living costs, calculated using the standard financial statement, a tool agreed between debt advice and financial services providers. The causes of negative budgets are complex, but broadly there are two reasons why a household will have a negative budget—a low income and high household costs. Negative budgets have been a growing problem in the UK since 2016, as an increasing proportion of people with debt have no money left at the end of the month after they’ve covered their living costs. Not only has the proportion of people with a negative budget increased over time, the depth of people’s negative budgets has also increased.

Citizens Advice notes that people often think that problem debt is the result of overspending, such as big credit card bills and bad money management. However, that story doesn’t ring true for Citizens Advice clients. The research finds that:

• Many people with negative budgets are in work, with over a quarter (28 per cent) in full-time work.
• The benefits freeze had a large impact on household budgets. From April to August 2019, 40 per cent of Citizens Advice clients with debt who claim income-related benefits did not have enough money to cover their costs (this is up from 32 per cent in 2016/17). In comparison, the proportion of households with a negative budget who don’t claim these benefits has remained largely unchanged.
• People with negative budgets do not overspend, as they spend very similar amounts to people with positive budgets.
• People with negative budgets spend an average 90 per cent of their income on fixed outgoings (e.g. mortgage or rent payments, car insurance, etc.) compared to 62 per cent for those who have a positive budget.

The report recommends that policymakers should strive to increase incomes and reduce key living costs for those who are struggling. It also recommends as a priority that the government should end, and start to reverse, the impact of the benefits freeze by uprating frozen benefits by the Consumer Prices Index (CPI) plus 2% for 4 years, as well as recalculate the Local Housing Allowance to at least the 30th percentile of local rents to re-establish the link with rental prices. Read the full report >>

UK Poverty 2019/20

Joseph Rowntree Foundation, February 2020

This is the 2019/20 edition of the Joseph Rowntree Foundation’s annual report on the nature and scale of poverty across the UK. Researchers find that over the last five years, poverty rates have risen for children and pensioners. Poverty rates are highest in London, the North of England, Midlands and Wales, and the lowest in the South (excluding London), Scotland and Northern Ireland. Researchers find that, despite growing employment and earnings protecting many working-age adults from rising poverty, in-work poverty has risen, because often people’s pay, hours, or both, are not enough. Around 56 per cent of people in poverty are in a working family, compared with 39 per cent 20 years ago. In addition, the report states that in-work poverty differs by sector—with the highest levels in accommodation (for example, working in hotels) and catering, followed by retail, and residential care. The report highlights three factors that stop families from working more:

• Underemployment: want to work more hours than they are able to find
• Childcare: inflexibility and cost of childcare is a large factor in why low-paid workers don’t work more
• Transport: lack of affordable and reliable transport that gets people to locations where there is work

Moreover, the report finds that the proportion of ‘concealed households’ is increasing—20 years ago, a quarter (2.4 million) of those aged 20 to 34 lived with a parent or guardian, compared to more than a third (3.8 million people) in 2017/18. For the last 20 years, the worst-off fifth of young adults have been more likely to live in a concealed household than independently renting or buying a home, rising in that time from 39 per cent to 53 per cent. In addition, researchers note that poverty rates for people with disabilities have also increased. In 2017/18, 31 per cent (4 million) of people with disabilities in the UK lived in poverty. By contrast, the poverty rate among the non-disabled population was 20 per cent in 2017/18.

The report outlines four key drivers of poverty across the UK that need to improve:

• We need as many people as possible to be in good jobs
• We need to improve earnings for low-income working families
• We need to strengthen the benefits system
• We need to increase the amount of low-cost housing

Read the full report >>