Personal debt reaches critical levels for UK’s most vulnerable
Financial education for the next generation, and a new ethical marketplace for lending, are required to halt the ‘massive’ growth in debt among self-employed, low earners and students, says ACCA.
A new report from the Association of Chartered Certified Accountants (ACCA), titled Britain’s debt: how much is too much? warns that a significant increase in consumer credit since the financial crisis means over-indebtedness is reaching ‘massive’ levels among the most vulnerable groups in UK society.
Commenting on the findings of the report, Anthony Walters, head of policy for ACCA UK said:
“The increasing use of credit cards and the debt levels of vulnerable groups are of great concern and require immediate attention. What’s more, savings are on a downward trajectory and the numbers of both self-employed people and students – two of the most vulnerable groups – are rising.”
The report contains a range of recommendations designed to help combat Britain’s ballooning debt addiction including measures to help students. As Walters explains:
“Introducing monthly maintenance payments instead of paying one-third of the annual amount at the beginning of each term is a simple change with big potential benefits. This already happens in Scotland and mirrors how payment is received in the working world much more closely, so helping students learn the valuable skill of managing their finances over time.”
Another initiative which would go a long way to alleviating potential financial management issues for students, both during and after higher education, is the introduction of a savings account with incentives.
“Under-eighteens should be offered a matched savings account based on an ISA incentive,” Walters added, “whereby if the account holder saves, say £1,000, the Government would match this amount once the young person enters further or higher education. Around 40% of full-time students leave education with an overdraft. The average balance among them is £894 in debt. A savings buffer of £1,000 could therefore save the majority of students from having an overdraft at all.”
Greater flexibility, more autonomy, entrepreneurship and being able to build a portfolio career are becoming ever more important to graduates and according to Walters, this makes financial understanding all the more important.
“Once the next generation leave education and enter the world of work, we know that an increasing number of them are seeking a new type of career with flexibility at its core. This has clear benefits to Britain’s economic future, but also come with risks. A sound understanding of financial management that is practical enough to be applied to the real world is vital to becoming successful, worry-free adults. Helping people understand their relationship with debt and credit at an early stage is a crucial part of that.”
Walters also believes that the current changes in how people access finance provide an opportunity to act.
“Digital innovations are making credit, and therefore debt, ever-easier to access. There is however an opportunity if we act quickly to use these technological advancements to introduce a new, ethical lending market that puts responsible lending and the needs of borrowers, particularly those from vulnerable groups, ahead of profitability.
“By improving education and harnessing the power of FinTech,” he added, “we can reduce the reliance on bad credit among the most vulnerable groups and create a more manageable level of personal debt in this country, along with a more ethical financial marketplace that incentivises a savings culture.”
“For those on erratic earnings putting just a small proportion of income aside may prove to be a lifeline during periods where there is little or no money coming in at all. This is particularly the case for the growing number of those who are self-employed. With uncertainties in the economy, driven partly by the forthcoming UK/EU referendum, there could be challenging times ahead. It is therefore important that action is taken sooner rather than later.”