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Can Insolvency Numbers Continue To Fall?

2nd August 2013

In 2006 the Financial Services Authority conducted a study which concluded that 35% of UK adults were “living on the edge”. This category included people that were finding it tough to pay their household bills, repay their debts or manage other financial commitments from month to month.

The Money Advice Service (MAS) has replicated the 2006 study to provide a comparative set of data for 2013. The results are frightening. They have found that 52% of UK adults (26 million people) are now “living on the edge”. This is a huge increase over the 2006 result.

The background to this period is of course one of wage restraint and inflation. In real terms (adjusted for inflation) average incomes are now 6% less than they were in 2006. This will inevitably have increased the financial stresses that many adults are subject to.   

Of course many people can adjust for reduced real incomes by budgeting and controlling their expenditure. This requires financial capability and forward planning however. The data captured by MAS suggests that these are two qualities that millions of UK adults lack. In terms of financial capability:

  • One person in eight believes that the Bank of England base rate is higher than 10%. It’s currently 0.5%.

  • One person in three fails to understand how inflation might eat away at the true value of their savings.

  • One person in six couldn’t point out the current balance on a bank statement when a copy of one was placed before them.

In an environment of financial difficulty many people are taking a very short-term view that could cause longer-term financial issues. In terms of forward financial planning:

  • One person in five would rather have £200 given to them today than £400 in just four months’ time.

  • Four people in ten had little idea how they could manage an unexpected £300 bill.

  • One person in four was clear that they’d rather live for today and worry about the future later.

Looking at these findings our thoughts are drawn to the explosion in payday loans, doorstep loans and other types of expensive short-term credit.

A lack of financial capability allied with a short-term financial viewpoint is extremely fertile ground for these types of lenders. Add reducing real incomes and, for the tempted borrowers at least, you’ve got a pretty toxic mixture.

In a recent blog we reported on the continuing fall in the number of personal insolvencies (trust deeds and sequestrations) that are happening in Scotland. Given the information unearthed by the Money Advice Service is a continued decline in personal insolvencies sustainable?

In our view it isn’t unless those that lack financial capability, or who take a short-term financial view, are protected from expensive short-term lending by a significant regulatory change affecting that lending sector. Unless this protection is quickly forthcoming it seems highly likely that the number of Scottish trust deeds and sequestrations (bankruptcies) will soon be on the rise again.

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