Credit and the UK Strategy for Financial Wellbeing

16 September 2020

Valentine MulhollandMoney and Pensions Service

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Our vision: Everyone making the most of their money and pensions

UK Strategy for Financial Wellbeing

2020—2030

Financial wellbeing

Current financial wellbeing Future wellbeing

Planning ahead behaviours

Managing Keeping track Building Workingcredit use resilience towards goals

Active saving Shopping around

Not borrowing Adjusting Retirement Planning forfor everyday spending planning later life

18 – 64 only 65 + only

Enablers and inhibitors

Financial Financial Considered Engagementconfidence numeracy spending with money

Digital

Retirement Sense of Savings Engagementengagement

planning with advice/confidence control mindset guidance

18 – 64 only

Building blocks of financial wellbeing

Eco

no

mic

con

dit

ion

s

Oth

er

ext

ern

alfa

cto

rs

Demographics

Source: UK Adult Financial Capability Survey 2018 (Principle Component Analysis

Not borrowing for everyday

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Active saving

Building resilience

Working towards goals

Retirement planning

Planning for later life

Financial confidence

Financial numeracy

Retirement planning

confidence

Sense of control

Current financial wellbeing Future wellbeing

UK Strategy for Financial Wellbeing

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Use of Credit

7

Overdraft only– Around 3.3 million (37%)

– Demographically…

• lowest income

• older

• female

– Try to repay credit cards

– Good numeracy (and budgeting)

– Typical balance £700

– Very small savings buffers

More than one– Nearly 4 million (42%)

– Demographically

• lower-income families

• aged 25-44

• full-time workers

• Rented home

• High use of retailer credit

• Lower numeracy

• Less than £500 in savings

• Typical balance £2,000

Multiple use– Nearly 2 million (22%)

– Use all forms of credit

– Demographically …

• Squeezed segment

• Men with dependent children

• Home owners

• Mental health issues

• Negative life events

– Very likely to miss payments

– Very confident managing money and using numbers but poor numeracy

– High levels of savings (£10k+)

– Typical balance £4,000

Three key groups of consumers in the nine million using credit for everyday bills:

Money and Pensions Service

Credit use and the two Challenge Groups

Use credit for essentials (9 million)

Would benefit most from affordable credit

(4.4 million)Use High Cost Short Term Credit

or borrow from friends and family and have missed payments

5.8million

3.2million

1.2million

Socio economic drivers of use of creditA literature Review by Andrea Finney

Income, earnings and employment• Low-income households are less likely to use consumer credit than those on higher incomes.

However, they are more likely to use high-cost lenders when they do, and often then to make ends meet.

• Using credit (specifically a credit card) for food or other living costs is more than twice as likely among those with low incomes as the average.

• People with unpredictable incomes are at least than twice as likely to have used overdraft (and incurred charges on these) and five times more likely to have used high-cost credit than those with stable incomes.

The cost of living• Rising living costs have disproportionately affected low-income families because they spend

proportionately more of their incomes on essentials, including food, bills and housing (which have also risen more than headline inflation).

• Nearly a half of the poorest working-age adults spend over a third of their income on housing.[

Socio economic drivers of use of creditA literature Review by Andrea Finney

Financial shocks• Emergencies and life events, such as redundancy, illness, starting a family and moving home, are key

factors in driving over-reliance on credit.• Often intending it as a short-term solution, it is common for people who use credit in these

circumstances to overestimate their ability to repay.• Life events also negatively affect financial confidence.

Financial difficulty and debt spirals• The use of credit and particularly higher-cost credit in already difficult financial circumstances can

trap low-income households in a cycle of credit dependency.• Using credit cards, increases in the limits on these, taking on other debts and not asking for advice

can all contribute to a debt spiral. The lack of a repayment schedule is particularly problematic for credit cards.

• The biggest driver for people re-borrowing several types of higher-cost credit products was that the customer considered the product to be their only option

Next steps for the UK Strategy

• Developing proposals to achieve our 2030 target by the end of the year.• Publication of Delivery Plans for each of the four nations of the UK in Spring

2021 • Will set out the key activities in affordable credit and mainstream credit

markets• Affordable credit work led by Fair4All Finance with some support from

MaPS• Mainstream credit work led by MaPS collaborating with the Financial

Conduct Authority, Financial Services Firms and Regional and national employers and partners

• Likely to involve:• Regulatory change • Research and behavioural trials • Tools and products• Money guidance

A role for local authorities: case study Local Community Partnerships

• Funded by MaPS to enhance coordinated working between organisations to improve local

communities' financial capability and resilience.

• Working with organisations trusted by the local community

• Embedding financial support alongside help with other social welfare issues

• The intended outcomes that more people will build financial resilience through regular

savings, and fewer people will use credit for everyday spending.

• Partnerships involving local organisations working with individuals, groups and

communities who are in the ‘struggling’ or ‘squeezed’ segments, to improve the

effectiveness of financial capability support and enhance financial resilience.

Birmingham Local Community Partnership Lead

agency

Partners Project activities

Birmingham

City Council

BCC Neighbourhood Advice &

Information Services

Data mapping of fin cap services coverage and community

need across the area to better target future services

BCC Financial Inclusion Team Credit union B2B promotion of payroll savings with local

employers and working community

Citysave Credit Union 1-1 financial literacy workshops and advice sessions in

community venues

Advance Credit Union Financial capability community engagement events and

radio shows

Spitfire Advice &Support

Services

Ongoing support interventions with individual service

users to enhance access to affordable credit and overall

financial resilience Smartlyte (community training

provider)

Narthex Sparkhill (community

organisation)

Ashiana Community Project Illegal Money Lending Team has helped pioneer a ‘near-

miss’ credit product, a loan available to borrowers who

have narrowly failed to meet standard CU affordability

requirements. The loan capital is funded by assets seized

from convicted loan sharks.

Lymer & Associates (research

body)

England Illegal Money Lending

Team (unfunded)

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