Up to our neck in it. The debt crisis in London and the impact on London s free face-to-face debt advice services

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1 Up to our neck in it The debt crisis in London and the impact on London s free face-to-face debt advice services June 2009

2 Contents Contents 1 Executive Summary 2 Introduction 4 Background to this report 4 Up to our neck in debt and demand for debt advice 5 Higher demand for free face-to-face debt advice services 5 Increasing urgency of people s debt issues 8 Rising financial exclusion and greater need for advice 10 Changing creditor behaviour towards debtors 12 New types of clients displacing traditional ones 13 Changing landscape of demand for free debt advice services and debt issues in London 14 Inner and Outer London 16 Recommendations The Ask 17 Authors: Mark Allan and Tobias Stapf (Capitalise, Toynbee Hall) Thanks to: Andy Gregg (LASA), Arti Dillon (Toynbee Hall), Charlotte Jackson (Citizens Advice), David Hawkes (AdviceUK), Gaynor Humfreys (London Funders), Glenn Marshall (GLA), Graeme Currie (Broadway), Graham Fisher (Toynbee Hall), Helal Miah (Toynbee Hall), Helen Rice (Blackfriars Advice Centre), Jodi Manning (Citizens Advice), Kemi Togun (LSC), Margie Butler (Mary Ward Legal Centre), Mark Brangwyn (London Councils), Melanie Johnson (LSC), Mengdie Qu (Toynbee Hall), Rachel Leeser (GLA), Robert Prothero (DMAG)

3 Executive Summary This report, produced by Capitalise London s Debt Advice Partnership, identifies the major trends of the last 3 years, regarding the changes in personal debt and the demands on free face-to-face debt advice services in London against the background of the current economic climate. The report aims to identify the strategic issues facing debt advice services and those who fund them and proposes a list of priority actions to ensure that services are sustained in the short and medium term, with some asks from all sectors and leaders with a stake in the provision or funding of debt advice. The analysis uses data from almost 20,000 people who have received free face-to-face debt advice in London through the Capitalise debt advice partnership run by Toynbee Hall, with additional statistical information from Citizens Advice Bureaux debt advice services across all London boroughs and the Legal Services Commission. Some of the main findings presented in the report include: Demand and need for free face-to-face debt advice services Citizens Advice Bureaux in London have seen demand for free face-to-face debt advice increase by 35% since April 2008 at many advice agencies, including those of Capitalise, people are now waiting significantly longer to get help from a qualified debt adviser. There has been a 16% increase in people with 2 or more debt issues since 2006, as well as a 320% increase of the average level of priority debts, increasing the complexity and urgency of the cases that debt advisers are dealing with. Creditors are putting more and more pressure on debtors, making it harder for them and advisers to negotiate sustainable repayment agreements as more cases are now passed to debt collection agencies or are pursued through the courts or bailiffs in comparison to Changes in the client profile of debt advice agencies 2 The average level of debt amongst Londoners seeking free face-to-face debt advice has increased by 16% since January 2007 to 18,131 per person - even though their average annual household income has remained the same at around only 10,000. Despite a significant rise in unemployed people seeking debt advice, especially since the middle of last year, more debt advice clients are still working full or part time and are coming to debt advisers with a 33% increase in their debt levels since 2006 from 14,000 to over 19,000. Self employed people seeking advice from Capitalise, although fewer in number, have seen a 300% increase in their debts from 10,000 to nearly 44,000 since While Capitalise and other advice organisations are now seeing more people who own their homes and who are often on low incomes than ever before, there is no reason to believe that demand for debt advice has decreased amongst the traditional low income clients living in social housing and there is a danger of excluding these potentially most vulnerable people from debt advice services.

4 Financial exclusion People seeking debt advice are now even more likely to be financially excluded or at risk of financial exclusion than when Capitalise started in Inner and Outer London The geographic profile of people seeking free face-to-face debt advice shows significant difference between Inner London and Outer London. Inner London has clients on lower incomes with a greater risk of financial exclusion, while people in Outer London have considerably higher levels of debt. Recommendations The report recommends a London Debt Strategy group to be established for a period of 18 months to implement short term solutions to the current debt crisis, and to ensure the sustainability of debt advice services post-2011 including when funding for the 56 Capitalise debt advisers in 17 charities across London is set to end. Solutions to minimise the impact of the recession include a co-ordinated approach to meeting demand including increasing the capacity of services, continued collaboration on the sharing of statistical information to monitor trends, promotion of the use of existing non face-to-face debt advice services, working with creditors and regulators to ensure guidelines and good practise are being followed, and the development of an apprenticeship scheme to train debt advisers in order to meet the current demand. Solutions to sustain services in the medium to long term include liaison with leading decision makers within Government around continued funding post-2011, cooperation with London Councils and Local Authorities to improve the targeting of current and planned service provision and identifying alternative funding solutions where services to those most in need are at risk. Preventative solutions will be explored with business leaders and employers, as part of a strategy to prepare people for changes in circumstances, and to enable people to manage their debt effectively, minimising the reliance for face-to-face services. Notes: Unless stated otherwise Average Debt or Average Debt Level refers to total debt excluding mortgage capital but including mortgage arrears. Unless stated otherwise under Source the data refers to data collected from clients of the Capitalise Debt Advice Partnership between January 2006 and April

5 Introduction London s free face-to-face debt advice services help people in crisis enabling them to manage their debts effectively, thus avoiding negative impacts on their lives such as losing their home, being made bankrupt, or being forced to find alternative and possibly illegal sources of credit. While the rise of internet and telephone debt advice services are helping many people to deal with their debts, or deal with less complex debts, face-to-face debt advice has traditionally helped those with some level of vulnerability, or on low incomes who are financially excluded to some degree. Complex debts involving bailiffs, court action or potential loss of home generally require face-to-face advice. Over the last year, free debt advice services across the capital have found it increasingly hard to cope with the demand for their specialised services. They are up to their neck in demand. As the drastic impact and speed of the global financial and economic crises shocked the world, free debt advice agencies have seen the demand for their help soar to unprecedented levels. People with slightly higher incomes (still under 20,000 per annum) and with more complex debts have been gradually replacing the traditional low income, social tenant type of debt advice clients. And they are coming forward with higher levels of debt than ever before, a result of the many years of easy access to credit. Many people in London are literally up to their neck in debt. With no reason to suspect that the need for debt advice amongst the latter group has suddenly decreased, this trend makes it more and more difficult for debt advice agencies to serve the most vulnerable and those on the lowest income as well as the emerging groups of people with problem debt. The continued rise of unemployment and the projected further decline of economic activity mean that more and more Londoners could see themselves on the brink of losing their homes and livelihoods. It is essential that we respond to this challenge now in order to prevent irreparable damage to the London economy and to the lives of local people and communities. Background to this report 4 The statistical information presented here is based primarily on data collected by the 56 debt advisers employed through Capitalise London s Debt Advice Partnership a cross sector partnership consisting of 17 charities providing free advice services across London (funded by the Department for Business, Innovation and Skills (BIS, formerly BERR) through the Government s Financial Inclusion Fund, and managed by Toynbee Hall), with additional information from Citizens Advice and the Legal Services Commission. The information presents a snapshot of those in debt in London who are seeking face-to-face help, and is indicative of the wider picture across the capital. The production of this report has been the start of a unique collaboration of some of the main providers and funders of free face-to-face debt advice in London, and while the different systems of data collection prevent the full comparison of all the data, this is an important step forward for the sector. Better shared data collection, and the involvement of the Local Authorities, large funders of debt advice services, are key to arrive at an even clearer picture of those in debt and the demand for free face-to-face debt advice.

6 Up to our neck in debt and demand for debt advice Higher demand for free face-to-face debt advice services Since April 2008 there has been a 35% increase in the number of enquiries for debt advice at London s Citizens Advice Bureaux and similar increases for Capitalise partners. This means that people now have to wait significantly longer for an appointment and once they receive advice, advisers have less time to spend with them. Given their limited capacity some advice agencies are forced to deal only with the most urgent debt problems (the priority debts), referring everyone else to telephone or internet advice and without any tracking methods to check whether people follow through on this. There has of course recently been a funding boost from Government which is allowing Citizens Advice Bureaux in London to offer an additional 246 hours of advice between February 2009 and March by increasing opening hours. However, this has not boosted the level of London s debt advice services sufficiently to prevent demand from outstripping the available services. 35% increase in debt advice inquiries since April 2008 Number of debt advice inquiries 39,000 38,197 37,000 35,000 33,000 31,000 30,934 28,163 30,118 29,000 27,000 Apr-Jun 2008 Jul-Sept 2008 Oct-Dec 2008 Jan-Mar 2009 Figure 1, source: Citizens Advice 1 Citizens Advice,

7 The average debt that people have when they come to see an adviser has increased by 16% since the beginning of 2007, which is due in part to the changing profile of clients using debt advice services. This increase preceded the marked rise in unemployment seen in the second half of Given the established link between unemployment and debt problems and the GLA s prediction that London s workforce will shrink by 3.8% in 2009 and remain stagnant in , debt advisers are expecting not only further increasing demand over the coming years but also increasing debt levels as the unemployment rate continues to increase for those who have accessed higher levels of credit. 35% Since January 2007: London's unemployment rate increased from 6.9% to 8.2% The average debt levels of debt advice clients increased from 16,770 to 18,131 London's workforce is predicted to shrink by 3.8% in 2009 (GLA Prediction) Rate of change in % 30% 25% 20% 15% 10% 5% % Change in Unemployment Rate % Change in Average Debt 0% 6 Jan-Mar 2007 Apr-Jun 2008 Jul-Sep 2008 Figure 2, source: ONS and Capitalise 3, Oct-Dec 2008 Jan-Mar GLA London s Economic Outlook Spring 2009

8 While the average debt level of people seeking free face-to-face debt advice has increased to 18,131, their annual disposable household income is just over 10,000, less than half the national average and less than a third of the London average income, indicating the extreme situation which these people are facing 3. Case Study Mr Jones, a skilled carpenter, sought advice from Capitalise earlier this year with over 27,100 in unsecured debt. When earning 600 a week he was able to service his debt. Despite being a skilled carpenter and applying for any kind of work, he could not find any employment since the end of last year and he fell into arrears, unable to make his debt repayments. Now he is seeking help from Capitalise to make himself bankrupt to be able to start afresh once the economy had recovered. Figure 3, source: Capitalise 3 GLA

9 Increasing urgency of people s debt issues The average level of priority debts has grown over recent years by 320% to almost match that of non-priority debts. This has increased the urgency of debt advice cases, as advisers need to act quickly to help prevent the most serious consequences for their clients. Many people unfortunately do not seek help at the earliest opportunity, thinking they can sort it out, resulting in last minute negotiation with courts or creditors. Priority Debts and Non-Priority Debts what s the difference? 4 Debt issues are divided into priority debts and non-priority debts. Priority debts include rent arrears, mortgage arrears, and council tax arrears. Arrears on priority debts can quickly result in debtors trying to repossess someone s home or a threat of arrest. Priority debts are therefore an indicator of the seriousness of the situation with the most serious impact on people s lives. Non-priority debts, such as credit card debts or unsecured loans, are serious and can result in high levels of chasing by creditors, but do not have the same immediate consequences. 15,000 13, % increase in the average level of priority debts ,000 9,000 7,000 Average of Priority Debts Average of Non-Priority Debts 8 5,000 3, Figure 4, source: Capitalise 6, 4 Direct Gov 2009

10 While the rise in the level of priority debts is making the need for face-to-face debt advice more pressing, clients are also presenting themselves with an increased number of individual debt issues, making each advice process more complex and time-consuming. Given the constrained capacity of debt advice services in London, this trend increases the time constraints on debt advisers and reduces their ability to see the growing number of people coming for advice. Sometimes people do not get all the help they need, as debt advice agencies balance the demand and complexity with the requirements of their funders to see targeted numbers of people. 70% 16% more complex debt advice cases since 2006 Share of Capitalise Clients 65% 60% 55% 50% 45% 40% 35% 1 debt issue 2 or more debt issues 30% Figure Figure 5, source: Capitalise 7, 9

11 Rising financial exclusion and greater need for advice What is financial exclusion and how does it relate to face-to-face debt advice? A commonly used indicator to identify people who may be most in need of free face-to-face help is financial exclusion. A person is considered financially excluded or at risk of financial exclusion if they tick two or more of the following indicators, which are based around their access to and their capability to use financial products and services 5 : No access to a bank account No savings Annual income below 14,500 High priority debt User of high interest credit The more someone s situation matches these indicators the less likely they are to be able to get themselves out of their debt problems and the more they are in need of free face-to-face debt advice. 2.4 Need for Debt Advice : Tenants are 20% more financially excluded and Home owners are 5% more financially excluded Financial Exclusion Count Above this level the need for face-to-face debt advice is urgent Capitalise Average Home Owners (24% of clients) Tenants (60% of clients) Figure 6, source: Capitalise 9, BIS 2009,

12 Since 2006, the financial exclusion of people seeking face-to-face debt advice has gone up from below the critical 2-indicator level (as represented in Figure 6) to an average of 2.3. Lack of savings, the use of high interest credit and the increasing number of people with priority debts are the main causes of this increasing financial exclusion amongst debt advice clients. While the need for debt advice as indicated by financial exclusion has increased more for social tenants than for home-owners. Case Study An elderly couple, aged 75 and 78, came to see a Capitalise debt adviser about their mortgage arrears. The husband cares for his wife who has ovarian cancer, osteoporosis, and Parkinson s disease. A year ago their daughter wanted to start her own business, and they were asked to finance it and therefore sought a mortgage. The lender overstated their income and subsequently their mortgage far exceeded the recommendable level. As a result the repayments far exceed their monthly income. For the last year they used their savings to pay down the debt but have none left now. The daughter has not contributed to the secured loan, and her business venture has closed. She has not been contactable. 11

13 Changing creditor behaviour towards debtors Debt advice agencies have observed creditors reacting to the debt crisis by passing on more cases to debt collection agencies and taking a less conciliatory stance towards their debtors by resorting to county court action or bailiffs or possessing some of the clients assets. This pressure on debtors is increasing their need to be supported to negotiate with creditors in order to preserve their livelihoods. Case Study 12 Figure Number of cases Changes in creditor's actions towards debtors : 40% increase in repossessions of assets 30% increase in county court action or bailiffs 30% more cases being passed on to debt collection agencies Figure 7, source: Capitalise 10, Case Passed to Debt Collection Agencies County Court Action/Bailiffs Repossession of assets A Capitalise adviser helped Mr Khan, a 38 year old single man, who is living in a Housing Association flat for the last 10 years. Since he was diagnosed with HIV, hypertension and asthma in 2005 he has been unemployed and in receipt of benefits. He had no debts except for 3000 in council tax arrears to his local authority for which he was being pursued by council bailiffs with a warrant for his arrest. Despite the adviser s ongoing negotiations with the council to suspend the arrest warrant over the client s extremely vulnerable situation, the bailiffs claimed to have arrested the client and ordered him to present himself in court. The client appears to never actually have been arrested but was ordered to appear in court nevertheless. Against the council s plea for the client s imprisonment the judge reduced his council tax debt to 450, to be paid back in manageable rates considering the health situation of the client.

14 New types of clients displacing traditional ones So far the current increase in average debt levels has been associated not with a rising number of unemployed clients but with those who are working full or part time and especially self employed workers. This may be linked to people taking pay cuts or reducing their hours, and self-employed people unable to get as much work and therefore facing a drop in income. As London s economy and workforce are predicted to contract over the coming years, preparing people for managing their debt and where to get help at the earliest opportunity is vital for avoiding the destructive effects of unmanageable debt. Since 2007 there has been a steady and substantial decline of clients with annual household incomes under 6,000 (generally people on state benefits), replaced by those with higher household incomes not necessarily high incomes, but higher incomes, in particular those earning up to 20,000 per annum. This trend has been accompanied by a decline of almost 10% Figure 8, source: Capitalise and Credit Action Changes in debt advice clientele : 13% more home buyers and 10% fewer social tenants in the number of social housing tenants, and a corresponding rise in home-owners, 55% 50% 45% seeking debt advice. It thus appears that 40% the people on low incomes and working 35% Social Tenants are finding it increasingly difficult to manage their debts. At the moment we still do not 30% 25% Home Buyers Private Tenants 20% know whether the traditional client group 15% is switching to other sources of advice or 10% whether they are just not accessing debt advice services, which could be producing a wave of suddenly escalating debt problems that are not being monitored. Figure 9, source: Capitalise Share of Caitalise clients

15 Changing landscape of demand for free debt advice services and debt issues in London The demand for debt advice and the urgency of debt issues are distributed differently across Greater London. People in some London Boroughs are facing debt problems more urgent than have been seen in recent times, with high levels of indebtedness coupled with increasing threats to their income security. The need for debt advice as measured by financial exclusion is also differently distributed. Figure 10, based on data up to March this year, shows the London Boroughs with the highest number of enquiries for debt advice are Bromley, Lewisham, Greenwich, Bexley, Hillingdon and Barnet. Other Boroughs like Newham, Ealing, Hounslow and Barking and Dagenham on the other hand have considerably lower numbers of enquiries for advice. This unequal distribution of demand creates bottlenecks for advice agencies in some locations given their constrained capacity for providing debt advice. Debt Issues by London Borough (Combined Citizens Advice and Capitalise Data 2008/09) 14 Legend Legend Bureau Issue Count Figure 10, source: Citizens Advice and Capitalise

16 The following graph shows that the need for Capitalise s services is most pronounced in the Boroughs shown in the darkest and biggest bubbles (representing the numbers of clients Capitalise has provided advice to). The level of need is also more pronounced in the Boroughs that are higher up on the financial exclusion scale, and the Boroughs with the higher levels of average debt. Hotspots of need for Capitalise debt avice services in London 2.5 Financial Exclusion Count Hammersmith & Fulham Ealing Redbridge Lambeth Lewisham Islington Southwark Camden Haringey Tower Hounslow Wandsworth Merton Hackney Hamlets Bromley Greenwich Havering Croydon Kingston Barking & Dagenham Newham Waltham Forest Hillingdon Enfield Brent Barnet Bexley Sutton Harrow Kensington & Chelsea Westminster Richmond Above this level the need for face-to-face debt advice is urgent Legend: Colour and size of the bubbles indicates the number of clients seen ,000 13,000 18,000 23,000 28,000 33,000 Average Debt Level Figure 11, source: Capitalise 15

17 Inner and Outer London Interesting geographical trends identified by Capitalise debt advice agencies are those comparing Outer London with Inner London 6. People living in Outer London generally have much higher debt levels than those in Inner London but they do also have higher levels of disposable household incomes their income has meant they have been able to borrow more. However, people living in Inner London tend to have higher levels of financial exclusion meaning they may be less likely to help themselves out of their debt crisis, possibly linked to issues around social exclusion or financial capability. This means people living in both Inner and Outer London are facing serious debt problems, but in different ways. 4% increase in the level of financial exclusion amongst Capitalise clients in Outer London since For the list of Inner and Outer London Boroughs see the ONS website downloads/london_boro.pdf Financial Exclusion Count Apr-Jun 2007 Jul-Sep 2007 Oct-Dec 2007 Figure 12, source: Capitalise Above this level the need for face-to-face debt advice is urgent Jan-Mar 2007 Apr-Jun 2008 Jul-Sep 2008 Average Debt and Income in Outer London Oct-Dec 2008 Inner London Outer London Capitalise Average 16

18 Recommendations The Ask Responding to the Changes in Personal Debt and Demands on Debt Advice Services Free face to face debt advice agencies continue to provide services up to the limits of their capacity to those with challenging debt problems and to those who are most financially excluded. However, debt advice agencies limited capacity means that many people now have to wait many weeks to get help, and there are an unknown number who do not get through or who cannot wait for 4 weeks or more to see someone. The current economic climate has not only put strains on people living in London with debt, and on debt advice organisations, it has put strains on firms who are fighting to remain in business, on local government services which are expecting big cuts in their budgets, on third sector organisations predicting a downturn in funding, and central government trying to find solutions to the multitude of problems that face people, public services and businesses in the UK. It is essential that the different sectors find solutions within their own networks and partnerships, and that the different sectors work together to find ways forward to ensure that more people do not fall into unmanageable debt and to avoid risking significant consequences on other public services such as social housing or the NHS. London Debt Strategy Group It is proposed that a London Debt Strategy Group is established for the next months, to work cross-sector on finding solutions to these growing problems. We recommend this to be led by the GLA in taking forward its Economic Recovery Plan for London, along with London Councils representing Local Authorities, and facilitated by Toynbee Hall in its role as manager of Capitalise, one of the largest providers of free face-to-face debt advice in London. This group will consist of key strategic organisations across London and will seek to identify short and medium term solutions to the impact of the economic recession on people living in London seeking help from debt advice services. Organisations are currently putting into action a range of strategies to cope with the increasing demand, from extending opening hours to prioritising people with the most serious debts. They face limitations primarily of capacity and a lack of funding to increase capacity. It is proposed that debt advice leaders in London - including the GLA, Citizens Advice, the Legal Services Commission, Advice UK, London Councils, BIS, London Funders Group, local Housing Associations, Capitalise and those offering telephone and internet services, work together to find solutions to ensure those who need help with their debts, get the help they need. 17

19 Meeting the Current Demand It is proposed that the leading debt advice providers and funders will work together to achieve the following short term objectives:- co-ordinate approaches to dealing with the demand, including adapting and increasing the capacity of services and gathering information on who are not accessing services but will need to promote examples of good practice within advice services and amongst funders in dealing with the increased demand share and bring together harmonised statistical information which identifies the growing changes and trends in people s debt in London work with creditors and regulators by providing evidence of breaches in guidelines and codes of good practise to ensure people are being treated fairly identify and implement coordinated strategies to promote the usage of non face-to-face debt advice services (which are also experiencing increased demand) for those more capable of helping themselves through the internet or who need some support by telephone develop a training or apprenticeship scheme to ensure enough qualified debt advisers are in place to meet the demands on services (currently qualified advisers are in short supply and recruitment only leads to vacancies elsewhere) Preparing to Meet the Demand from 2011 Capitalise employs 56 highly skilled debt advisers through 17 charities in London providing free face-to-face debt advice to those in or at risk of financial exclusion and those with unmanageable and complex debts. This is funded from the Government s Financial Inclusion Fund as part of its Financial Inclusion Strategy This funding is due to end in March 2011 and there are no plans for a new Financial Inclusion Strategy, and a lack of clarity on the options for funding post High level discussions have started within the Financial Inclusion Taskforce, with Treasury, as well as other Government departments and debt advice leaders. However, a lack of overall leadership in the debt advice sector, a pending Comprehensive Review, and a potential change in Government mean that significant decisions will need to be taken within the next 12 to 18 months to secure funding stability and to stave off a significant drop in services to people across London in most local authority areas. 18 The challenges around funding for this and for debt advice services generally are compounded by an unstable economic environment, and a difficulty in predicting the need for debt advice services. The risk is a huge cliff after March 2011 when remaining debt advice services will not be able to meet any sort of demand for debt advice from over-indebted Londoners in debt crises It is therefore proposed that the London Debt Strategy Group:

20 Liaise with leading decision makers within Government around continued funding post-2011, and supports their decision making process by providing statistical and other relevant information Map gaps in services across London, and work with London Councils and Local Authorities to identify current and planned service provision to ensure services are provided where they are most needed With leading commissioners and funders of services in London, identify alternative funding solutions where services are at risk to those most in need, should there be a drop in funding with no let-up in demand Employers and Prevention Ensuring that people have the skills to deal with changing circumstances and the impact on their finances is crucial. Redundancy may come with some short relief if an individual receives a pay-off, but for many people this relief does not last long, and the harsh reality of having to pay bills with a reduced income kicks in. Such a situation has been demonstrated to impact negatively on individuals housing situation, health and family life. Employers and debt advice providers must therefore work together to provide training opportunities to employees around managing their debt following sudden changes in circumstances, and how to get help at the earliest possible opportunity. The Group will engage with large employers and business leaders to identify better joint working arrangements, training opportunities, and promotion of advice services to employees. This includes Local Authorities, some of the largest employers in London. Where good practice exists this will be shared and promoted. Conclusion The symptoms of the economic recession in relation to debt are that increasing numbers of people are struggling with higher levels of debt, and debt advice services are struggling to help those who need it most. London is up to its neck in debt and demand for debt advice. Only a collaborative approach to curing these symptoms will ensure that people survive the recession with their homes and lives intact. 19

21 Toynbee Hall. Registered Charity No For more information visit