From the desk of Kevin Still
A core theme to many of the posts today relates to the rising cost of living that is aligned with the rise in inflation reported by ONS.
In advance of the SFS review of the FY 2022/23 figures next week, I have been in dialogue with MaPS around the recent announcement from BT of their above inflation price increases (9.3%) at the end of March 2022.
This is relevant to the comment that I made at the last meeting in 2021 around identifying whether hybrid/home working is relevant as part of the SFS completion process. Apparently, customers’ data usage had “increased dramatically” with a 90% increase on broadband usage since 2018, and a 79% increase on mobile phones since 2019. Working from home, online education and TV streaming has led to more demands on BT’s network.
This also aligns with my thoughts around capturing over 18 residents that are in fulltime education, where this is also likely to be applicable and with no additional income to support the household. One of the things we never really get a chance to discuss when looking at SFS usage from a debt advice perspective is the sustainability of a budget when looking to set up a debt solution like a DMP, IVA or in 2024, an SDRP. Factoring in any income from the 16-18 group is unlikely to be sustainable over a debt solution lasting 5 years or more.
The caveat on the BT fee increases is that customers on BT’s at-cost social tariff, BT Home Essentials, will not see a rise in prices, and neither will those on BT Basic.
Link: BT to introduce inflation-busting price rises – BBC News
As promised, I have produced a bulletin around the emerging picture in 2022 around this critical topic on operational resilience which has featured in the new government strategy from December 2021 and the work by the FCA. I hope this is of use in framing the challenge for many firms, both in supply chains they operate in or where their digital engagement model is a critical part of their business model.
I am hoping that Niran Seriki, Capgemini Security Architect, is witnessing that I did listen during all his coaching in 2021.
Cyber-crime may feature prominently alongside Economic Crime which is featured further on. I found this Blog from LexisNexis of interest around financial crime predictions for 2022. This features perpetual automated KYC and AML checks. This follows a significant upturn in demand for Regtech solutions that support effective ‘know your customer’ (KYC) and AML due diligence processes.
The LexiNexis article highlights that since the start of the pandemic, we’ve seen an exponential rise in people going online to access all manner of services, from banking and financial services, to e-commerce, gaming, entertainment and more. With the help of the burgeoning UK Fintech sector, many of these services are now accessible to customers 24/7 via a smartphone.
Marking the fourth anniversary of PSD2 becoming a regulatory requirement across the EU, the UK’s Open Banking Implementation Entity (OBIE) has issued a statement citing substantial adoption of the initiative across 3.9 million consumers and 600,000 small businesses.
With a 60% increase from 2.8m users in December 2020, the OBIE also revealed that one million new users are added every 6 months and by the end of 2021, over 26.6m open banking payments had been made – an increase of over 500% in just 12 months.
We have previously featured the Ecospend award with HMRC. HMRC became the first Government department in the world to allow users to make open banking payments. The release states that over £2.4 billion has been made using this method, significantly minimising the risk of fraud and customer error when making payments. Ecospend recently announced a partnership with Contis, a pan-European Banking-as-a-Service (BaaS) provider. BaaS is now featuring more regularly in our vocabulary.
Examples of local government and private sector collaborations
I am continuing to monitor for good examples. I found this during my trawl relating to using data to support digital and financial inclusion. Please send in your examples.
Mark Fowler, Strategic Director of Community Solutions at the London Borough of Barking and Dagenham (LBBD) said:
“At Barking and Dagenham we have invested a significant amount of effort, over a number of years, to embed a more preventative service model that is grounded in proactive, partnership working across the organisation. A key focus of this work is the identification of vulnerable or potentially vulnerable groups earlier – enabling us to better target the way they are supported. This has required a significant shift to proactive intervention; reduced dependency on the council; strengthened neighbourhood working; and improved communication between services, partnership organisations and community hubs.
“Throughout this period, we have worked in partnership with Xantura, utilising their OneView platform to help to identify vulnerable groups of residents, manage proactive contact and measure the impact of our work.
“Financial inclusion is a central pillar of our preventative approach. The pandemic has had, and continues to have a huge impact on households and in many cases can be a catalyst which accelerates wider issues. With that in mind, we are now using the OneView platform as part of a wider strategy to proactively support households that are financially vulnerable and have wider risks present, whilst simultaneously identifying households that do not have these vulnerabilities – so that collections activity can progress without risking wider deterioration in outcomes.
“The initial results have been extremely promising, and we are already receiving some fantastic feedback from residents who have been proactively contacted and supported.”
By contrast, I have been looking at some of the arrears management pages for local authorities and was struggling to work out how Dukes Bailiffs would lead anyone to a ‘debt free future’. I would be confused if I looked at the page and tried to work out who does what under the banner of ‘Make 2021 the year you become debt free’.
HM Treasury BNPL consultation
I have continued to update the DEMSA LinkedIn post on BNPL with other submissions, including MAT, CCTA and Klarna.
The CCTA response to HM Treasury is now available online. They have taken a firm position around consistency in application of the CCA provisions and the need for robust affordability assessments. They have stated that is important that there is consistent regulation – and consumer protection – for substitutable credit products. DEMSA agrees that the customer journey for any credit product needs to be structured to ensure consumers have all the information they require, presented in a clear way, and opportunity to exit the process if they decide it is not the right product for them. These are fundamentals of the proposed FCA Consumer Duty, including understanding the customers objectives in using a credit product.
There seems to be agreement that comprehensive reporting of credit usage and repayment history is vital to protect customers and lenders. How the FCA this aspect is going to be critical. Debt advice providers will increasingly need to look at what is in ‘the pipeline’ when undertaking advised reviews with a customer.
MAT support rapid regulation by the FCA. Timing seems important with the cost-of-living increases and alignment with the FCA Consumer Duty. 3.4% of National Debtline clients in December 2021 had BNPL debts whilst 1.6% of Business Debtline clients reported that they had BNPL debts in December 2021. MAT has flagged a concern that DEMSA flagged in that some consumers do not regard BNPL as a debt. When completing the Standard Financial Statement (SFS), this may require clarity where consumers use this type of facility in the same way that traditional borrowers used home credit. Is it servicing essential household expenditure is a key assessment by either the consumer (if self-assessing) or the debt adviser? They must be disclosed and better reporting to the CRAs will assist this process.
National Debtline is reporting 37% of callers having a deficit budget, so disclosure of BNPL is really important.
Alex Marsh of Klarna agrees that there is a need to regulate the BNPL market to protect consumers against ‘problem debt’, but strongly argues that credit referencing and credit scoring also needs a major overhaul. DEMSA has flagged this in its response to HM Treasury and the need for a clear direction of travel by the FCA before new rules and credit agreement categories are introduced by the established and challenger CRAs and data analytics firms.
Klarna carries out “soft” credit checks on every transaction, which has proved effective in stopping ‘problem debts’ piling up. Not every BNPL provider does this. They have been piloting “open banking” to have a real-time view of a prospective customer’s financial position.
Alex Marsh states “Fixing the availability of real-time credit data is important, for all our sakes. That’s why I hope the HM Treasury consultation triggers a debate about deeper reforms to safeguard against dangerous borrowing”.
In December 2021, Klarna research found that customers of BNPL schemes were least likely to miss a payment (6%), compared to credit cards where nearly 16% of respondents reported having missed a payment. In addition, the survey found the highest source of debt is by far from credit cards at 50% followed by borrowing from a high street bank (25%), and taking out a payday loan (23%), highlighting the concerning levels of consumer debt racked up from traditional forms of credit.
Probably an interesting one for the CRAs and challenger CRAs on the circulation list. There have been a number of stories in the news around greater competition in the retail bank, including from the FCA. The share of personal and micro-business current accounts held by digital challengers rose between 2020 and 2021, while the largest banks saw their share fall.
December 2021 – Insolvency Statistics
Amid much speculation around the ongoing impact of the pandemic and tough times for some business sectors, the number of company insolvencies rose by 20% compared to Dec-20 and 33% on Dec-19.
The number of registered company insolvencies in Dec-21 was 1,486, of which 1,365 were Creditors’ Voluntary Liquidations (CVLs), which is 37% higher than in Dec-20 and 73% higher than in Dec-19. Other types of company insolvencies, such as compulsory liquidations, remained lower than before the pandemic.
The ONS business insights may also be useful if horizon scanning around business confidence and the likelihood of more small firms getting into financial difficulties.
For individuals, 434 bankruptcies were registered, which was 47% lower than Dec-20 and 60% lower than Dec-19. Meanwhile, there were 1,872 DROs in Dec-21, which is 51% higher than Dec-20, but 10% lower than Dec-19.
There were, on average, 6,648 IVAs registered per month in the 3-month period ending Dec-21, which is 16% lower than the same period in 2020, but 15% higher than 2019. This is one of the key assessments in debt advice demand when looking at whether volumes are approaching 2019 levels and rising. FCA intervention in the debt packaging sector may influence this from April 2022.
In Dec-21 there were 81 individual insolvencies in Northern Ireland, 48% lower than in Dec-20, and 42% lower than Dec-19. This consisted of 63 IVAs, 11 DROs and 7 bankruptcies. I will produce a separate report on Scotland.
Breathing Space applications continue to decrease
Between the launch of the Breathing Space scheme on 4 May 2021, and 31 December 2021, there were 41,127 registrations, comprised of 40,503 Standard breathing space registrations and 624 Mental Health breathing space registrations. The link below highlights the continued downward trend in applications, with 4,196 in total, of which 4,092 were standard breathing space applications. The first month, May 2021, remains the highest month for applications at 6,105.
DEMSA is expecting the next consultation on Statutory Debt Repayment Plans (SDRPs) imminently and the lessons learned from the Debt Respite Scheme need to be taken account of.
DEMSA is closely monitoring the position on the IVA market as the impact of FCA intervention in the intermediary sector becomes more apparent. We are also looking at whether the downward trend in bankruptcies continues with more DROs for those now eligible after the Insolvency Service changes to criteria in June 2021. It is clear that creditor referrals to the debt advice sector are on the increase and that leading debt advice providers are gearing up for more genuine debt advice sessions as we head towards significant rises in cost of living in April 2022. DEMSA is concerned that MAT has confirmed that 37% of consumers seeking debt advice through National Debtline in 2021 had a deficit budget. This seriously limits the debt remedies available.
RTL report following publication of 2021 consumer CCJ stats
Having seen the dramatic rise in creditor referrals to PayPlan heralding debt advice demand rising above 2019 levels, Registry Trust Ltd (RTL) has published a paper entitled “What does 2022 hold for financially vulnerable households”.
DEMSA has just responded to the call for evidence on Council Tax collections practices and the HM Treasury consultation on BNPL. Both topics are very topical for the most financially vulnerable, along with the rise in energy costs.
848,124 CCJs were registered against consumers in 2021, up by 36% from 625,901 in 2020. Total value rose from £1.1 billion to £1.4 billion. The average value of consumer CCJs fell by 8%, from £1,811 to £1,658. Analysts at RTL have explored the correlation between the rise in CCJ volumes and demand for debt advice. The underlying debt advice demand data needs updating in line with the impact of the pandemic and the wider debate around MaPS debt advice commissioning in 2022 and the blend by channel (i.e. digital, by telephone, F2F).
The Financial Conduct Authority Financial Lives report from February 2021 that coincided with their vulnerability guidance framed the potential scale of the challenge facing the debt advice sector when forbearance measures end and cost of living increases truly hit (allowing for a period of contemplation by impacted consumers). This has been in evidence since October 2021 and will significantly worsen from April 2022.
Having CCJ data by creditor type would be immensely powerful.
Centre for Social Justice (CSJ) Call for Evidence in Financial Education
I also wrote to Carolyn Griffiths yesterday around the CSJ Call for Evidence that is referencing MaPS research. The deadline is 11 February 2022.
I have made her aware of a number of initiatives by DEMSA affiliates around the wider topic of financial education, notably when someone is engaged in purchasing a product or service as a ‘prospective customer’ and at the ‘points of pain’ where timely information is required, sometimes to simplify the journey and/or use appropriate engagement tools that help with better understanding and determination of the customer’s objectives. These factors will become increasingly important under the FCA Consumer Duty and BNPL is likely to be one of those product lines where best practice needs to be evident to higher risk consumer groups where BNPL may be regarded as a loan of last resort.
Joseph Rountree Foundation (JRF), MAT, Payplan, Policy in Practice and StepChange – impact of energy costs and rising inflation
This week has seen several new pieces of insight and research from Joseph Rowntree Foundation (JRF) around both the impact of energy costs and rising inflation. The Vulnerability Registration Service (VRS) has also reinforced the need to focus on the impact of cost of living rather than other matters distracting the politicians.
Whether the ‘levelling up’ white paper focuses on hardest hit regions remains to be seen. The link below highlights the disproportionate impact rising energy costs have on the lowest income households where many will be left with a deficit budget. The research extends to the long-term this may have on children growing up in poverty.
They have separately commented on the impact of 5.4% inflation, which is still set to rise further. The latest rise from 5.1% is partially attributed to the cost of groceries, which make up a significant part of a low-income household budget. Benefits look like they will be uprated to 3.1% which will not keep pace with rising costs of living.
Around the time of the budget, JRF estimated that 3.8m low-income households were in arrears of some form and that 4.4m had taken on new or increased borrowing through the pandemic. From April 2022, this may become more acute. There are very limited debt remedies with deficit budgets and solutions like a DRO only have limited benefit if the household budget struggles to meet priority expenditure.
Rising energy bills and cost of living were key factors in the Payplan Autumn Income Shock Survey. They polled over 1,500 individuals. Most respondents were in employment, but still found that increased energy costs, the end of the Universal Credit uplift and other general cost of living increases have made it more difficult to buy essential items and to pay essential bills.
- Rising energy prices will affect 30% of people’s ability to put food on the table
- 57% will have to cut back on groceries and toiletries
- 50% of respondents said they could not meet household bills since the Universal Credit uplift ended
- Over 30% said increased energy costs were having a negative impact on their mental health
- 16% of respondents said rising living costs would force them to turn to food banks over the Winter
Policy in Practice has just published their document ‘2022: The challenges ahead for low-income families’. This blog explores these challenges and looks at the mitigating actions that central and local government, and their partners, can take to make a difference.
The StepChange research has also been generating some media interest. This covers the growing dependency on credit (i.e. Credit Safety Net) that relates to much of the feedback on regulating BNPL. The report is worth a read.
MAT has also flagged the challenges ahead, including tax rises.
Credit-Connect Think Tank – 3/2/2022 – Affordability and Vulnerability Assessments
I have posted a teaser on LinkedIn which is now being picked up by a few on the circulation. My thanks to Simon Gregory, Data on Demand, for his feedback below. Vanessa Northam of StepChange is chairing the event and I will be on the same session as Chris Leslie of the CSA.
“Is there technology that can help” – Absolutely. Many organisations may already have the platforms and process in place to identify customers in potentially vulnerable circumstances and facilitate the required bespoke customer journeys, but there are now several businesses and offerings that can help create new, or adapt existing processes / platforms to achieve this – Several of which you’ve mentioned (Aveni / Callminer / Cerebreon / IE Hub).
“Can data really identify vulnerable customers?” – I’m slightly biased and there is no silver bullet, but a resounding yes from me. We can clearly see from our own data instances of consumers who have recently suffered a significant life event such as loss of employment, income reduction, or a bereavement. We can also identify people who are making applications for High Cost Short Term Credit to cover utility bills. Data like this can help to identify the significant percentage of the population who are in a potentially vulnerable situation, but may not feel able to initiate the required conversations with service providers and creditors. You also have data available on declared vulnerability from organisations such as the VRS for consumers who have already made the step to make their circumstances known.
“How do we ensure the best customer outcomes?” – Combine points 1 & 2 and make them a priority within your business. Again, no one size fits all, apply them proportionally and relative to your own offering and hope the regulators do likewise!
Join the debate at the link below. I can see that IE Hub and Aveni have already.
CSA urges reform of customer telephone call security processes – their new report
This looks like a great initiative and relevant to creditors more generally and other firms dealing ‘outbound’ with under pressure consumers and micro-business owners. The public has been warned to be wary of scams by policy makers, regulators and various watchdogs.
Consumers are now far more savvy where vanilla dialer functionality is involved and at working out the ‘call intent’ from the first few words uttered by the agent, which can sometimes be robotic/deadpan.
DEMSA believes that building confidence is really important and this extends to the debt solution sector when trying to engage in annual reviews and identified changes in circumstance. This is where a blend of engagement/communication tools can be very powerful so that calls don’t come ‘out of the blue’.
Understanding consumer contact preferences is always helpful, especially for those with characteristics of vulnerability. This is a consideration when cases are outsourced or sold. We have a number of debt buyers and DCAs on the circulation list.
ICO guidance for small businesses
I have noticed an increase in the number of posts by the ICO for small businesses around core UK GDPR practices. Some of these are applicable to the wider supply chain and security requirements touched on in the cyber-security/resilience bulletin.
Link: https://ico.org.uk/for-organisations/guide-to-pecr/electronic-and-telephone-marketing/telephone-marketing/#checklists – this is probably relevant to the CSA topic above in distinguishing between unsolicited calls and those where a third party is contacting a customer on behalf of another (e.g. a debt recovery call)
Economic Crime Levy from 2023
Definitely one for the insolvency practitioners to contemplate in their longer-term horizon planning along with insolvency reform.
Private sector AML costs will rise
In 2021 the Economic Crime Levy was announced in the UK Government’s Finance Bill to develop a long-term Sustainable Resourcing Model (SRM) to tackle economic crime and raise much needed funds for fighting financial crime in the under-resourced public sector. The levy will aim to raise £100 million per year from the AML regulated sector to pay for government initiatives to help tackle money laundering, as outlined in the Economic Crime Plan. Charges will become applicable for regulated entities in the new financial year, from April 2022, but will only be payable from the following year and will be calculated based on company size, determined by their UK revenue. As such, 2022 will be a year of preparation for those private sector firms who are impacted, ready for when the bills start arriving, in 2023.
The battle against green crime is still in its relative infancy. Green crimes include air pollution, water pollution, deforestation, species decline and the dumping of hazardous waste. They include: illegal trade in wildlife; smuggling of ozone- depleting substances (ODS); illicit trade in hazardous waste; illegal, unregulated, and unreported fishing; and illegal logging and the associated trade in stolen timber.
Meanwhile, the UK and US are both reviewing their existing AML regulations. One thing all 3 regions have in common is they all follow FATF guidance on the risk-based approach and effectiveness which will doubtless reflect in local regulation. So, while we may see some local differences, the overall direction will be similar: more AML regulation is likely.
The UK regime remains committed to providing guidance to specific sectors via the Joint Money Laundering Steering Group (JMLSG) and there won’t be much change to this in 2022. However, the regulatory approach to supervision is becoming risk-based in line with broader AML guidance and is itself under close scrutiny to improve the overall effectiveness of the three Statutory Regulators (the FCA, HMRC and the Gambling Commission) and the 22 other supervisors overseen by OPBAS.
The Economic Crime (Anti-Money Laundering) Levy (‘the levy’) is part of the government’s wider objective, outlined in the 2019 Economic Crime Plan (ECP), to develop a long-term Sustainable Resourcing Model (SRM) to tackle economic crime. As one part of this SRM, and supported by ongoing government funding, the levy will aim to raise £100 million per year from the AML regulated sector to pay for government initiatives outlined in the ECP to help tackle money laundering.
Who is likely to be affected?
Entities regulated for anti-money laundering (AML) purposes under the Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017 that are medium, large or very large in size based on their UK revenue.
An entity is classified as:
- medium if its UK revenue for the relevant accounting period is more than £10.2m, but not more than £36m
- large if its UK revenue for the relevant accounting period is more than £36m, but not more than £1 billion
- very large if its UK revenue for the relevant accounting period is more than £1 billion
The sectors that we expect will be impacted are:
- credit institutions
- financial institutions
- auditors, insolvency practitioners, external accountants and tax advisers
- independent legal professionals
- trust or company service providers
- estate agents and letting agents
- high value dealers, casinos, auction platforms and art market participants
- cryptoasset exchange providers and custodian wallet providers
The levy will first be charged on entities that are regulated during the financial year from 1 April 2022 to 31 March 2023, and the amount payable will be determined by reference to their size based on their UK revenue from periods of account ending in that year. Amounts will be payable following the end of each financial year. Therefore, first payments will be made in the financial year from 1 April 2023 to 31 March 2024.
All small entities (<£10.2m turnover) will be exempt, whilst medium entities will pay £10,000; large entities £36,000; very large entities £250,000.
Operational impact (£m) (HMRC or other)
The levy is being collected by the 3 statutory AML supervisors: HMRC, the FCA, and the Gambling Commission.
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