New help for people in debt

15 March 2010

The government today welcomed the introduction of extra support for consumers struggling to meet loan repayments.

The package was agreed in the context of a Ministry of Justice, Department of Business, Innovation and Skills and Insolvency Service consultation on Debt Management Schemes, published in September 2009, and ongoing work by the Lending Standards Board to monitor and enforce the recently established lending code.

The Ministry of Justice has been working with the British Bankers' Association (BBA) and the Consumer Credit Counselling Service (CCCS), with input from Citizens Advice to develop a new way to help people who suffer an unexpected 'income shock' such as redundancy, reduced hours or illness. This initiative will allow debtors to make minimal token payments until their financial situation has recovered, where this is the best option available to them.

Under the new initiatives announced today:

• Banks, building societies and credit card lenders who follow the Lending Code will provide additional protections to people who find themselves in financial difficulties. Under guidance issued by the Lending Standards Board, lenders will consider reducing or freezing interest and charges. Lenders will also accept token payments where appropriate.
• The CCCS will after Easter, introduce a new payment arrangement for consumers with at least two unsecured debts, who are unable to meet their debt repayments, allowing them to make token payments of as little as £1 per debt a month – provided they take responsibility for their debts, engage with their creditors, and pay what they can. This will show the customer's creditors that, although they currently cannot meet their debt repayments, they are keen to repay when they can. The customer can benefit from this scheme for an initial six month period, after which they will hopefully be back on their feet financially and able to resume their debt repayments, or an alternative form of debt remedy may have to be considered.

Justice Minister Bridget Prentice said:

'We've already been working with lenders on a variety of schemes to reduce the rates of repossessions among homeowners and allow flexibility when it comes to repaying consumer debt. These new practices by lenders will strengthen the protections offered to people who may have been making regular debt repayments but, through no fault of their own, are temporarily unable to continue to do so.

'At the same time, this initiative introduced by the CCCS will help those debtors who have multiple debts, providing much-needed relief until they are back on their feet financially and able to resume normal repayments.

'We will continue to work with lenders and the debt advice industry to get the best possible results for those homeowners, consumers and families experiencing tough times financially.'

Consumer Minister Kevin Brennan added:

'If people in debt genuinely can't pay for a short period, they should be offered this important relief and the chance to make token payments while they sort out their problems. Lenders recognise that there are sensible alternatives to taking court action, for them as well as for their customers.'

Today's new package of measures by lenders was confirmed in advance of announcements to be made by the Prime Minister on Monday 15 March 2010, expected to include fairer rights for credit card users, low-cost access to online credit histories and other reforms designed to make the financial services industry work in the interests of consumers.

Eric Leenders, Executive Director of the BBA said:

'When customers are struggling with their finances, it is absolutely critical that they speak to their creditors as soon as possible to discuss their circumstances.

'Through the Lending Code, the BBA's members have long committed to treating customers in financial difficulty sympathetically and positively and this is a pragmatic response to the consequences of the present economic climate.

'We welcome this new initiative for 'can't pays', and are happy to continue to work with the Ministry of Justice and CCCS, providing real assistance to customers who find themselves in financial difficulty.'

CCCS Chairman Malcolm Hurlston said:

'Currently about a third of the people we counsel have no capacity for repayment. Our new token payment arrangement aims to help them give the right signals to their creditors and develop the discipline of making a monthly payment averaging £7. This is the first widespread scheme anywhere in the world offering people who effectively can't pay a free repayment channel to reassure their lenders.'

Notes to editors

1. Responses to the debt management consultation are still being considered and a full response will be published in due course. Immediate legislative action is unlikely.

2. New guidance issued to firms subscribing to the lending code includes the following provisions:

• Firms should consider reducing or stopping interest and charges when a customer evidences that they are in financial difficulties. Such reduction/suspension decision should be based upon an income and expenditure statement indicating that they are unable to make repayments sufficient to meet contractual terms. Where a customer is able to make only token payments, their debt should not increase as a result of interest and charges levied.
• The assessment should reflect the customer's lack of ability to pay rather than the stage an account has reached in the arrears cycle or whether they are using free sources of debt advice.
• There is no reason why the content of the income and expenditure statement should not be challenged but if the figures appear to be reasonable and in line with trigger figures where a common financial statement is used, then these principles should apply. Where a firm declines to allow concessions, they should be prepared to explain why to the customer or their adviser if requested to do so.
• The protection offered will be ongoing and reviewed when customer's financial circumstances change, rather than being reviewed on a strict time basis.

3. Details of the CCCS token payment arrangement for 'can't pays':

• Under the CCCS token payment arrangement for 'can't pays', everybody who has been counselled and been found to have a deficit budget (owe more than they need to spend on basic living) will be offered a free channel for token monthly payments of £1 per debt.
• Each arrangement can last for six months, during which time the situation may change but important relief will have been gained.
• CCCS is committed to finding new ways of helping the 'can’t pays' whose numbers are growing rapidly. On current estimates, at least 5,000 people a month will be eligible for help under the token payment arrangement.

4. Other government measures to help consumers and homeowners in financial difficulty include:

• Changes in eligibility criteria for Income Support Mortgage Interest for homeowners getting Income Support, income-based Jobseeker's Allowance, income-related Employment and Support Allowance or Pension Credit. Where they have a mortgage, those benefits may include an additional element called 'support for mortgage interest', which assists the homeowner with the interest on their mortgage.
• The Homeowner Mortgage Support Scheme enables eligible borrowers to reduce their monthly mortgage interest payments to affordable levels for up to two years, helping them get back on track with their finances if they suffer a temporary loss of income. Significant funds invested to strengthen the provision of debt advice, including:
  
  • £130 million in England and Wales between 2006 and 2011 for free face-to-face debt advice including an additional £10 million last November to support longer opening hours at over 330 Citizens Advice Bureaux, and £5.85 million for the National Debtline to increase frontline staff levels by 50.
  • This is in addition to the investment in legal advice available through the Legal Services Commission to help those in need in the current economic climate.
  • The new self-help debt advice toolkit being developed by the Money Advice Trust and funded by BIS will enable those who can to negotiate debt repayments with creditors themselves with more targeted advice agency support. This will allow debt advice agencies to prioritise their resources better and advice more clients who need in depth help.
  • The Insolvency Service has also published a guide for consumers who may be struggling with debt problems: In debt? Dealing with your creditors, which offers practical, simple advice on finding the best solutions.

5. The Prime Minister's announcement of wider reforms in the financial services industry was published today

6. For further information on additional measures to help debtors by those organisations who follow the Lending Code, please contact the British Banker's Association press office on 020 7216 8989.

7. For more information on the CCCS token payment arrangement please contact Frances Walker, Head of Media and Public Affairs, on 07771 788 713.