First seen in FT Advisor in June 2018

It’ll take more than the FCA’s new guidelines to reduce financial difficulty caused by high cost credit options. Education and fintech innovation must form a combined approach to bursting the personal debt bubble says our CEO, James.

The majority of those using high cost credit options must understand the financial ramifications, but they are increasingly finding it difficult to escape the vicious cycle of debt – which obviously increases the financial stress. While the FCA’s guidelines are intended to reduce the number of people relying on high interest credit options including home-collected loans, in-store credit cards and rent-to-own schemes, it’s easy to wonder whether enough is really being done.

Three million people in the UK currently rely on high cost credit schemes and 19 million regularly use overdrafts and are in financial trouble. Just last month, consumer group Which? revealed that unarranged overdraft fees can cost borrowers up to seven times more than a payday loan, although high street banks escape the criticism and reputation of the payday lenders.

While its plans to impose caps on charges are a welcome move, the FCA would do well to explore longer-term steps that could change the narrative for those living with debt from a tale of owing to owning. It’s not the FCA’s job to simply change the fortunes of those burdened by debt and help them live happily ever after, but while capping charges and issuing mobile alerts are a step in the right direction, they will fall short of the level of action that is required to make a meaningful change reducing the financial difficulty.

The jilted generation

The reality is that these guidelines will not be enough to prevent people experiencing severe financial stress by paying extortionate fees to borrow before payday. As wildly acknowledged, this problem won’t be solved overnight, a good start however would be having similar standards, limits and restrictions across the full range of finance options so people can more easily compare and make informed decisions. Fundamentally better education around personal finance, combined with digital tools that provide more transparency and control over their own finances, will be how people will turn their fortunes around. Shaping this two-pronged approach should be central to the FCA’s efforts in helping people avoid high cost credit and therefore financial troubles.

In late 2017 the FCA themselves uncovered an estimated 4.1 million people in the UK living in financial difficulty, owing to missed domestic or credit bills. It said that the consumers that had failed to pay bills in three or more of the six preceding months were most likely to be aged between 25 and 34. For younger generations, there are various financial challenges which make them worse off than the generations before them.

The ongoing housing crisis means one in four millennials are yet to fly the nest, let alone pay off student loans on time. An estimated 83 percent of graduates will be unable to fully clear their debt within the three decades in which they are expected to complete repayment. When it comes to building up a nest egg, things also look bleak with 43 percent of millennials intending to use money inherited from their parents to pay off their debts.

A 2018 report by Resolution Foundation suggests that UK millennials are the second worst-hit economically in the developed world, but things could be even more dire for future generations which could really experience financial difficulty. If they too are laden with lifelong financial burden and their own parents have not had the means to save an inheritance to pass down, how are they to cope?

A new balance

Educators and employers should be obligated to offer free financial guidance and the FCA should be making steps to support both parties in making this happen. The challenge is that even with free resources available, younger generations believe they have a strong handle on their finances, therefore they don’t pay attention at their possible financial difficulty. According to a study from the National Endowment for Financial Education, 69 percent rated their own financial knowledge highly, yet only 24 percent of millennials demonstrate basic financial literacy.

There are plenty of recent studies supporting the fact that younger generations have and will continue to have the odds stacked against them.  In an age where technology dictates how we live our lives, steps should be taken to provide better education around personal finance with the aid of technology. Just as the likes of Uber, Deliveroo and Airbnb have disrupted out-dated conventions, Fintech is revolutionising the way we handle our money by putting more control in the hands of the consumer.

The FCA could begin to make a real impact by encouraging employers to explore Fintech products that can help workers build a better understanding of their finances and reduce their financial difficulties and therefore their financial stress. Considering financial troubles have a significant impact on mental health according to debt charity Step Change, which in turn impacts peoples’ productivity at work, it is in the interest of employers to consider their workers’ financial wellbeing too.

With experts at Manpower Group predicting that by 2020 millennials (now aged 21-35) and Gen Z (aged 20 and younger) will make up more than half of the entire workforce, the financial wellbeing of employees has never been a more important factor.

Employers needn’t dig deep to provide such support, with solutions emerging that are helping workers quickly pay off overdraft charges, credit card bills and other unexpected expenditures, free to implement with zero impact on the business’ cashflow.

There are now Fintech solutions that can grant access to income as it is earned which is of great use to those who need access to funds before the end of the month. Income smoothing is a far more powerful and fair solution, avoiding the negative cycle of inflated repayments and debt which, in the long term, increase the financial difficulty.

Fintech solutions that are breaking down the traditional conventions of monthly pay cycles, which don’t necessarily fit in with modern financial demands, are not only going to relieve the financial stress of workers but have the added benefit of encouraging them to stay in work and be more productive.

Debt should not be a taboo issue; politicians, institutions, businesses and employers need to embrace initiatives that allow those who need financial support to access it without getting themselves into situations that can quickly spiral out of control. Educators and employers are ideally placed to support workers to become more financially savvy and less financially stretched using the latest fintech solutions that are disrupting pay forever helping, hopefully, people’s financial difficulty.