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In their "Debt Management Guidance Compliance Review", the OFT gave a damning report on the debt advice industry and found that many companies were failing to provide an adequate service to vulnerable customers.
The report identified that the OFT has told 129 debt management firms that they face losing their consumer credit licence if they do not take compliance action within the next 3 months.
In contrast, all DEMSA members were compliant with the OFT guidance and were singled out as having already addressed all issues raised.
The report also explains that the OFT are working with DEMSA to improve overall standards across the industry, following the increase in unregulated companies trying to capitalise amid the current financial climate.
During an interview on BBC Radio 5's breakfast programme Nigel Cates, Deputy Director of Consumer Affairs at the OFT, explained that the commercial market had grown as a result of the increased number of people struggling with their finances.
As part of his summary on the report, he signposted customers to organisations providing "sound" advice, stating that DEMSA: "…is promoted by the OFT and they have the OFT Code, and we would recommend that if you are going to use a commercial debt management company always look for that membership."
Michael Land, Chairman of DEMSA, said: "We're glad that the hard work by DEMSA members, to ensure customers receive the highest standards of service, has been publicly recognised by the OFT and we look forward to continuing our work with the OFT to ensure standards across the industry can be improved further."
Posted: 19/10/2010 | Source: DEMSA
People seem to be more interested in paying off debt than saving for the future in the current low-interest climate, a representative from Credit Action has observed.
Jo Parsley, advocacy and media officer at the charity, explained there could be a variety of reasons for this trend, but she believes general job insecurity and low savings rates may be important factors.
"Given that interest rates are still at a record low and because many are still feeling concerned about their jobs, I wouldn't be surprised if consumers still opted to repay their debts," she said.
Ms Parsley cited research by Unbiased.co.uk showing that Brits paid back more than £1 billion in the second quarter of 2010 and suggested recent figures produced by the CBI showing an increase in sales may have been down to the sunny weather over summer.
The study indicated that transactions in August were at a higher level than the same month the previous year.
Posted: 04/10/2010 | Source: Money News
A representative from Credit Action has suggested the number of people seeking insolvency advice will go up gradually over the next two years.
Richard Talbot, director of the money education charity, suggested that many people are still living beyond their means and utilising payday loans and pawnbrokers when they get into financial difficulties.
In his opinion, the number of insolvencies will steadily climb over the next two years, with the lack of a savings culture in the UK being a major factor in this pattern.
He explained that people should put some money aside in case an unexpected expense needs to be paid, such as a broken washing machine or a car's MOT.
"As an organisation we would promote people to try and save [and] at least have some rainy day savings to give them some buffer," said Mr Talbot.
His comments follow a study by R3, which indicated that more than 40 per cent of British adults either regularly or occasionally struggle to reach their next payday with cash in the bank.
Posted: 22/09/2010 | Source: Money News
Consumer Credit Counselling Service report says debt problems affect people's relationships and ability to work.
I keep mine hidden: Many people don't share their debt problems with others.
More than eight out of 10 people with debt problems say their financial difficulties are having a negative effect on their lives, jeopardising their personal relationships, health and ability to carry out their jobs, according to a debt counselling charity.
The Consumer Credit Counselling Service (CCCS) found that debt problems had adversely affected the relationships that 37% of the 372 clients surveyed have with their partners, and 22% with their children.
The charity said this might explain why many people chose to keep their problems hidden from those who were close to them: when asked who they had told about their difficulties only 34% named their partners, 20% their friends and 16% their parents. A further 10% said they had told no one, citing shame, embarrassment and a difficulty to "acknowledge that you are an adult and unable to manage your finances" as reasons for their silence.
Nearly half of those questioned said their problems had a very negative impact on their health, with some suffering a nervous breakdown, loss of hair, palpatations and cessation of menstruation. Only 6% said it had no effect.
Two-thirds said debt affected their ability to do their jobs, with CCCS clients saying "work has become difficult due to the constant worry about debt", and that they "found it difficult to concentrate some days" as they were "continually worrying about money".
Delroy Corinaldi, external affairs director at CCCS, said: "Only 15% of people had a debt problem because of overspending, almost half had a debt problem because of redundancy, a pay freeze or reduced working hours, while others were left overindebted because of a relationship breakdown, illness or having children.
"This busts the myth that recklessness with credit is the main cause of debt problems. Rather it is life itself over which we often have no control. Such people need sympathetic and practical support to guide them through this crisis so it won't scar them and their families for life."
Posted: 30/08/2010 | Source: guardian.co.uk
Record numbers of women are struggling to stay afloat financially, and the experts are divided on the reasons why.
The number of British women going bankrupt has risen almost fivefold in the past 10 years, with new figures revealing a 28 per cent increase in the past year alone. In some cases, according to insolvency experts, the surge is down to the "irresponsible spending" of women trying to emulate glamorous celebrities, while others are being driven to financial ruin by unemployment, pay inequality and childcare costs.
New figures from the Insolvency Service show that women now account for 40 per cent of all bankruptcies, rising from 6,042 in 2000 to 29,680 in 2009.
Younger women are finding it particularly difficult to manage their money, with those between the ages of 25 and 44 making up almost two-thirds of female bankruptcies. In 2009 17,595 declared themselves bankrupt, up from 13,575 in 2008.
Where female insolvency was once hardly spoken of, for this, too, there are now celebrity "role models". The singers Kerry Katona and Mica Paris both went bankrupt, despite earlier having million-pound fortunes.
Women are also taking up other official debt resolutions, such as debt relief orders (DROs) and individual voluntary agreements (IVAs).
"These figures show that more and more young women have levels of debt incurred through trying to maintain lifestyles that are unsustainable," says Graham Horne, deputy chief executive of the Insolvency Service. "It is critical that all young people are aware of the impact that irresponsible spending can have. Filing for bankruptcy or obtaining a debt relief order should be viewed as a last resort."
Women's rights organisations have countered that, far from being profligate or financially illiterate, they simply "earn less, own less and have lower earning potential" than men. Experts have pointed to the effects on finance of divorce - after which women are overwhelmingly left poorer than men - single motherhood and career breaks to look after children.
The Consumer Credit Counselling Service (CCCS), a debt advice charity, believes women have now overtaken men in the bankruptcy stakes; 51 per cent of the people it recommended bankruptcy to in 2009 were female. Overall, male bankruptcies rose by 18 per cent in 2009.
"One thing that stands out is that 58 per cent of women made bankrupt are between the ages of 25 and 44. They are the ones who are spending and incurring credit card debt," says Nigel Millar, business recovery partner with the accounting service Baker Tilly LLP. "Females have much more control than they used to over their own finances; however, they are getting more credit and incurring the consequences."
Research by the Equal Opportunities Commission in 2004 found that breaks from work to care for children or relatives accounted for 14 per cent of the pay gap. "Women typically earn less, own less, and have lower earning potential," says Anna Bird, head of policy and campaigns at the Fawcett Society. "When it comes to rising unemployment, women who lose their jobs are less likely than men to have savings, so they become dependent on benefits more quickly."
In addition to a rise in bankruptcies, women are also turning to the new DROs - a form of insolvency introduced in April 2009 aimed at people with debts under £15,000, assets of less than £300 and only £50 a month surplus income. In 2009, 63 per cent of DROs were awarded to women, with 12 per cent awarded to people under 25. The number of women entering into IVAs - under which a repayment plan is agreed with creditors - rose by 22 per cent, while the number of men taking the same action rose by 20 per cent.
The CCCS believes that rising unemployment is one reason for the increasing number of insolvent women. And experts have warned that the situation will get worse as the public sector is hit by spending cuts. Women are twice as likely as men to work in the sector, with four in every 10 employed in public sector occupations.
"These figures make for worrying reading," Ms Bird says. "The rise in women having financial trouble is especially disturbing when you consider the likely disproportionate impact of the emergency Budget. Women will bear the brunt of cuts."
Social factors, including rising divorce rates and an increase in lone parents - nine out of 10 of whom are women - are thought to be leaving women more cash-strapped than ever.
"There are a lot more single households. There is a degree to which that is contributing," Mr Millar says. "The only advice I can give people is to live within your means and control your expenditure."
Recent studies have shown that divorce leaves men richer, but women poorer. Research by the Institute for Social and Economic Research in 2009 found that, contrary to popular belief, men were 25 per cent richer five years after divorce, whereas women's incomes fell by a fifth.
However, some analysts point out that in many cases bankruptcy is not linked to poverty but to financial mismanagement. Louise Brittain, head of bankruptcy at the accountancy firm Deloitte, which has handled the bankruptcies of celebrities including Katona, Grant Bovey and Bruce Grobbelaar, explains: "Sometimes they haven't paid their tax bill; others have got involved in legal action which they have lost and can't afford to pay. There are different reasons."
While there are negative consequences to going bankrupt - it must be declared publicly in a newspaper, still carries social stigma and affects an individual's ability to borrow money in the future - some argue that the increasing number of women becoming insolvent can be seen as a positive change.
"It was ridiculously skewed before; when I started 20 years ago, I would hardly ever see women going bankrupt," Ms Brittain says. "The rise is partly because there are more women starting their own businesses, which should be encouraged."
Kimberly Randall, 23, Stockport
"I feel I should know better, but I'm thousands of pounds in debt. Most of my debt comes from credit cards and buying from catalogues. I spent £200 on clothes from a catalogue and now owe them £648 because of £12 non-payment charges. I am overweight and can't just pick up a cheap little dress in the market, but there is a pressure to look good. I do try to make the effort: I will get my hair cut or buy lip gloss. It's definitely more difficult to live within your means now. I used to be able to go on a night out and spend £30, but now I need £70. I'm getting married in six weeks and all my partner's salary is going into the wedding fund. Hopefully, after the wedding we will be able to start to pay off our debts."
"Over the past few years, I was made redundant from my job as a manager for a transport company, and my husband was made redundant twice. Debts built up. We'd got a loan to buy a car, but couldn't manage it any more, and we reached the limits on our credit cards. We had a mortgage - interest rates alone meant that it was £1,100 - and my parents had to help us to keep a roof over our heads. At one point my mother was so worried about us that she went to the Salvation Army to get us a food hamper. In total, we owe about £48,000 now; about a quarter of that is interest charges. I got a new job, but my daughters are six and three, and I'm spending £15,000 a year on childcare. There is a stigma to being in this situation. People look at you as if you've mismanaged your money, but it is just life, we've had some bad luck. We aren't excessive: we don't go on holiday, and the girls don't have new clothes. We thought about going bankrupt, but were advised that we'd be better off taking up an Individual Voluntary Agreement. It is a huge worry."
Laura Wadsworth, 26, Manchester
"I started getting credit cards at 18, and had five by the time I was 22. I was using them to buy holidays - I went to Malta, Greece, the Canaries - and clothes. It was free money then. I wasn't worried about paying it back. I was working as a supervisor in a pub and being paid £12,000 a year. It wasn't that I couldn't manage on it, but I wanted the rest: new electronics and stuff. I got married at 22 and took out a loan to pay for that. When I was 23 I realised how bad my situation was and set up a debt management plan with an organisation called ClearDebt.I separated from my husband about a year ago, and money was a factor. I'm £14,000 in debt and regret it a lot. I repay as much as I can now, but it will take me years to pay it back."
Women who had it all ...
Rosie Millard
In 2005, the former BBC arts correspondent revealed she was £40,000 in debt and her bank account had been frozen. Though property investments 'turned into a nightmare', she said taking on four credit cards was her downfall. The married mother of four insisted she needed "a decent haircut every eight weeks, Stila make-up and The New Yorker magazine".
Liz Jones
A columnist, Jones says debt problems began in her twenties. "I thought my new wardrobe would get me a job. The bill took years to pay off." A £4,000 cheque for a boob job also bounced. Later expenditures included a £26,000 bat sanctuary. Now, she says, "I dream of owning nothing, so I can sleep again."
Kerry Katona
The singer bought supercars and bikes, several homes and lots of cocaine. When advert, book and television deals later dried up, the ex-Atomic Kitten owed the taxman £82,000. Declared bankrupt in 2008, she famously "danced down the street" in 2009 after being discharged.
Toni Braxton
Despite album sales grossing more than $170m (£110m), the R&B singer-songwriter, who has won six Grammy awards, was declared bankrupt in 1998 with debts of $2.8m. Extravagant purchases, including bamboo-handled Gucci silverware and a personalised home caviare service, contributed to her financial difficulties.
Sarah Ferguson
The Duchess of York fired 12 members of staff last week as financial difficulties pinched. Ferguson is currently £2m in the red, owes £200,000 to solicitors Davenport Lyons, and in May foolishly attempted to sell access to her former husband, Prince Andrew, to an undercover reporter for £500,000.
Sherrie Hewson
The actress, 57, declared herself bankrupt in 2007 after losing her £130,000pa Emmerdale role and being threatened with the bailiffs. Twice-divorced Hewson, who also played Maureen Webster in Coronation Street, once spent £3,000 on a breast enhancement for her daughter's 21st birthday.
LaToya Jackson
One of Michael Jackson's sisters, LaToya filed for bankruptcy in a Los Angeles court in 1995. Financial grief followed an ailing singing career, along with a habit of regularly breaking contracts - in one case leaving her with $550,000 damages owed to one nightclub - and an expensive beauty regime that included manicures costing $500 a time.
Cyndi Lauper
The chanteuse was declared bankrupt in 1981 after being sued for $80,000 by a former manager when a single with her band Blue Angel flopped. She later quit the band and went on to enjoy a successful singing career, with total record sales amounting to more than $25m.
Anna Nicole Smith
The former Playboy model filed for bankruptcy in 1996 despite an annual income of at least $275,000. Court files later revealed she lost jewels worth millions and couldn't pay a $265 gas bill. After the 1995 death of her billionaire husband, she fought a fierce legal battle over his fortune.
Kim Basinger
The actress's downfall came after she pulled out of the Jennifer Lynch film Boxing Helena. The film studio won an $8m judgment against her, exacerbating her long-standing financial woes. The Academy Award winner filed for bankruptcy in 1998 - and admitted that buying the town of Braselton, Georgia, in 1989 for $20m was a mistake.
Posted: 30/08/2010 | Source: independent.co.uk
For those homes with any form of unsecured lending the average debt amount is now £18,159. If the amount of any mortgage is included that value rises to £108,972.
That means that the average debt for a household with loans and a mortgage is now more than 4 times annual average income. Banks are feeling the pinch too with them writing off around £23.35m every day in bad debts.
Whilst some are seeing the green shoots of recovery many experts are still unsure as to the future of the economy and with the recent round of public spending and benefit cuts, many will find their incomes stressed even further. So what can be done if you are feeling the pinch in these tough times?
All households must have a serious review of their finances and develop a budget by which to manage expenditure. By analysing where your money goes each month you can quickly identify areas where money can be saved in the short term. Items to prioritise are the mortgage or rent, council tax and utility bills. These will keep the roof over your head. Cut out any unnecessary spending on luxury items such as health club memberships and move to a cheaper supermarket for the weekly shop. And take a list with you and only buy what is written down! Impulse spending can be a challenge so take cash and leave the credit and debut cards at home. You can't spend what you do not have.
If you have any equity in your home you may want to consider raising a secured loan to pay off all your short term store card debt. This will save money in the medium term as long as you put the cards away and pay off any spend each month in full!
There are numerous companies that now offer debt management plans and advice to help you get back in control of your finances. Independent advice from an organisation such as the Citizens Advice Bureau (CAB) will help point you in the right direction if you are unsure of what to do. Debt management plans range from informal arrangements to reduce your payments with lenders through to more formal Individual Voluntary Arrangements (IVA's) that are approved by the court. IVA's are now a recognised way for those with debts over £15,000 to get back in control over a 5 year period. Some of the loan balance may be written off at the end of the term if you keep to the plan agreed.
Posted: 02/07/2010 | Source: economicvoice.com
In the autumn of 2009 Jonathan Mitchell, a British software developer, realised he had a problem. He had been running up his credit-card bills for years after his partner got sick and was unable to work. He ended up owing £30,000. "You think if they are going to give it to me, I must be able to afford it," he recalls.
Mr Mitchell tackled his problem before the bailiffs arrived. He took advice and applied for an IVA (individual voluntary arrangement), a British scheme that allows the borrower to negotiate a plan for dealing with his debts. After allowing for essential spending, he now pays £280 a month to his creditors. If his house rises in value over the next five years, he will have to take out a further mortgage to pay back other creditors. But his life is not too constrained: he still has a mobile phone and satellite TV.
Mr Mitchell is one of millions of consumers across the developed world who are struggling to deal with their debts in reduced economic circumstances. By the standards of past centuries he has got off lightly. A failure to repay debts was once seen as a sign of moral laxity. Nowadays it is the lender as much as the borrower who is perceived to be at fault for extending credit to those who should never have been granted it.
The idea that debt is a shameful state to be avoided has been steadily eroding since the 1960s, when a generation whose first memories were of the Depression was superseded by one brought up during the 1950s consumer boom. People were already used to buying houses and motor cars on credit, but suddenly a whole range of durable goods—TVs, fridges, washing machines—could be had on easy terms. Credit cards and charge cards came into widespread use. Buyers no longer had to scrimp and save to get what they wanted; they could have it now. As the range of desirable products grew, from Nintendo Wiis to iPhones, the urge to buy first and find the money later increased. "Consumers' attitudes have changed incredibly over the past 15 years," says Steve Rees of Vincent Bond, a debt-management agency. "They have gone from aspiring to be just above their pay bracket to aiming a long way above their pay bracket."
All this meant that growth in consumer credit regularly outstripped growth in GDP in the Anglo-Saxon countries and saving ratios fell to historic lows. At the end of the second world war in 1945 consumer credit in America totalled just under $5.7 billion; ten years later it had already grown to nearly $43 billion, and the party was just getting started. It reached $100 billion in 1966, $500 billion in 1984 and $1 trillion in 1994, or around $4,000 for every man, woman and child. The peak, so far, was almost $2.6 trillion in July 2008. Household debt approached 100% of GDP in 2007, a level seen only once before, rather ominously in 1929.
America was not alone in embarking on a debt spree. In Britain household debt rose from 105% of disposable income in 2000 to 160% in 2008, according to the McKinsey Global Institute, and in Spain the ratio rose from 69% to 130% over the same period. Only in the past couple of years have consumers paused for breath. In America the volume of consumer credit in 2009 declined by 4.4%. By March this year the annual growth rate had crept up only to 1%. In Britain credit-card lending fell in eight of the 16 months between January 2009 and April 2010.
In part, this is because consumers in many countries have become more frugal in response to the recession and the decline in house prices. In America houses turned into cash machines during the credit boom as people remortgaged to release equity and boost their spending. Mortgage equity withdrawal rose from less than $20 billion a quarter in 1997 to more than $140 billion in some quarters of 2005 and 2006. After 2007 it slowed abruptly and even went negative (homeowners paid down debt) in 2009. Consumers are also more cautious about borrowing in view of sluggish wage growth and rising unemployment in most of the developed world.
In part, too, borrowing has slowed down dramatically because lenders have become much more chary about extending consumer credit. A survey by the Federal Reserve in October 2008, when the financial crisis was at its peak, found that 60% of banks had reduced credit-card limits for both new and existing customers. Like mortgage lenders, credit-card companies found they had allowed lending standards to drop too far. This spring the default rate on American credit cards was a record 13%, according to Fitch.
How do lenders decide whether consumers are creditworthy? In America one of the key determinants is an individual's FICO score, named after the Fair Isaac Corporation, which devised it. The idea goes back decades, to a time when small retailers, which needed to offer credit, pooled information on which customers were good and bad payers. These days the bulk of the information is provided by banks and lenders such as credit-card companies. This is translated into a score ranging from 350 to 800, with the most creditworthy customers getting the highest rating.
Life's new essentials
Andy Jennings of FICO says that customers' rankings remain remarkably steady over time; the best payers remain the best payers. What does change is the level of bad debts across all categories when the economy hits a recession. During the subprime-lending boom mortgages were offered to borrowers with lower FICO scores than in the past. An updated version of the FICO model, to reflect the subprime crisis, was released last year.
The crisis has brought about one big change in consumer behaviour. The mortgage used to be the last debt people would default on. They did not want to lose their homes or to forfeit the substantial deposit they had had to find. But during the subprime boom many borrowers were able to buy homes without putting down any money, which changed their attitude. In effect, they were renting with an option to profit from higher house prices.
In the current recession some borrowers have given priority to their credit-card and car loans rather than their mortgages. After all, they can usually find a new home to rent. But without a car many of them cannot get to work and without a credit card they find it hard to shop.
Perhaps the housing crash will change attitudes towards home ownership. For a long time it seemed like a one-way bet, with homeowners able to buy an appreciating asset with cheap debt. Having realised that prices can fall as well as rise and that houses are illiquid assets, many more people may opt for the greater flexibility of renting and hold their wealth in more diversified forms. That is what happens in Germany, which has a much lower rate of home ownership than Britain or America.
Meanwhile, those who have maxed out their credit cards have been forced to turn elsewhere. One very expensive route is payday loans. As Jean Ann Fox of the Consumer Federation of America explains, this involves the borrower writing a cheque to the lender for the sum borrowed, plus the financing cost, which the lender cashes on payday. Over two weeks the cost works out at around $15 of interest for every $100 borrowed, which amounts to an annual interest rate of 400%. People who use the facility average nine payday loans annually, so they can end up paying more in interest than they have borrowed.
The outcome is predictable. According to the Centre for Responsible Lending, a quarter to half of all payday borrowers default every year. Congress has restricted access to such loans for the families of members of the armed services. But why do consumers choose such an expensive way of borrowing money? "A lot of people opt for a payday loan because it's easy and the lenders don't run a credit check," explains Ms Fox.
For many, debt has become a necessity, not a choice. In real terms, the median wage of American workers has barely shifted since the 1970s. Thomas Schoewe, chief financial officer of Wal-Mart, says that "more than ever, our customers are living pay cheque to pay cheque. They're very concerned about their own personal finances." Consumers got by because both husbands and wives went out to work and they borrowed heavily, as described by Raghuram Rajan, an American economist, in his book "Fault Lines".
A fate worse than debt
After the financial crisis it briefly looked as if consumers were becoming more cautious. Between the first quarter of 2008 and the second quarter of 2009 the saving rate surged from 1% to 5% of personal disposable income. But then it fell back again, perhaps because people found they simply could not afford to save. Consumption held up because the Obama stimulus plan boosted incomes. But that boost will be strictly temporary. And then what?
An interactive chart allows you to compare how the debt burden varies across 14 countries and to examine different types of borrowing
Posted: 24/06/2010 | Source: economist.com
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