Spring 2022 Consumer Finance Update

Eddie Flanagan discusses the latest updates from the consumer finance world

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Now is a key time for both consumer protection and the effective use of regulatory bodies to protect everyday consumers

Key factors affecting consumers

  • Amid the cost of living crisis, and the surges in energy bills, what do we know about the impact on consumer financial behaviour?

  • What can consumers expect in the upcoming months?

  • How can consumers prepare for further forced tightening of their own and lenders purse strings?

Klarna is Reporting Consumer Activity to Credit Bureaus

What seemed to be a light touch and easily accessible form of finance could prove to have more negative long term effects on perceived credit worthiness. From 1st June 2022, FinTech organisation Klarna started reporting customer data to credit bureaus in the United Kingdom. This move was in preparation for BNPL sector regulations that will come into force shortly to try and quell the amount of debt owned by younger consumers. With 16 million people using Klarna within the UK, with options to pay in 30 days or split the payments into three, there is a perception that this is fuelling unaffordable spending and that regulatory intervention is now due.

TransUnion and Experian are two of the bureaus that are receiving Klarna’s data. This then influences individuals’ credit reports, and could have unforeseen consequences on the likes of mortgage applications.
Ryan Browne, writer for CNBC, says: “BNPL companies face a reckoning in the U.K. and other countries, as regulators look to crack down on such services amid worries they are encouraging consumers — Gen Z and millennials, in particular — to spend more than they can afford” (CNBC).

However, these regulatory interventions may leave unexpected adverse credit foot prints. This raises the question that the lead time for same should have been extended.

Credit Card Debt on the Rise amid Cost of Living Crisis

According to a report by Creditspring, the UK is forecasted to borrow a further £9bn on credit cards within the next six months, due to the cost of living crisis.

Bank of England figures give a breakdown of how lending currently looks:

  • UK individuals currently borrowing £1.5bn every month on credit cards;

  • This will increase by 18% to £68.9bn;

  • Monthly debt repayments have increased by 9% YoY;

  • Total balance of unsecured loans has increased by 13% YoY.

27% of UK households are feeling “financially unstable” due to rising costs. Only 10% felt this way during the pandemic, which speaks volumes about the worrying state the UK’s economy. Theodora Hadjimichael, the CE of Responsible Finance, says “Any one of the cost of living crisis, recovering from the financial impact of the pandemic, or the explosion of unregulated Buy Now Pay Later products would have sent shockwaves through society. All three together are causing a seismic shift in the consumer credit market” (Credit-Connect).

Cost of Bills to Overtake Wages by 2024

According to Credit Strategy, a new report from Yorkshire Building Society and the Centre for Economics and Business Research has found that monthly outgoings could overtake incomes, by £100 a month in two years.

Younger generations looking to start on the property ladder could face increasing interest rates, and a potential need to dip into savings just to “get by”.

With the adverse effect of Covid, the unprecedented rise in fuel costs, together with inflation at such rates that is unknown to many, consumers we are now facing a perfect storm.

It has been noted that many consumers are now starting to challenge energy companies for hiking up their monthly instalments.

Regulatory measures must be applied effectively to ensure that consumers are protected. Transparency, fairness and the good behaviour of creditors is key to the resolution of financial issues in this time of considerable uncertainty.

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Eddie and his team advise clients on a wide range of issues concerning leasing, hire, consumer credit, the FCA source book and the regulatory landscape affecting the UK finance and leasing sector.

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Breathing Space: The Debt Respite Scheme

Blog | Debt

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The Debt Respite Scheme comes into force on the 4 May 2021, and will give people who are in debt legal protection from their creditors. This scheme is known as “Breathing Space.”

Types of breathing space:

A standard breathing space

A standard breathing space is available to anyone with problem debt. It gives them legal protection from creditor action for up to 60 days. The protections include pausing most enforcement action, contact from creditors and freezing most interest and charges on their debts.

A mental health crisis breathing space

Breathing space for a mental health crisis is only available to someone who is receiving treatment for their mental health. This type of breathing space also has some stronger protections; it lasts as long as the person’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).

What does it mean for creditors?

As a creditor, if you’re told that a debt owed to you is in a “breathing space”, you must stop all action related to that debt and apply the protections outlined in the respite scheme. These protections must stay in place until the breathing space ends.

What does it mean for debtors?

You or your solicitor will receive a notification of each debt owed by you in a breathing space, and the date the breathing space started. It is possible your debt might be added to a breathing space at a later date, because it is only identified after the breathing space has started.

In this case, you have to apply the protections from the date you get the notification, or when the regulations consider you to have received it; whichever is the earliest.

How does someone enter breathing space?

A breathing space can only be started by:

  • a debt advice provider who is authorised by the Financial Conduct Authority (FCA) to offer debt counselling

  • a local authority (where they provide debt advice to residents)

Debt advice providers (debt advisors) are responsible for the administration of a breathing space. They are the point of contact for the debtor, their creditors (and appointed agents), and the Insolvency Service. The Insolvency Service will maintain the electronic service that debt advisors use to start the breathing space process and send notifications to creditors during the breathing space period.

The Insolvency Service will also maintain a register of details of people whose debts are in a breathing space, and the date a breathing space ended or was cancelled within the last 15 months.

Debtors can only access a breathing space by seeking debt advice from a debt advisor, and anyone who cannot or is unlikely to be able to repay their debts can apply to a debt advisor for a standard breathing space. Although all applications are considered by law, the debt advisor might decide a breathing space is not appropriate for the debtor.

Example:

For example, if a person can access funds or income, they might be able to pay their debts with some budgeting help. Another example would be if they already have assets that could easily be sold to clear the debt. In these cases, a breathing space would not be the right solution. A breathing space might also not be appropriate for someone who can enter a more suitable debt solution straight away, without needing the protections.

A debtor’s eligibility for a standard breathing space has to be considered, and before a debt advisor can start the breathing space, they must confirm eligibility. The following conditions must be met:

  • a debt advice provider who is authorised by the Financial Conduct Authority (FCA) to offer debt counselling

  • a local authority (where they provide debt advice to residents)

In addition, both of the following conditions must also be met:

  • the debtor cannot, or is unlikely to be able to, repay all or some of their debt

  • the debtor cannot, or is unlikely to be able to, repay all or some of their debt

A debtor must have at least one qualifying debt owed to a creditor, and this must be included in their application for breathing space. The debtor must tell the debt advisor about all of the debts they know about and give them the contact details they have for each creditor.

If they know about a debt collection agent acting on a creditor’s behalf, they might also give the debt advisor those details. This does not change the legal standing of either the agent or the creditor.

Which types of debt qualify for breathing space?

Debts included in a breathing space must be qualifying debts. Debts are any sum of money owed by the debtor to you, while liabilities are any obligation on the debtor to pay money to you. Most debts are likely to be qualifying debts. These will include:

  • credit cards

  • store cards

  • personal loans

  • pay day loans

  • overdrafts

  • utility bill arrears

  • mortgage or rent arrears

Government debts

Government debts like tax and benefit debts are all likely to qualify, unless they are included in the list of excluded debts.

Joint debts

Joint debts can be included in a breathing space, even if only one person applies for a breathing space. The joint debt would become a breathing space debt, and you must apply the same protections to the other people who owe that debt to you. The breathing space does not affect the other people’s debts and liabilities in their own names.

Guarantor loans

While guarantor loans can be included in a breathing space, the protections do not extend to the guarantor. The guarantor can apply for their own breathing space, if they’re eligible.

Qualifying debts can include any that the debtor had before the Breathing Space legislation came into force on 4 May 2021.

All personal debts and liabilities are qualifying debts, except for:

  • Secured debts (like mortgages, hire purchase or conditional sale agreements)
    You can only include arrears on these debts that exist at the date of an application for a breathing space. Any new secured debt arrears that happen after the breathing space starts are not protected. If a secured debt is also an ongoing liability and a debtor misses payments, it could mean the debt advisor stops their breathing space.

  • Debts incurred from fraud or fraudulent breach of trust
    You should think of this in the same way you would if a person is bankrupt. Discharge from bankruptcy does not release a person from bankruptcy debts which they incurred by fraud. If you request a review of a breathing space because of fraud or suspected fraud, you might have to provide evidence to the debt advisor or to a court.

  • Liabilities to pay fines imposed by a court for an offence
    This includes any interest on the fine and any penalties connected to it. This does not include penalty charge notices, like a parking ticket.

  • Obligations from a confiscation order

  • Child maintenance or obligations under an order made in family court proceedings

  • A crisis or budgeting loan from the social fund

  • Student loans

  • Damages they need to pay for death or personal injury caused to someone else

  • Advance payments of Universal Credit

  • Council tax liabilities if not yet fallen due
    If all instalments for that financial year have fallen due and have not been paid, these are considered to be a qualifying debt. If a debtor has been served with a ‘reminder notice’ to pay a council tax bill, the remaining liability for the financial year is a qualifying debt

New debts incurred during a breathing space are not qualifying debts. Neither are new arrears on a secured debt that arises during a breathing space.
Eligibility for mental health breathing space

For a debtor to be eligible for a mental health crisis breathing space they must still meet the same criteria and conditions for a standard breathing space, but they must also be receiving mental health crisis treatment at the time that an application is made.

A debtor who has had a standard or mental health crisis breathing space in the last 12 months may be eligible for a mental health crisis breathing space. There is no limit to how many times a debtor can enter a mental health crisis breathing space.

Concluding thoughts

It should also be noted that while some business debts also qualify for the breathing space, they do not qualify if the debt only relates to the business (not the debtor personally) and the debtor is VAT registered, or the debtor is a partner in a business with someone else.

An eligible non-domestic rates debt (or business rates) is a qualifying debt if all instalments for that financial year have fallen due and have not been paid. If a debtor has been served with a ‘further notice’, the remaining liability for that financial year is a qualifying debt.

The purpose of the breathing space is to allow those with problem debt time to deal with their debts, and as a creditor you should be aware that a breathing space is not a payment holiday. While you cannot enforce a breathing space debt during a breathing space or charge interest or fees on it, a debtor is still legally required to pay their debts and liabilities.

During the Breathing Space, the debtor should continue to pay any debts and liabilities they owe you. You can continue to accept these payments, including those you get from existing direct debits.

How we can help

As solicitors dealing with recovery of your debts, we will receive notification of any breathing space and will pause and action we are taking for the relevant period. We will also inform you of the start of the breathing space and anticipated end date, save for in some mental health cases where the pause can be unlimited. If any enforcement action is being taken, we will ensure this is not pursued within the requisite period and this will include action taken by any third parties, such as High Court enforcement officers.

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Guides & Advice

Commercial rent recovery: no CRAR, no problem

In an effort to lessen financial pressure on businesses, on 10 March 2021 the government extended the restriction on the use of the Commercial Rent Arrears Recovery (CRAR) process by landlords.

This measure will increase the total number of days' outstanding rent required for CRAR to be used to:

  • 457 days (between 25 March 2021 and 23 June 2021), and
  • 554 days (between the 24 June 2021 and 30 June 2021).

However, with this being a popular option for landlords looking to recover unpaid rent, what other debt recovery routes are available in the meantime?

What is CRAR?

Commercial Rent Arrears Recovery (CRAR) is a procedure that allows commercial landlords to recover rent by taking possession of a tenant’s goods with a view to selling them. No court proceedings are necessary, with certificated enforcement agents able to enter the property and seize the goods for sale at auction after seven clear days’ notice to the tenant has been given.

Negotiating commercial lease terms/concessions

Although CRAR is an efficient way to regain funds, renegotiating contracts can be the best alternative for the longer term.

During this process, compromise on both sides is key. For example, this could mean lowering the amount of monthly rent in return for an extension on the lease (or another benefit to the landlord).

Issuing court proceedings

The second alternative involves issuing court proceedings to recover the debt. Much like CRAR, this option means that, once a judgment is secured against the tenant, enforcement officers are able to enter the tenant’s property to remove goods.

Unlike CRAR, this method also gives landlords the opportunity to issue a claim for other sundries, meaning more money can be recovered. However, this does come at a cost, from court fees to further expenses that may come later down the line.

When choosing this path, landlords must:

  • Issue a Letter Before Action (LBA), which informs the tenants that court proceedings are being considered. This acts as a formal demand for money owed and gives the tenant chance to pay or contest.
  • Be clear about what they are claiming for and why, whether it be purely rent or other items as well.
Can a landlord forfeit a commercial lease?

As a last resort, landlords can forfeit (i.e. terminate) the lease. However, bear in mind that finding another tenant can be hard in the current climate.

Light at the end of the tunnel

With the rollout of the COVID-19 vaccines, there is the hope of financial recovery in 2021. However, if landlords are struggling with cash flow due to unpaid rent, court proceedings are always an option.

Nevertheless, negotiation often should be the first port of call, with the outcome potentially being better for both parties. These are complicated times for everyone and demonstrating flexibility landlords and tenants can keep relationships strong.

Contact us

Our commercial property disputes and debt recovery teams can help you through this difficult period and guide you towards a solution - contact James Fownes or Jayne Gardner for advice and support.

From inspirational SHMA Talks to informative webinars, we also have lots of educational and entertaining content for life and business. Visit SHMA® ON DEMAND.

Our free legal helpline offers bespoke guidance on a range of subjects, from employment and general business matters through to director’s responsibilities, insolvency, restructuring, funding and disputes. We also have a team of experts on hand for any queries on family and private matters too. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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Guides & Advice

Improving cash collection – every little helps

In a world where cash is king, cash flow is all important to ensuring the survival of any business, which has been bought into even sharper focus now in our new COVID-19 world.  Whether your business is sailing smoothly, treading water or struggling during these tough economic times, having a reliable collection strategy is integral to remaining solvent.

What is a cash collection strategy?

A cash collection strategy is one way to ensure that your accounts receivable (money in) stays under control and you continue to collect your cash and a collection strategy sets a particular standard and a set of processes on how to collect your money from people who owe you money for goods or services.

The problems cash flow can cause

Many businesses do not realise just how much cash is NOT flowing. The key to the future of a business can be tied up in just that process – the gap between money out and money in, and to enable your business to survive you need to make sure that the people who owe you money for goods pay you on time.  Not receiving monies on time for goods and services, means you may well not have the money to pay your bills and staff and is a fundamental requirement for a successful business.

It’s time therefore to review your cash collections strategy.

As a business you can set your own payment terms.  Many small businesses and sole traders submit invoices which are payable on presentation.  Other common terms of business are seven days, 14, 28 or 30 days.  However this means you should have the cash in your account by that date.  This is not the timescale that you should then use to start a collection process to chase cash.

All too often, invoicing and chasing cash is not given the focus it needs and particularly when a business is in trouble, this needs to change and quickly.

Steps to take to improve your cash collection
  • Review your overall invoicing and cash collection strategy and ensure that it is someone’s responsibility within the business to manage this most vital of tasks. Sometimes this job is given to reception staff or office administrators and often it will not be done properly or in a timely manner. Asking people for money is difficult so ensure adequate training is given to enable them to do the job properly and well.  If you have a credit controller this is their job to manage this process proactively.
  • Review your whole process carefully. What is your process?  Is it too long?  Is it fit for purpose?   Make the changes needed.
  • As a business you should not be waiting until a payment is due to start chasing that debt. If you know when your customers set their payment run, call your customer to check that payment is on the next run. This can often be done under the guise of a customer care call – are they happy with the product/service etc.
  • Do not send a statement by mail as the next communication, this will not encourage payment. Send an email invoice reminder.
  • Call the customer and ask when you can expect to receive payment – after all this is your money. If there is an issue with the goods, be prepared to sort this out.  However this should not prevent a customer paying for the goods that are correct, so push for a part payment.
  • Keep calling your customers at regular intervals until you receive payment. Customers will almost certainly divide invoices into urgent and ‘can wait’.  If you keep calling, you keep your invoice top of their list.
  • Develop good relationships with the credit control team at your larger customers.
  • If payment is not forthcoming get in touch with your actual business contact – they may be able to expedite payment as they are not close to the accounts team.

If payment is still not forthcoming do not delay in starting the formal proceedings and contact a debt collection expert. If you work with the correct third party, they will support you in the collection of your debts, without damaging your reputation.

What else can I do to help with cash collection

Review your terms of business.  When many businesses start out it is often the case that the terms of business can be a slight afterthought, often ‘borrowed’ from somewhere else or found on the web. In order for a business to claim all monies due to them, it’s vital to ensure your terms are drafted correctly and includes several very key elements.

An important thing to consider is:

  • Do your terms of business do what you think they do?
  • Do they allow you to recover your goods if your customer becomes insolvent?
  • Do you have an enforceable retention of title clause within your terms of business?
  • Do your terms of business allow you to recover collection costs or claim contractual interest on overdue invoices?

If you are in any doubt we can review your terms of business, ensure they are drafted correctly and review your cash collections strategy ensuring you are in the best position to ensure your cash keep flowing.

Contact us

For further help in developing a cash collection strategy contact Jayne Gardner or another member of the debt recovery team in your local office.

For legal support in relation to the coronavirus or any other matter, get in touch with your team today.

We have launched our guide to recovery and resilience, helping to support businesses and individuals unlock their potential, navigate their way out of lockdown and make way for a brighter future. Further advice in relation to COVID-19 can be found on our dedicated coronavirus resource hub.

From inspirational SHMA Talks to informative webinars, we have lots of educational and entertaining content for life and business visit SHMA® ON DEMAND.

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