Millions of people have taken debt payment holidays. What happens when they end?

Britain faces a personal finance crisis as well as a jobs crisis, James Moore writes

Britain faces a looming personal finance crisis (Getty/iStock)

Keen to show the banking industry is doing its bit, trade body UK Finance at the end of last week released some figures designed to show off the “unprecedented support for consumer credit borrowers put in place by the banking and finance industry”.

Under the beady eyes of the Financial Conduct Authority, of course, and would this have happened if it hadn’t engaged in some judicious poking and prodding? But let’s set that to one side for a moment, because the numbers are huge.

Some 1 million payment deferrals on credit cards, a further 707,000 on personal loans and more than 27 million customers offered interest free borrowing of up to £500 via pre-arranged overdrafts. That racks up to a staggering £13.5bn if everyone who so far has one uses the full amount.

The figures serve to highlight the two very different Britains that live side by side.

Fortunate Britain has disposable income and has been stashing money away in savings while there’s been nothing much to spend it on. The government is keen to encourage spending to turn the taps back on. Its efforts have, to date, met with only limited success.

But hey, maybe 50 per cent off meals and non-alcoholic drinks on Monday, Tuesday and Wednesday in August, at participating restaurants, will work the oracle. And maybe Donald Trump will manage a day without tweeting.

On the wrong side of the tracks resides unfortunate Britain, living from pay cheque to pay cheque without much, if any cushion, against a sudden fall in income such as seeing freelance hours drying up or being put on furlough at 80 per cent of usual wages.

There’s an uncomfortably large group of people in that second group. A TUC survey at the end of last year, for example, found that one in three workers wouldn’t be able to pay an unexpected bill, one in five went without heating when it was cold, and a similar number skipped meals to make ends meet.

Customers yet to request a payment freeze or one of those overdrafts still have until 31 October 2020 to apply for one. So the numbers reported by UK Finance are only going to grow.

There are good reasons for paying attention to October, because that’s when the chancellor, Rishi Sunak, brings down the curtain on his job retention scheme and the unemployment (expletive deleted) will really hit the fan.

Now, it’s true that in some cases people may already have been able to start repayments again. The jobs data that emerged last week showed, for example, that freelancers’ hours were picking up in May. The economy’s reopening has created opportunities for them.

If this continues to progress and the coronavirus remains contained – which remains a very big if – they will grow.

But even if that happens, it won’t be enough for everyone. And there are also people on payment holidays, who are in full-time employment, which they’re going to lose.

“No matter what your situation, if you are facing temporary financial difficulties due to the coronavirus pandemic there will be support still available to help you through these challenging times,” said Eric Leenders, managing director of personal finance at UK Finance.

Which is designed to sound warm and fuzzy, without going into specifics.

The problem with the current situation is that it is made up of temporary measures put together for those in temporary difficulty.

October will likely see an awful lot of those temporary difficulties turned into something permanent. It’s already happened for some.

In other words, Britain isn’t simply staring down the barrel of a jobs crisis. It is also facing a looming personal finance crisis.

The hard truth is that personal insolvencies are inevitably going to rise, as a result, and repossession too. Banks’ bad debts will rise with them. This could quickly get very messy.

The Bank of England conducts annual stress testing of lenders’ ability to handle crises. But at the end of March it said it wouldn’t this year, and with good reason. There’s no need to run a test when you have an extreme scenario happening live.

The Bank’s Financial Policy Committee thinks the banking sector can cope. We’d best hope it’s right.