This year will see the gradual introduction of the Standard Finance Statement (SFS), a new affordability template set to bring about greater consistency to the debt advice process for consumers, advisers and creditors.
At the heart of any debt solution is an understanding of the household budget – it is the key to being sure that solutions are realistic and affordable. However, what people think they spend, actually spend and should spend are often 3 entirely different amounts. Whilst there are currently industry expenditure guidelines available to advisors, measuring affordability has become quite a divisive issue for debt solution providers and the regulators assessing the suitability of debt advice.
When consumers seek debt advice it is often because they have lost control of their expenditure and are not aware of the individual amounts they spend on different areas of their budget. There are also irregular costs or perhaps annual bills that are forgotten when considering the monthly spending. The majority of people do not keep a budget, especially when they are not struggling to meet monthly payments. When asked by an advisor what they spend, debtors often simply have no idea.
A further problem is that people are rarely standard; there are endless variations of how people’s lives effect their finances. Applying expenditure guidelines can become challenging, as adaptation is nearly always required to best reflect the customer’s individual situation. If creditors only accepted debt solutions based rigidly on expenditure guidelines, then very few would be accepted; a bigger holistic view has to be adopted and usually is.
Advisors are under increasing scrutiny to ensure they do not manipulate expenditures, opening themselves to criticism that they are creating solutions that are not affordable. The reality is that advisors often have to guide people to help them understand what typical expenditures are to complete the process; this is part of the rehabilitation process that ultimately helps people to identify and stick to a reasonable budget. In addition where it becomes apparent that an IVA could be available and the debtor wishes to pursue it, the advisor knows that creditors will only accept certain guidelines figures, so has to use these to ensure the IVA has the best chance of success.
The new SFS will replace existing industry guidelines including the budget guidelines from Stepchange (formerly The Consumer Credit Counselling Service) and the Common Financial Statement managed by the Money Advice Trust. In theory a single format is preferable in that it should create greater consistency in the debt advice process, but the challenge will always remain where debtors fall outside these norms. Where a situation is genuine, demonstrable and reasonable, debtors should be able to deviate from the norms provided by any guidelines.
Ultimately the new SFS will be a tool to assist in the affordability assessment, but should not be used in isolation; a full picture of the debtor’s personal situation and potential changes in future has to be taken into account. However connecting the debt advice sector and creditors and enabling them to work together can only be a positive step in the pursuit of achieving the right outcomes for people struggling with their finances.