Is there a debt tsunami looming as the furlough scheme ends?

By Mel Chell, director, Equivo and partner, Shoosmiths LLP

Mel Chell, director, Equivo and partner, Shoosmiths LLP

The Coronavirus Job Retention Scheme (JRS) was introduced when the first Covid-19 lockdown was enforced in March 2020. The scheme has successfully protected millions of jobs. At present the scheme – popularly known as ‘furlough’ – is due to end at the end of September as a result of the lifting of Coronavirus-related restrictions.

There has been much industry debate about the likely impact of the end of furlough. In April 2021 the New Economics Foundation released research showing as many as 850,000 jobs could be at risk of redundancy, loss of hours, or loss of pay when the scheme closes.

There are additional complications due to the number of economic issues beyond the pandemic, driving demand for the furlough scheme. One such example is the automotive industry, where furlough rates have risen from 7% in January to 21% in late June as a result of the global semi-conductor shortage and other Brexit-related issues.

Lenders have also shown restraint, encouraged by the FCA with over 4.5 million payments deferred since March 2020. Despite this, the Centre for Social Justice in its recent paper entitled Taking Control for Good describes an ominous looming of “no less than a tidal wave of debt” as these “rubber rings thrown out by the government run out of air”.

It is true to say that until now, some people have managed to save money and clear down debt as a result of the money saved by not commuting or purchasing the usual holidays and flat whites – however, more than half of adults in families from the lowest income quintile have had to borrow more to cover everyday costs. An additional £10.3bn of debt and arrears has already been built up as a result of the pandemic.

With the financial resilience of lower income groups stretched to such a degree, the forthcoming withdrawal of the successful furlough scheme (and the planned cut to Universal Credit) are sadly likely to see families increase their borrowing even further and fall behind on essential bills such as rent and council tax. As we head into winter 2021, and the potential for further lockdowns, it is likely to be much colder and bleaker for many than winter 2020.

So how do lenders ensure they are well placed to deal with this potential tsunami of debt?

- Review your policies and procedures to ensure they are compliant and offer appropriate levels of forbearance. Ensure your collectors understand those policies and can operate within them.

- Ensure that you have full, agile, cross trained collections teams. Take time to ensure your teams have all had specific training in dealing with vulnerable customers, suicidal callers and complaints.

- Implement technological solutions to make straightforward processes as efficient as possible. Consider automated journeys and open banking solutions. Remember to ensure that your offering is omni-channel to account for customer preferences.

- Review your supplier panels to ensure you partner with firms who can scale up as required and support the full customer journey and lifecycle of debt.

- Clear the decks. Work through any accounts which are suitable for outsource or litigation now, as it is extremely likely that the courts are going to get busy and delays are very likely.