In Depth

Why are young people bearing the burden of UK’s debt crisis?

Financial watchdog says millennials racking up large debts to fund essential living costs

The consumer debt crisis is having a disproportionate effect on young people in the UK, the chief executive of the Financial Conduct Authority (FCA) has warned.

In an interview with the BBC, Andrew Bailey, who heads up the regulator, said the young were having to borrow simply to cover basic living costs.

Unsecured household debt in Britain, which includes credit cards, overdrafts and car loans, recently topped £200bn for the first time since the financial crisis.

Bailey said the younger generation were not “reckless”, but were forced to rack up large debts paying high rents and funding “essential living”.

He said: “There is a pronounced build-up of indebtedness amongst the younger age group.

“We should not think this is reckless borrowing. This is directed at essential living costs. It is not credit in the classic sense, it is [about] the affordability of basic living in many cases.”

The regulator told the BBC that the change marked a generational shift and that young people faced being worse off than their parents.

Why are so many young people turning to credit?

Bailey highlighted “high rental costs and lack of income growth as key problems which lead young people to turn to credit in order to make ends meet”, reports the London Evening Standard.

“There has been a clear shift in the generational pattern of wealth and income, and that translates into a greater indebtedness at a younger age,” he said.

“That reflects lower levels of real income, lower levels of asset ownership. There are quite different generational experiences.”

His organisation’s findings chime with a recent report by the Resolution Foundation, which said that millennials are spending three times more of their income on housing than their grandparents.

The think tank warned that people in the generation currently aged between 18 and 36 are typically spending more than a third of their post-tax income on rent or about 12% on mortgages. This compares with 5% to 10% of income spent by their grandparents in the 1960s and 1970s.

Personal debt “can also mount during university”, says the the i website. “Despite often having low or unstable incomes, some students can still access large overdrafts and credit cards.”

Andrew Hagger, of consumer website MoneyComms, told the website that banks are very keen to get students on board as customers, despite their lower incomes.

What effect has it had?

The number of 18- to 34-year-olds becoming insolvent jumped by almost a third (31.3%) between 2015 and 2016, according to the UK Insolvency Service. “Seaside towns in England and Wales have the worst levels of debt among young adults in the UK, led by the Isle of Wight, Torbay and Scarborough,” says The Guardian.

Debt management charity StepChange reports that in the first six months of 2017, almost two-thirds (64%) of all clients who sought advice were aged under 40.

Citizens Advice says that the failure to cope with payday loans and other forms of high cost credit is one of the main reasons for an influx of distressed young people seeking guidance. The charity has seen a 34% rise in the number of under-25s seeking help with high-cost credit in the last two years.

Meanwhile, projections from a major lettings network found record numbers of rental sector tenants leaving London over the past year.

According to Countrywide, nearly 65,000 tenants are estimated to have left London in the past year, the highest number to do so since its records started in 2007, reports the London Evening Standard.

What are the solutions?

FCA boss Bailey said he would like to see “more focus on what is sustainable, affordable credit provision”, with action taken to reduce long-term credit card debt and high-cost payday loans.

The regulator is also scrutinising the rent-to-own sector, which can charge high levels of interest for white goods such as washing machines, he said.

Liberal Democrat leader Sir Vince Cable has called on the Government to implement an election manifesto pledge to adopt a “breathing space” scheme to help people with serious debt problems.

“It would give them the opportunity to apply for legal protection from further interest, charges and enforcement action for up to six weeks, and then offered a statutory repayment plan where appropriate,” he said.

Brexit Secretary David Davis is apparently going one step further and calling on the Treasury to scrap historic student debt, arguing that it is hampering young people from contributing to the economy.

Sources close to the Brexit Secretary told The Sunday Times that “[Davis] would urge the Treasury to start with the answer and look at the financial structures to see if there was a better way for students that doesn’t leave the debt to hang over their entire life”.

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