Q4 2018 insolvency statistics – R3 comments

29 January 2019

Commenting on the Q4 2018 (October-December) England & Wales insolvency statistics (published this morning by the Insolvency Service), Stuart Frith, President of insolvency and restructuring trade body R3, says:

Corporate insolvencies

• Excluding one-off 'bulk insolvency events', seasonally adjusted corporate insolvencies in 2018 rose 10% from 2017. Excluding these one-off events, there were 16,090 insolvencies in 2018.
• Seasonally adjusted corporate insolvencies fell by 9% in Q4 2018 compared to Q3 2018, but rose by 11% compared to Q4 2017.

"After three years of relatively flat numbers, 2018 saw insolvencies creep back up to levels last seen in 2014. The pressure point for businesses most frequently cited by our members is weak consumer demand. People just don't have much spare cash at the moment, reflected in the rise in the number of personal insolvencies also confirmed today. Although recent government figures showed that the weekly amount spent by households has hit its highest level since 2005, much of that expenditure went on housing and transport, with less left over for consumer outlay. This is having a big impact on consumer-facing businesses, such as retailers and the restaurant sector.

"This also spells bad news for businesses at one remove from the consumer, such as manufacturers supplying consumer products, shop fitters, or logistics firms. Every business is part of a network and one struggling business will affect others. R3 research from the middle of last year found that one in four UK companies had taken a financial hit following the insolvency of a supplier, customer or debtor in the previous six months, illustrating the reach and impact of the 'domino effect'.

"Meanwhile, uncertainty around the shape of the final Brexit deal and future EU-UK trading relationship is already forcing businesses to hold off on investment decisions, again affecting their suppliers and customer networks. It has also prompted some companies to stockpile, putting a squeeze on cash flow and reserves.

"An area to watch in 2019 will be public service provision. Businesses, social enterprises and charities in the health and education sectors are being hit by a double whammy: Government funding or subsidies are being cut, while these sectors are also expected to pick up the slack for work that the public sector doesn't have the resource to carry out anymore.

"Government proposals to give itself priority status for repayments in insolvencies may well have a negative impact on the ability of small businesses to finance themselves this year. With uncertainty in the supply chain, many businesses will be seeking to increase their stock levels to counteract this and will require new finance to do so. But if funders are concerned that the Government will take a bigger cut if things go wrong, then lending decisions become much harder.

"Across 2018, R3's members across the UK reported that demand for their services - from advice on turnaround and restructuring processes to formal insolvency procedures - increased, and this has carried over into the start of 2019. We would encourage directors of companies which are finding current market conditions tough to seek out knowledgeable and qualified advice from a professional source. The earlier a company seeks advice, the more options it will have."

Personal insolvencies

• In 2018, there were 115,299 personal insolvencies, an increase of 16% on 2017, and the highest annual total since 2011.
• Personal insolvencies rose 35% from Q3 to Q4 2018, and are 35% higher than in the same quarter in 2017.

"Personal insolvency numbers have been rising steadily every year since 2015, and 2018 was no exception. As banks and other lenders have tightened their credit standards in response to the Bank of England's concerns around consumer over-indebtedness, many people have run out of road. In previous years, the 'helicopter money' provided by PPI refunds, along with generally less stringent lending requirements, helped to paper over the cracks that opened up as a result of a decade of persistently stagnant wage increases, but these avenues look to be closing themselves off. People are having to spend more of their income on housing and transportation, leaving less left over for savings and making budgets more vulnerable to shocks.

"It is notable that bankruptcies and Debt Relief Orders have risen over a year in which, if you look at the headline figures, England and Wales enjoyed record low levels of unemployment, which is something normally associated with fewer insolvencies. While unemployment is low, the nature of employment is much-changed. Working hours can be unpredictable and not necessarily well paid. That said, low unemployment may help explain rising IVA numbers: employment helps give people a platform for the regular debt repayments involved in the procedure.

"Inflation was above the Bank of England's target rate for most of 2018, and although wage growth overtook inflation, there was still a considerable amount of lost ground to make up. For many people it would have been a case of too little, too late. Spending levels were maintained through debt or by using savings, but this is obviously unsustainable in anything other than the short term.

"Savings levels are painfully thin, exposing people to financial upsets. As an illustration of this, recent research from R3 and ComRes found that one in five British adults (20%) would find it somewhat difficult, very difficult or impossible to immediately pay an unexpected bill for an amount as little as £20, without assistance from an external source.

"It's always important to look at the numbers for different types of insolvency procedures, as Individual Voluntary Arrangements, Debt Relief Orders, and bankruptcy numbers each tell us different things. IVAs are often used to deal with consumer debts, but IVA numbers can also be sensitive to changes in the debt advice market and can rise and fall independently of overall personal indebtedness. DROs and bankruptcy are perhaps better indicators of the state of the nation's personal finances, so increases here are concerning. DROs are used by people with low assets and low debts, and show us the number of people for whom even small value debts are completely unaffordable. Bankruptcy is linked to job loss or insolvencies among small and medium-sized businesses and sole traders.

"There are measures being taken by the Government to help people in financial distress. The breathing space for people in debt is due to be introduced in the next few years, and will give indebted people a two-month period free from creditor action to seek qualified advice as to the best way for them to resolve their situation. R3 has campaigned for the breathing space for many years and we are very pleased to see that it is nearing its launch.

"In the meantime, anyone with debt worries - especially if they have recently become more intense - should speak to a regulated and reputable debt advisor as soon as possible, for help and support as they decide on their next steps."