7. Drawing up a financial statement

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Debt Advice Handbook 14th edition

7. Drawing up a financial statement

• The common financial statement
• The standard financial statement

A financial statement is an essential document. It summarises information in a standard form and allows you to present this to a creditor (or court) in a structured way. A carefully drawn-up financial statement is probably your most important negotiating tool, as it forms the justification for any repayment proposal as well as for any request for non-payment.

A financial statement should present a sufficiently clear and complete picture of the individual (or family), her/his income and expenditure, details of her/his creditors and whether there is any surplus income with which to pay those creditors. It must be based on a true and accurate assessment of the client’s circumstances, and any offers made must be realistic and sustainable. Provided it is stored electronically, it is easy to amend the statement as circumstances change. It can also be a useful budgeting tool for the client as, in many cases, it may be the first time s/he has reviewed her/his income and expenditure.

A financial statement based on either the income and expenditure of a single person or the joint income and expenditure of the client and her/his partner should be fairly straightforward to prepare. More care is needed if it is based on the individual income and expenditure of a client who is a member of a couple. You may need to look at the household budget as a whole to get a clear picture of how things are arranged between the members of the household, rather than just splitting figures 50:50, or apportioning them on some other basis, as a matter of course. The financial statement should always reflect what happens in practice. For instance, if the client pays all the household bills from her/his own income and contributions from other members of the household, the financial statement should be drawn up on this basis. However, in many cases it is not possible to identify who pays what because all income is pooled. In such cases, expenditure should be apportioned proportionately to income.

The Financial Conduct Authority (FCA) recommends using the ‘common financial statement’ (even though it is no longer in use) or an equivalent or similar statement.1FCA Handbook, CONC 8.5.2G Many agencies now use the standard financial statement, which replaced it (see below). If an agency does not use this, FCA guidance recommends that the format of any financial statement sent to creditors should be uniform and logically structured in a way that encourages consistent responses from creditors and reduces queries and delays.

Advisers should use all the information from the previous stages of the debt advice process outlined in this chapter when preparing the financial statement. It should include:

•the basis on which it was prepared. For example, ‘This financial statement has been prepared on the basis of information submitted by:

Mr A Client

123 High Street

London SW1 1ZZ’;

•the members of the household whose income and outgoings are being considered together;
•a breakdown of all the income for the individual or household;
•a list of expenditure under the headings used in Stage five plus expenditure to deal with priority debts. Certain types of expenditure may be best to combine – eg, cigarettes are probably best included in ’other household items, toiletries and food’ rather than on their own. No expenditure is shown for debts other than those that have been defined as priorities;
•a comparison of income and expenditure. In some cases, the financial statement may show there is more income than expenditure. Such excess income should be calculated in the statement and described as available income. If expenditure already equals or exceeds income, the available income should be stated as none. In many cases, expenditure exceeds income. This may be because amounts have been included that are not actually spent, but are what should be spent if the client were able to do so. Whatever the reason, be prepared to explain if challenged by creditors.

Explain in a covering letter any unusual items of expenditure and any special circumstances or needs – eg, whether any member of the household has a disability.

It is good practice to ask the client to check and sign the financial statement to confirm that it is accurate to the best of her/his knowledge.

 

1     FCA Handbook, CONC 8.5.2G »

The common financial statement

The common financial statement was an initiative of the Money Advice Trust and British Bankers’ Association and has been replaced by the standard financial statement. The common financial statement was withdrawn on 1 April 2018.

The standard financial statement

On 1 March 2017, the standard financial statement was introduced to replace the common financial statement.1See also G Harvey, ‘Standard Financial Statement’, Quarterly Account 43, IMA

The standard financial statement was developed by the Money Advice Service in conjunction with major advice providers and creditors to provide a universal income and expenditure statement and a single set of expenditure or spending guidelines. The spending guidelines are updated on the first Monday in April each year. The aim of the standard financial statement is to bring a greater degree of consistency to the debt advice process and for it to be accepted by a broader range of creditors than accepted the common financial statement – eg, the Insolvency Service. The standard financial statement consists of:

•a budget form containing a detailed list of income and expenditure;
•a two-page financial statement summarising the information obtained from the client and recorded in the income and expenditure sheets;
•standard spending guidelines for three sets of expenditure (communications and leisure; food and housekeeping; and personal costs). These are known as ‘flexible costs’, and the ‘spending guidelines’ are those which are considered reasonable for particular types of household;
•a detailed user guide, including a checklist of the types of expenditure that can be included in the flexible costs categories;
•a requirement for agencies to obtain a membership code number, which must be entered on the statement. Agencies can obtain this by completing an online application form and agreeing to the standard financial statement code of conduct.

The main differences between the common financial statement and the standard financial statement are the following.

•There are more specific fields (eg, there is a separate category for health costs), which largely replace the ‘Other’ category in the common financial statement and which should provide greater transparency.
•The common financial statement categories which had ‘trigger figures’ were ‘travel’, ‘housekeeping’, ‘phone’ and ‘other’. The standard financial statement only has three categories with ‘spending guidelines’: ‘housekeeping’, ‘personal’ and ‘communications and leisure’; consequently, some items of expenditure now fall into different categories.
•There is a separate ‘savings’ category, which allows the client to save up to 10 per cent of her/his available income (ie, the amount available to offer to creditors) up to a maximum of £20 a month (for both single people and couples). Note: the Insolvency Service debt relief order team has confirmed that it will not accept a savings element as an item of essential expenditure and standard financial statement guidance states that payments to priority creditors should take precedence over savings.

If the client’s expenditure exceeds the guidelines, advisers are required to provide a ‘meaningful’ explanation to ‘enable consideration of exceptional circumstances’. Creditors have committed not to challenge financial statements where expenditure falls within spending guidelines and to accept an adviser’s reasonable explanations, unless they have reasonable cause to believe that the client’s financial statement may be incomplete or inaccurate. The Standards of Lending Practice and the Finance and Leasing Association Lending Code (see here) state that if an offer of payment is made via the standard financial statement, this should be used as the basis for pro rata distribution among the client’s creditors (The Standards of Lending Practice) or as the basis for negotiating a repayment arrangement (Finance and Leasing Association Lending Code).

 

1     See also G Harvey, ‘Standard Financial Statement’, Quarterly Account 43, IMA »