6. Drawing up a financial statement

Newer version available

There is a newer version of this publication available:
Debt Advice Handbook 15th edition

6. Drawing up a financial statement

• Standard forms of financial statement
• The common financial statement
• The standard financial statement

Preparing a financial statement is an essential part of the debt advice process. The document presents financial information in a standard form and allows you to communicate that to a creditor (or court) in a structured way. A carefully drawn-up financial statement is probably your most important negotiating tool, because 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 the statement is stored electronically, it is easy to amend the financial statement as circumstances change. If there is more than one version of the financial statement on the case file, it should be made clear which is the current version. The financial statement can also be a useful budgeting tool for the client, especially if it is 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 is 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. 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. It might not be possible to identify who pays what because all income is pooled. In such cases, expenditure should be apportioned proportionately to income.

Standard forms of financial statement

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. 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:

•client details;
•whether the statement includes income from other household members;
•a breakdown of all the income for the client or household;
•a breakdown of essential expenditure (it is acceptable to pool certain items of expenditure together. Cigarettes could be included in the amount for other household items rather than listed separately);
•payments towards priority debts; and
•a comparison between income and expenditure.

If income exceeds expenditure, that is available income for non-priority creditors. If expenditure exceeds income, there is no available income for non-priority 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 a FCA requirement that clients confirm accuracy of financial statements before they are sent to creditors. Therefore, 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.

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

Alert: For the first time, the Money and Pensions Service (MaPS) (formerly the Money Advice Service) has carried out an in-year review of its spending guidelines. Less than three months after the guidelines were updated, new figures take effect from 20 June 2022. This is due to the fact that the increase in the cost of living has caused inflation - as measured by the Consumer Prices Index (CPI) - to to rise more than 5% above the figures used for the regular annual review.

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 is available at sfs.moneyadviceservice.org.uk.

The standard financial statement has some differences from the common financial statement. The standard financial statement has more specific fields to replace the ‘other’ category. There are different categories for spending guidelines and a new ‘savings’ category, allowing the client to save up to 10 per cent of his/her available income up to a maximum of £25 per month (£20 per month prior to 4 April 2022).

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 when 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 »