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Mr. Mark Lazarowicz (Edinburgh, North and Leith): I am pleased to have secured a debate on an issue as important as consumer debt. I begin by declaring an interest: I am a member of Capital Credit Union Ltd. in Edinburgh, which is an expanding and successful credit union. I hope that time will allow me to talk about the role that credit unions can play in dealing with the issues that arise from consumer debt.
All hon. Members face the problem of debt in their constituencies. For this debate, I was fortunate to receive a briefing from Citizens Advice Scotland, for which I am grateful. I should like to put on record the thanks that I am sure many hon. Members would offer to the staff and volunteers in citizens advice bureaux up and down the country for the good work that they do in our communities.
In its briefing note, Citizens Advice Scotland confirms that debt and in particular consumer debt continue to be the most consistent problems with which bureaux have to deal. The problem is growing. In 200001, Scottish citizens advice bureaux dealt with more than 400,000 new cases, of which just over 50,000one eighth of the totalrelated to debt.
In the two citizens advice bureaux in my constituency, of more than 23,000 inquiries in 200001, an even greater proportion related to debt. In that year alone, the service in Scotland dealt with 160,000 ongoing cases, involving around £70 million of debt. That was an increase of £10 million on the previous year. I have no reason to believe that figures for the United Kingdom as a whole or for any of our constituencies would vary greatly from those for Scotland or for my constituency.
Of course, consumer debt is not new and there is nothing inherently wrong with consumer borrowing.
Mr. David Marshall (Glasgow, Shettleston): I congratulate my hon. Friend on securing this debate. Does he agree that the service provided by citizens advice bureaux is very underfunded, especially in Scotland, where they have to deal with ever-increasing legislation from Holyrood as well as from Westminster? Given that 40 of the 52 forms from the Department for Work and Pensions77 per cent. of the totalrefer claimants to citizens advice bureaux, does he agree that funding of the bureaux should not be left only to local authorities and that there should be direct central funding to enable the bureaux to do their very important work?
Mr. Lazarowicz : I could not disagree with my hon. Friend's strong point. In Scotland, citizens advice bureaux have to deal with devolved legislation as well as UK legislation, so they have a heavy work load and an especially important role to play in their communities.
Consumer borrowing is not inherently wrong. At some stage in our lives, we may all have had a mortgage, credit cards, overdrafts and so on. As a result, we are able to enjoy lifestyles that would not otherwise be possible. Lending and borrowing can make the economy go round. However, the increase in the number of people taking their debt problems to citizens advice bureaux shows that the growing consumer debt
Mr. David Drew (Stroud): This is an apposite debate. Does my hon. Friend accept that one of the biggest problems relating to consumer debt is that people who are already in serious debt may still be chased by companies that should know only too well of such people's difficulties and still offer them finance and credit? We are not talking about fly-by-night credit companies, but about the leading banks, mortgage companies, and so on. What is his view of that problem?
Mr. Lazarowicz : I agree absolutely with my hon. Friend. I was just coming to that point. We are not talking about just a few fly-by-night organisations. We are talking about a need for a culture change in the industry as a whole.
Debt can arise from many causes and, even now, poverty remains a major one. That is why I and most hon. Members welcome the measures that have already been taken by the Government to tackle poverty. Poverty is not, of course, the only reason why people find themselves in debt. The major contributor to the problem is the behaviour of several businesses, big and small, which sell credit and encourage consumers to take out loans.
We all know stories about loan sharks, who prey on the poor and vulnerable in too many of our communities. I include in that category not just the local moneylender, but shops that supply goods at ultra-high interest rates to those who could not otherwise get credit at fair rates, and lenders in the home credit marketdoorstep credit providerswhose annual interest rates are often in excess of 100 per cent. That market is growing and expanding.
In 1999, Provident Financial plc, the largest home credit company, charged its 1.5 million customers a typical annual percentage rate of 164 per cent. and made pre-tax profits of £155 million. In the same year, Cattles plc, which owns Shopacheck, opened 75 new branches. Those companies alone accounted for more than £1 billion of lending to low-income households. If that money were recycled through credit unions, it could be invested in local communities rather than going to the type of organisation that I have mentioned. I welcome the recent Government consultation on tackling loan sharks and proposals to modernise the Consumer Credit Act 1974. It would be useful if the Minister gave some idea of the progress on modernisation.
Mr. Andrew Love (Edmonton): Does my hon. Friend agree that when it is easier to take out a consumer credit licence than open a bank account, something must be up and something must be done?
Mr. Lazarowicz : Absolutely. Nevertheless, as my hon. Friend the Member for Stroud (Mr. Drew) said, it is too easy just to single out a few obvious bad guys, such as the loan sharks, and think that by dealing with them we have dealt with the problem. Some of our biggest and most respected financial institutions are responsible for
We all know from experience about the type of marketing and advertising that goes on. Our daily postbag at home probably contains half a dozen offers of credit at apparently attractive introductory rates. Telephone sales representatives may try cold calling, perhaps with an offer of a financial health check. One finds increasingly while paying bills that banks issue invitations to take out new credit facilities. In shops, too, there might be unsolicited invitations to take out new credit cards.
Most hon. Members have learned to throw junk mail in the bin or politely to decline the offer of whatever colour credit card is available under the latest wheeze of credit card companies. Given our generous salaries, if we get heavily into debt, we at least have some prospect of getting out of it. However, too many people are not in our fortunate position, and there are too many examples of consumers becoming trapped as a result of over-eagerly responding to invitations to take on credit.
I was struck by one example provided by Citizens Advice Scotland. I was told of the case of a 19-year-old woman who received a credit card from a well known high street building society. Accompanying her card were four cheques of £500 made out in her name. We are all familiar with that sort of marketing tool. The 19-year-old was just about to cash the cheques when her mother realised that credit card rates of interest would have to be paid on the amounts. It is not just loan sharks or moneylenders who lend at high interest; the big banks and the financial services industry need to look at what they are doing as well.
In the time available to me, I want to suggest a few ways that action could be taken. First, we must find some way of preventing people from being charged extortionate interest rates on their borrowing. Present legislation allows a court to set aside grossly exorbitant credit agreements, and to substitute them with terms that are fair and reasonable. However, those provisions are rarely used. I think that fewer than 30 cases have been considered in the courts in the past 25 years or so. In only eight of those have the courts actually held that an agreement was extortionate. The Department of Trade and Industry rightly pointed out in its consultation on tackling loan sharks that the provisions are too narrowly defined, and it suggested that the definition of extortionate credit should be changed so that the courts can deal more easily with examples of extortionate interest. I welcome that suggestion, but I think that we could go further.
Mr. Michael Weir (Angus): Does the hon. Gentleman agree that one problem with loan sharks is that there are no written agreements? Agreements are purely verbal, so there is no way for people to go to court to sort out the matter of excessive rates of interest.
Mr. Lazarowicz : Indeed; as I am sure the hon. Gentleman realises, there are many aspects to the problem. The problem of illegal moneylending is, by
The suggestions in the consultation paper on restricting extortionate interest rates are welcome, but I wonder whether we should approach the issue in a more simple and direct way. Why do we not consider simply setting a legally binding maximum interest ratean interest rate capat a certain percentage above the base rate, so that any obligation on a debtor to pay higher interest would be null and void? If my hon. Friend the Minister would not go as far as accepting thatas I suspect may be the caseperhaps we should change the law so that there is a presumption that interest charged above that cap is extortionate. A creditor would then have to justify to the court why an interest rate in excess of such a cap were otherwise fair and reasonable.
Secondly, we must tackle the problem of inappropriate selling and marketing of credit.
Mr. Love : I apologise for interrupting my hon. Friend but I wanted to pick up on the point about a ceiling on interest rates. The argument against it is that companies would gravitate towards a maximum interest rate for a wider range of customers than is currently the practice. Many people would not be able to get conventional credit under those circumstances, would end up going to loan sharks and would be thrown into the hands of the illegal merchants. How does my hon. Friend respond to that?
Mr. Lazarowicz : I would not deny that there are issues that would have to be pursued if a cap were put in place. I suspect that the difficulty of interest rates drifting up towards the cap could be dealt with by ensuring effective competition in the marketplace. To allow lenders to charge annual rates of, effectively, 164 per cent. is wrong, so we should certainly consider a cap that makes such an extortionate interest rate impossible.
We also need to tackle the problem of the inappropriate selling and marketing of credit. I have a simpleperhaps too simplesuggestion. Why not bar the unsolicited direct selling of credit? By that, I mean no more unsolicited direct mail, cold calls from telephone sales representatives and the like. That may seem too radical for manyI am sure that it would represent too much regulation for the hon. Member for Blaby (Mr. Robathan), who speaks for the Oppositionbut we should bear in mind that lots of professions and businesses are restricted in how aggressively they can market their services. For example, solicitors can advertise their services, butcertainly in Scotlandthey cannot phone homes at 9 o'clock in the evening to ask whether somebody has tripped over a paving stone that morning or is feeling poorly and would like to make a will. There are many restrictions on the types of selling and marketing that can be undertaken. Indeed, the House has just passed legislation to restrict tobacco advertising.
I am not suggesting that lenders be banned from advertising. They can advertise in the media or in their shop windows and send information in response to queries or, within reasonable limits, to their existing clients. If people want to get credit, they will have no
Mr. Drew : My hon. Friend has been generous in giving way, because many points need to be made. Does he agree that one of the worst aspects of advertising arises when advertisers who are trying to get people to roll up their debts do not make it clear that they will charge them the costs of that advertising to get them on to their books? I hope that my hon. Friend the Minister will give that urgent consideration, because it is compounding the misery of the very people whom we should be helping.
Mr. Lazarowicz : My hon. Friend makes a valuable point. If my simple suggestion to stop the unsolicited selling of credit does not find favour with the Government or with other hon. Members, I hope that it, together with the concerns expressed during the debate, will at least serve to emphasise to those in the financial services industrybig and small, respectable and not so respectablethat they must get their act together on advertising, marketing and the various ways in which they can push their products.
Thirdly, people need to be more aware of what they are getting into when they take on credit. Interest rates must be transparent and people must know their rights under existing laweven more so if the rights of consumer creditors are to be extended as the Government suggest. Several good initiatives have been introduced by the Government and by many in the financial services industry. I hope that the national debt helpline that is being piloted by the Department of Trade and Industry can be rolled out UK-wide as soon as possible. Nationwide building society provides its customers with a simple table containing details of the key features and costs of its credit card so that customers can more easily compare the costs and benefits of different credit cards. That is an excellent initiative, and I hope that other lenders will follow its example. I do not want to suggest that the work of the major high street institutions is all bad. Many of the big banks do good work in financial education by promoting awareness of the need to manage one's finances sensibly.
More alternative sources of credit at fair rates are required. A crucial role can be played by credit unions, as community-based suppliers of low-interest loans that can release people from the loan sharks and high-interest lenders in the home credit market.
I want briefly to mention a particularly Scottish aspect of the debate that was drawn to my attention by Citizens Advice Scotland. Consumer credit is a matter that is reserved to the Westminster Parliament, but the way in which UK-wide law is applied in Scotland seems to give rise to an anomaly whereby debtors in Scotland get less protection than those in England and Wales. Provisions in the Consumer Credit Act 1974 allow debtors in Scotland, as in England, to apply for a time order so that a court can both consider a debtor's ability to repay their debts and set a repayment figure that a debtor can afford.
Citizens Advice Scotland had begun to use that procedure and had represented clients in court, but the Sheriff Courts Rules Councilthe judicial body that sets down rules in court in Scotlandnow states that because UK legislation is silent on the issue of lay representation, no lay representation can be permitted in a Scottish court on that matter. Indeed, because the legislation is UK law, it states that the matter can only be dealt with by changes to UK primary legislationto the Consumer Credit Act. I am not sure whether that interpretation is correct, but I ask my hon. Friend the Minister to look into the anomaly identified by Citizens Advice Scotland. If legislation is required in the UK Parliament, I hope that she will modernise the Consumer Credit Act.
I have spoken for longer than I intended, but I have taken several interventions. The problems that arise from unaffordable levels of consumer debt affect us all. Too many people find themselves crushed under mountains of debt from which they find it almost impossible to break free. The problem is getting worse and I welcome the Government's action to tackle it, but I urge them to press ahead with their plans for radical reform of the laws on consumer credit and to shift the balance firmly in favour of the consumer.
John Barrett (Edinburgh, West): I congratulate the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) on securing this morning's debate. I agree wholeheartedly with many of the points that he raised. In fact, I wondered whether I should declare an interest as someone who has relatively large debtsa mortgage, a credit card and an overdraft. As he pointed out, consumer debt is not such a problem if one has a regular income and is able to manage one's debt.
In areas of my constituency, house prices are rocketing and few people do not have significant debts. Consumer debt is not a problem for the majority in my constituency, but sadly that is not the case throughout. Areas such as Muirhouse and Pilton, which border the hon. Gentleman's constituency, have high unemployment and deprivation. I regularly see an increasing number of elderly people who are living close to the breadline and young, single parents who are struggling to get by. I recently visited my local citizens advice bureau and sat in on some cases in which, as has been mentioned, debt was a recurring issue. The funding of local citizens advice bureaux is key because they have experts who are able to give advice that people need.
I should like to raise the issue of the constant pressure on people to take on more debt. I must admit that the Liberal Democrat party constantly hounds its members to take up the Liberal Democrat credit card, but that is not a major problem[Interruption.] I believe that the rate of interest is very competitive. People are constantly being put under pressure through not only the post but the medium of television. There are regular advertisements about rolling up debt and somehow replacing it with payment of a lower weekly or monthly amount. Such commercials are often aimed at people who have no job and are watching daytime television. They are given the misleading impression that all they have to do is make a telephone call and their problems will be sorted out. Clearly, we need to ensure that people avoid loan sharks and high rates of interest.
We need to consider the practices of reputable establishments. Some years ago, I held an account with a bank in the United States. Its literature stated that a bank should be more than a source of money; it should be a force for positive change. Frankly, I do not see that among many of our banks, which do not go out of their way to attract poorer customers because they want those to whom they can sell insurance and for whom they can provide more credit and finance.
We must look forward to adequate resourcing of those who are giving expert advice. Protection of the vulnerable is one of the key issues. The way forward is for people to avoid debt if they can. Many cannot manage to live week by week, and providing such vulnerable individuals with access to credit is not the way forward. I look forward to hearing what the Minister says about how we can protect the most vulnerable.
Mr. John MacDougall (Central Fife): I am grateful for the opportunity to contribute to this important debate, and I pay tribute to my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) for securing it.
I recognise that the Government have already acknowledged the issue under discussion. I am advised that the actions that they have taken so far have been supported by the setting up at the end of 2000 of a debt taskforce that has called for clearer and more understandable credit agreements. On 19 March 2001, in answer to a written question, my right hon. Friend the Chancellor of the Exchequer stated:
I recognise the Government's work, and that they have embarked on a massive and complex task. That has been recognised by many of the organisations involved. My hon. Friend rightly paid tribute to the work of citizens advice bureaux, as well as highlighting issues in Scotland.
We must ask what else can be tackled to minimise the scale of the impact of consumer debt. Issues that have cropped up highlight what we need to do: clamp down on lenders who prey on vulnerable consumers; put a stop to irresponsible lending; help consumers who want to settle loans early; protect a greater number of credit agreements and stop the so-called free credit deal sting; enable online agreement; improve the transparency of loan information; and simplify advertising regulations and curb misleading marketing. All of that has been referred to this morning in one shape or another.
The main issue, however, is the hidden enemy: loan sharks who approach vulnerable peopleperhaps those in their younger years with high aspirations, or elderly people who fail to understand what is being presented to them, sometimes in the form of a cheque. Such people are easy prey and can be duped into signing for something for which they cannot deliver the repayments. That worries me greatly.
Much has been done in Central Fife to encourage the use of credit unions and to establish their value as a credible way of borrowing. Someone can try to sell
The issue is not political inasmuch as no one can disagree that such serious problems must be tackled. Consumer debt is a big industry. Total UK consumer debt is somewhere in the area of £700 billion, which is by no means a small figure or one of little concern to the Treasury or us as parliamentarians. The amount of outstanding, unsecured consumer credit in the UK has increased 11-fold since 1979. In August 2000, unsecured credit had reached £122 billion. Clearly, behind it is a certain amount of human misery, which breeds other reactions and must be addressed.
As I said, much has been done. However, I hope that the debate will allow us the opportunity to focus on the scale of the challenge ahead and on the legislation that is necessary to minimise the effect of this serious problem in our society. A solution to the problem of extortionate credit rates lies in effective legislation. Although the issue is complex, such legislation could make a significant difference. It must be accessible to the consumer and help to improve the ability of consumers to make more informed choices from a range of credit options, as opposed to the hard sell option that frequently confronts them on their doorstep.
Mr. Love : The matter is being considered at European level. It is likely that the discussions will result in a recommendation to ban door-to-door selling of credit agreements. Would my hon. Friend agree with that?
Mr. MacDougall : Any measure that minimises the present scandal, in which exploitation is on the wrong side of the equation, must be considered seriously. Clearly, the Government must take the proposal on board and develop a considered opinion on it. My hon. Friend makes a good point, which highlights the need to consider other options, such as the proposal of my hon. Friend the Member for Edinburgh, North and Leith on maximum interest on loans. If that is not acceptable, we must at least appreciate the scale of the problem and try to make changes in addition to the measures that have been taken to minimise effects.
Mr. David Marshall : Will my hon. Friend comment on another insidious practice that is in the small print of some agreements? So-called reputable finance houses, often the subsidiaries of major banks, are used by retail outlets that advertise zero per cent. finance. People who sign such agreements make monthly payments totalling half the amount, leaving one final payment of 50 per cent. of the total debt, which they often cannot make. If they buy televisions, videos or hi-fi equipment for £1,500, for example, they are left with a final one-off payment of £750. If they do not pay it in timethe deadline is also in the small printthey are usually
Mr. Roger Gale (in the Chair): Order. I remind hon. Members that interventions must be interventions, not mini-speeches.
Mr. MacDougall : Members of the public must have more information about their choices and a range of credit options from which to choose. I do not think that anyone in this Chamber could honestly say that they would clearly understand every agreement that they may be asked to sign. We are not ignorant of the problem, yet such agreements would present a challenge to us. How can we expect the citizens of this country to understand the options that are presented to them?
I referred to the need for legislation that prevents the imposition of what I would classify as extortionate credit rates. We have already highlighted the scale of the problem and the work that has been achieved so far, but we have yet to contend fully with that very important issue. I do not know whether we will ever find the absolute answer, but any measures that the Government can take to improve on the work that has been carried out so far would not go amiss. As the Chancellor of the Exchequer has highlighted, there are strong links between debt and poverty and financial and social exclusion. I hope that the debate serves as a reminder that the issue is very serious. It requires serious attention and a continued effort to try to make a difference.
Mr. David Drew (Stroud): I shall keep my remarks as brief as possible, because I know that other hon. Members want to speak. I congratulate my fellow collaborator, my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz). It is good that we have already heard one of the answers to the problems: the growth of the credit union movement.
I pay tribute to citizens advice bureaux. When I am at the annual general meeting of the citizens advice bureaux in Stroud, I notice that, more and more, the discussion is given over to consumer debt. That does not belittle the other problems of housing and employment difficulties, but consumer debt is the problem of our age. Much as it pleases me that through the prudent operation of the Chancellor of the Exchequer we seem to have got a hold on public debt for the first time in a generation, on the other hand there has been an enormous growth
Mr. Andrew Robathan (Blaby): What about the Chancellor of the Exchequer's off-balance sheet debt, which many people are talking about? It is at its highest level ever, and it is growing.
Mr. Drew : I will not take the opportunity to discuss financial prudence in the macroeconomy, but I do want to make the point that the huge burden of consumer debt is growing.
I pay tribute to the citizens advice bureau in Stroud, which is under the managership of Caroline Pym, who is supported by Lindsey Waddington, Ann Horner and Chris Lingarde. They pick up issues with me all the time.
I want to concentrate on a couple of detailed areas and then to consider consumer education, which has not been discussed, even though many people get into debt because of the complexity of the arrangements. First, I return to an issue that has already been raised: without labouring the point, I want to emphasise that what seems to be wrong at the moment is that even the reputable financial companies try to offer more and more debt to their customers. The companies might call it credit, but, in reality, we are talking about debt. We need to recognise that.
I am not going to mention the companies by name because I have not got time, but we all know that they could do more about the situation. When people are in serious debt, companies tend to exact the last penny by imposing additional interest and chasing people. That is the wrong way to handle the situation; indeed, it is reprehensible. When people are in difficulty, there ought to be a point at which they are no longer chased. At the moment, companies offer even more opportunities for people to borrow, which is extraordinary, and then they go after people. That damages those people for the rest of their lives.
When people are at the ultimate stage of not being able to pay back their debt and seek to wipe the slate clean, two courses of action are open to them. They can either seek an administration order through the county court, or they can sue for personal bankruptcy. The problem with the former is that the amount of money that people are allowed to write off through an administration order has not changed since the 1970s. It is still stuck at £5,000, which almost certainly means that, owing to the complexity and level of their debt, more and more people have to sue for personal bankruptcy. My hon. Friend the Minister may want to write to me about that.
Suing for bankruptcy comes at a cost; people must have the money to be able to do it. To us, £250 plus court fees and a petition for bankruptcy may not sound a lot, but if people have no money, it is an added difficulty to raise it, so they go further into debt. We must search for a mechanism whereby people can try to work their way out of that dreadful problem.
In the short time available to me, I want to consider the other side of the matter. One of my constituents, Marie Jennings, who isI hopewell known to my hon. Friend the Minister, has spent a lot of time trying to work through the complexity of consumer issues. She writes regularly for the Daily Mirror, the Daily Mail and other earnest publications, and her starting point is that it is not the fault of the individual that such levels of complexity are allowed to increase. The industry fails to explain, often deliberately, what people need to know. She has spent her lifetime trying to get those points across and I pay enormous credit to her.
Mr. Love : The recent Treasury Select Committee report highlighted the issue of transparency. Does my
Mr. Drew : My hon. Friend puts the matter more succinctly than I could. The nub of what is wrong is that we are encouraging greater complexity instead of simplification and transparency. Marie Jennings has told me many times that achieving the latter is not impossible. It may be difficult due to the myriad of different schemes, but that is up to the industry, the regulators and, therefore, the Government who appoint the regulators. I know that that is not the responsibility of my hon. Friend the Under-Secretary, but the Financial Services Authority needs that to be at the centre of its work in this area.
We have just had the Sandler and Pickering reports. My friend, Marie Jennings, is critical of the way in which they fail to go to the nub of the issue: how to enable people to understand their pension provision, what their pensions consist of, what is happening to them, and so on. That may seem to be irrelevant to consumer debt, but we must look at people's whole-life experience. They get into debt because their financial affairs go wrong not in one area but in multiple areas. If older people are kicked out of a final salary pension scheme on whose income they were relying, they will have difficulties. Marie Jennings has told me many times that we must recognise that consumer education, starting in school and continuing, is essential and possible, but the industry, through the regulator, must take responsibility for that. It is the only way in which to prevent some of the awful situations about which hon. Members have spoken today.
That is the main message that I want to leave with hon. Members. It would be particularly useful if my hon. Friend the Under-Secretary considered it in terms of education and the way in which we deal with specific problems, including the one to which I referred. The problem will not go away; it will increase and it is time that we in this place and elsewhere took it seriously.
Mr. Michael Weir (Angus): Before I was elected, I practised as a solicitor for many years. Consumer debt always caused problems and I often had to go to court to deal with small claims and summary cause cases. I reiterate the point made about the time orders under the Consumer Credit Act 1974. It would be helpful not only to individuals, but to courts if representation were available in such cases. There is nothing more frustrating for a court than to be faced with someone trying to conduct their own case and getting completely out of their depth. It takes up an extraordinary amount of time and goes nowhere.
The citizens advice bureaux give very good advice on these cases. Allowing them to be represented in court would be a major step forward, and should be instigated jointly with the Scottish Parliament. Under the Debtors (Scotland) Act 1987, there is a similar time by which to pay an order, and representation is allowed. There seems to be an inconsistency, which the Minister should examine, which perhaps highlights the complexity of the matter in that it crosses not only Parliaments but Departments.
In its briefing note, Citizens Advice Scotland referred to what it calls the
which, I appreciate, is not directly under the Minister's control. It also says:
It finds that the fund is failing those people, however, because a criterion for receiving the money is the ability to repay the loan. Many people who are in dire need of a loan cannot repay it, so they are turned down for the loan in the first place. Citizens Advice Scotland says that 40 per cent. of applicants are turned down for budgeting loans, 66 per cent. are turned down for community care grants, and 27 per cent. are turned down for crisis loans. Its point is that that drives away many of the people who still need to get the money to doorstep lenders, loan sharks and others, which leads to the problem of debt. I ask the Minister and her colleagues to examine how the social fund may be reformed to tackle those problems, although I appreciate that that does not fall within her remit. As I said, such people turn to unrestricted lenders.
There is also a particular problem in Scotland with in-court advisers, which, again, this Parliament and the Scottish Parliament should tackle jointly. Many courts in England have in-court advisers who can advise people in debt cases, but there is only one in-court adviser in Scotlandin Edinburgh. I ask the Minister and her colleagues to re-examine the social fund in relation not only to consumer credit, but to other forms of credit, as they all affect people.
Mr. Russell Brown (Dumfries): I congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on securing the debate. This morning, we have heard about high levels of personal debt, which, we would all agree, can cause misery for hundreds of people, especially at this time of year in the run-up to Christmas. People are often lured into credit agreements to buy presents on the basis that they receive interest-free credit for a few months. My hon. Friend the Member for Glasgow, Shettleston (Mr. Marshall) described some of the things that can go wrong when people cannot afford to pay for the goods. A one-off payment needs to be made within a given period. When that period expires, the amount due, as he explained, can increase by as much as 30 per cent. of the initial cost, even though a downpayment was made.
In today's society, it is becoming much easier to obtain credit. Regrettably, however, it is becoming more and more difficult to escape the problems that can be caused by debt. In 2000, the citizens advice bureaux in Dumfries and Galloway had 1,930 people on their books who owed approximately £4.5 million in debt. During the following financial year, the advice service handled another £2.8 million of new multiple debt, which resulted in the overall debt figure rising to some £5.8 million.
The manager at my local citizens advice bureau recently gave me an indication of some of the horrendous problems with which people are confronted. I shall briefly mention three of them. She mentioned a client on income support who had an outstanding debt of £12,018 with a high street bank. It had refused its
In another case, a single parent with three part-time jobs had a total weekly income of £84.40 and debts amounting to more than £5,600, including money owed to two banks and the local authority. We must appreciate that people do not have only one debt; they tend to have several debts, which may include council tax payments or rent arrears.
Mr. Drew : My hon. Friend is making an important point. One of the problems in the case of multiple debts is that those who are owed money will not talk to one another, and I regularly hear that the debtor in a case will not talk directly to the CAB. Those complexities add to the confusion and increase the problem.
Mr. Brown : My hon. Friend is right. The various parties will often not talk to one another. I am sure that he and other hon. Members have experienced difficulties helping individuals who have similar problems and are familiar with the standard letter in reply, which says, "Sorry, we cannot disclose any information until we have something in writing from our client."
I have recent experience of two cases. My bank manager may think that I am just hitting high street banks, but, worryingly, high street banks have caused some of the most significant problems. The staff at banks seem to have information at their fingertips, almost at the touch of a button, and some problems seem to flow from the availability of information. In one case, the main breadwinner in a family, the husband, had become ill. The family decided to go to the bank for a small loan to cover a family event. After some detailed discussion at the bank, they were granted the £200 loan that they sought.
A couple of weeks later, the bank contacted the family saying, "We see that you also have a car loan, which you pay through the bank by direct debit. Would you like assistance with that?" The outstanding car loan was for £500 or £600, and the couple decided that it would be a splendid idea to pay it off. They paid off the car loan, increased their monthly repayments, and then the bank telephoned again to say, "It is getting near to Christmas. We realise that you are not receiving any money from your husband's employer. Is he still unwell? Would you like some assistance over Christmas?" In the end, a £200 loan became a £4,000 debt, hanging around the family's neck. It reached the stage when the family had to seek loans from the bank to make their payments to the bank. The situation became ridiculous and the family got out of the mess only when another family member assisted them.
In another case, a gentleman in his late 70s or early 80s, who had worked in a profession for many years, used his experience to provide holiday cover for businesses in a certain sector of the community. On the basis of that work in retirement, he managed to secure a loan from his bank. Regrettably, he contracted a life-
Since summer last year, the Government have taken significant steps and introduced a package of proposals, including increased protection for some of the most vulnerable consumers by clamping down on loan sharkswe have all heard sad stories involving them. Steps have also been taken to try to stop irresponsible lending. I include banks and other high street organisations in that category. Lenders must now consider whether their prospective borrower is overcommitted.
The issue of consumers wanting to settle loans early is important. It is difficult for people to get their minds around it. It is ridiculous that people should face tough penalties for settling early. I suspect that, like me, other hon. Members have dealt with people who have tried to settle a mortgage early and found that the building society wants an astronomical figure to allow them to do so. There should be a clampdown on such practices.
The point made by my hon. Friend the Member for Stroud (Mr. Drew) on educating the public about credit was right. Consumer education needs to be part of structured systems in the 21st century. We live in a consumer-driven society. Regrettably, many people fall foul of the systems in their continual striving to keep up with the Joneses. People suffer at the hands not only of loan sharks but of lenders who are perceived as responsible.
Dr. Vincent Cable (Twickenham): I add my congratulations to those that have been offered to the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz). I do not know whether it was good luck or inspired judgment on his part that led to the debate being held after the release of the recent striking set of figures on consumer debt, but the circumstance prompts me to begin my remarks on a slightly different note from other contributors.
The consumer debt problem can be viewed at a micro, personal leveland rightly, because of its effect on people's lives and because of the working of the consumer credit market for individuals. However, it is also useful to look at the big picture and what is happening in the economy as a whole. There has been striking growth in consumer credit13 per cent.in the past year. We are in the middle of an extraordinary boom in consumer credit, at least as substantial as that of the 1980s.
I understand that in the past five years consumer credit debt has grown by about 55 per cent. In the 1980s it roughly doubled, so we are in the middle of a boom of the sort that last happened when Nigel Lawson was Chancellor, which came to a messy end. One hopes that this time things will not end in the same way. One must ask under what conditions the boom could come to a sticky end. The relevant figures were accompanied by a veiled warning from the Bank of England, in the coded language of its chief economist, that there could well be trouble along the road.
How could the trouble arise? The one thing that makes individual consumer debt unsustainable is unemployment. My hon. Friend the Member for Edinburgh, West (John Barrett) referred to that. As the Liberal Democrat Member of Parliament for Edinburgh, West, he has long-term, secure employment, but many of our constituents do not.
I am forcefully reminded of that when I think about my constituency, which is in many ways a model of the new prosperity. We have virtually no unemployment. House prices have gone through the roof and the prosperity is visible. However, last month, for the first time in seven years, there was a sharp increase in unemployment. People are being laid off on a serious scale by the IT industry and by City accountants. That effect is spreading through the hitherto highly prosperous suburbs of south-west London. The first signs of serious problems are beginning to appear.
What happened in the 1980s will happen now. As people are laid off, their first task is to protect their mortgage. Many of them have heavily over-borrowed. They give first priority to their mortgage payments, but that puts pressure on their other consumer debt, much of which is credit card debt and conventional bank loans. Half of all consumer debt is credit card debt. Such people then find it difficult to escape their obligations, so they borrow in order to finance their borrowings and end up in a distressing cycle.
Although the British economy is in relatively good shape compared with those of other rich countries, recession is rolling in from the United States, Germany and Japan, and compounded by deflation which none of us has experienced because it last happened 70 or 80 years agoit might affect us. A world in which prices are falling is an horrific environment if one is a debtor because the value of the debt rises instead of falling over time, and one gets into a debt trap. I can envisage an alarming situation arising for people who already have high levels of consumer debt.
Mr. Drew : I totally concur with the hon. Gentleman on the macro side. To return to individual cases, job loss is often compounded by relationship breakdown and by illness. It is difficult to deal with a situation in which various forces have come to bear on multiple debt. In such circumstances, people need advice very quickly, but it is often not forthcoming.
Dr. Cable : That is a helpful point. Divorce has been a key factor in personal financial distress and, as the hon. Gentleman says, people need advice. The latest figures from the CAB suggest that there has been a 35 per cent. increase in people seeking financial adviceusually in distress. That is the context of the debate.
I should like to consider some positive ways forward. The hon. Member for Edinburgh, North and Leith seems to be promoting mutuality as a way of dealing with consumer debt. I strongly endorse that and I know of his work, and that of the hon. Member for Edmonton (Mr. Love), on credit unions. Mutuality is a way out of the trap for many who are caught with escalating debt obligations. The problem with credit unions, however, is that although the regulatory environment has
Secondly, as the hon. Member for Stroud (Mr. Drew) has said, there are various ways in which Government and the regulatory agencies can assist with the problem of financial illiteracy. I do not mean that in a pejorative way. We are all financially illiterate to various degreesthe FSA pointed out yesterday that collectively we lose some £700 million a year as a result of not doing elementary things like checking the relative costs of bank accounts and credit. We can all learn. The FSA could help by placing more emphasis on financial education.
The hon. Member for Stroud made my third point too. A lot of problems arise not because of rogue lenders but because of mainstream ones. The problems with banks and credit card companies are real; they often charge more than they should. I always raise the following matter in debates relating to the financial sector, but in the interests of teasing the Minister, I still ask what is happening to the Government's proposals to deal with the banking system. Three years ago, a report suggested that the cost of credit was too high. The Government have made helpful suggestions on business lending, but there has been nothing about bank lending and no follow-up on the Cruickshank report. The regulation of the payment system is still out in the ether. All those things affect the cost and availability of credit.
Where do the Government stand on the credit card market? It has been argued that credit card interest rates are simply too high. The effective rate of interest is 15 to 20 per cent. in an environment in which the actual interest rate is 2 to 3 per cent. That is a high cost of credit, and the interest is often not transparent. I know that the matter has been considered by the Office of Fair Trading, but are the Government satisfied that the credit card market is working effectively and in the interests of consumers, bearing in mind that more than half of consumer debt is credit card debt? There are big questions to be asked about banks and credit cards.
Most hon. Members have mentioned non-status borrowers and non-status lenderscompanies at the fringes of lending. I share many of the concerns that have been expressed, but it is important not to stereotype all companies in that line of business. Moneylenders are not necessarily a bad thing; they exist because the banking system fails and because people who cannot get credit from mainstream banks are bound to turn elsewhere. Some moneylenders are responsible and conscious of the fact that they deal with vulnerable people, but many are outright crooks. We must acknowledge that we are dealing with a spectrum of companies with different standards of integrity.
Certain practices are, however, clearly unacceptable. The hon. Member for Dumfries (Mr. Brown) mentioned the obvious and especially bad example of individuals who are penalised for trying to repay loans early. There are also the classic free-credit scams. People buy a washing machine on free credit, but incur penal interest rates if they miss any of the instalments by as much as a day. Their cheque or giro may have taken seven days to clear, but the credit company takes no account of that and is happy to impose penal interest rates. Other
What does the Minister think is the best way forward? How should we deal with the many malpractices that have been highlighted in the non-status lending market? There seem to be various options, and the OFT has considered the issue. The Enterprise Bill, which recently went through the House, will give the Government new powers to make stop-now orders. How many practices could be dealt with in that way? Will it be necessary to introduce legislation to update and strengthen the Consumer Credit Act 1974? I do not know the answer, and I am interested to hear how the Minister would deal with abuses that we all recognise as real and that clearly need attention.
Mr. Andrew Robathan (Blaby): Like the hon. Member for Twickenham (Dr. Cable), I shall focus on the macroeconomic causes of the increase in debt and on what the Government can or cannot do about it.
As the hon. Gentleman said, this debate is timely. The headline on the BBC online news at 10.16 yesterday was "UK shoppers build up record debt". The accompanying article noted:
It added that the level of debt was
Similarly, mortgage lending has surged.
Like the hon. Member for Edinburgh, West (John Barrett), I should disclose a small interest. I, too, feel crushed by a mountain of debt, because I have a distressingly large mortgage. However, that was my choice and, like all hon. Members, I am privileged to have a regular income and relative job security. It is about two and a half years to the next election, so I will not take out any debts that extend beyond that time. I address that remark to every hon. Member, because no one can be certain in the game of politics. None the less, we are relatively privileged. Other people have limited or irregular incomes, and many suffer the problems of consumer debt.
Like other hon. Members, I shall briefly quote NACAB Its annual report states:
We all have tremendous sympathy with those who plan their lives reasonably but who are struck by job lossperhaps as a result of illnessand whose lives fall apart. One third of those surveyed owed more than £10,000.
Sue Beaumont runs an excellent citizens advice bureau in Lutterworth, in my constituency. It gives me a good service, and I hold my advice sessions there. Sue Beaumont also keeps me well briefed on issues such as this.
I turn to another point that the CAB mentioned: in September 2001, there was £1.2 billion of unsecured consumer debt. That is an enormous problem and its
The net debt positionthe difference between total saving and total borrowingis the important and alarming factor. According to the figures from the Bank of England, the savings ratio has fallen to 3 per cent. As recently as five years ago, it was 10 per cent. Everybody in this Chamber believes that individuals are responsible for their own actions; they make choices from which they may or may not benefit. I do not think that anyone believes that the state is in the business of bailing out people who have become over-indebted. However, I think that we would also say that, notwithstanding individual responsibility, the Government are not absolved from their duty to create and maintain the right incentives so that individuals are neither encouraged to borrow too much, nor discouraged from saving too much.
The Government have discouraged savingsan issue on which I take the macroeconomic position. That is why the savings ratio has fallen. They abolished tax-free TESSAs, replacing them with less generous ISAs, which are a simple way of saving that many have taken up. The taxing of pensions through the abolition of the advance corporation tax credit has taken £5 billion a year out of people's savings.
We are now enduring a succession of leaks about how pensions will be less attractive in futurefor instance, the reduction of the tax-free lump sum that people may take out. That is another discouragement to saving. The Government are so proud of their spending plans, though we now know that tax risesperhaps up to £20 billion-worthmay be required by as early as 2006. That means that people's incomes and savings will be taxed further.
People are beginning to feel that no matter how carefully they try to save their moneyin a bank account, on the stock market or in a pension fundit will be taxed again. That is at the root of why the savings ratio has fallen. Individuals are therefore spending money, running down savings and amassing more debt, because they fear that the Government may take the money off them. The problem is not that people do not want to provide for their futures, but that the Government have not made it worthwhile for them to do so through personal savings. People are therefore spending money in a way that is traditional in this country: investing in the property market. The result is a debt-fuelled property boom, as the Bank of England identified, which is in danger of over-heating. We must all be concerned about that.
Through the Enterprise Bill, which I think the House is finally discussing again this evening, the Government plan to make bankruptcy easier. That will exacerbate the problem. Commenting on the Bill, the Institute of Chartered Accountants in England and Wales pointed out that the incidence of bankruptcy arising from consumer debt, as opposed to failed entrepreneurship, is rising. The institute argued that to reduce the bankruptcy period to 12 months will encourage consumers to embark on feckless financial behaviour. It stated:
Other hon. Members have mentioned the problems that confront individuals, and perhaps that is the basis on which the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) initiated the debate. I was appalled by the story told us by the hon. Member for Dumfries (Mr. Brown) about a high street bank encouraging a customer to get into such debt. That was plainly irresponsible. We know about predatory lending at high rates to poor people. We all have constituency cases of that sort. I would not necessarily describe such people as financially illiterate, but they may not be as privileged as we are, and may not have had a decent or reasonable education with some understanding of maths. However, they are plunged into debt with little hope of getting out of it often because of ghastly loan sharks. The credit unions can do a good job of helping such people, and the citizen advice bureaux do a good job in helping them to reschedule their debts.
The other, more difficult issue is the bombardment from credit card companies, which encourages debt by offering over-generous introductory rates. That could be considered a demonstration of how successful and competitive the consumer credit market is, but I think that anyone who pays debt on a credit card is foolish, because the annual percentage rate on such debts is higher than almost anything else. Nevertheless, I understand that the average credit card debt is in excess of £500 per card.
I have great sympathy with the points raised, particularly those by the hon. Member for Edinburgh, North and Leithfor instance, about the encouragement caused by the advertising of unwanted offers. I do not receive unsolicited junk mail because I am registered with the mailing preference service, which I recommend to everyone, including to my constituents. However, that does not get us away from the problem. I am generally against banning things. I am generally against banning unsolicited mail, but the Government have taken on board the fact that that some practices are unhelpful and should be discouragedif not more.
I thought that the hon. Member for Stroud (Mr. Drew), with an intervention from the hon. Member for Edmonton, made a good point about the need for transparency and simplicity in offers. If one does not have the wherewithal to understand thingsnot every one does, and not all our constituents are as fortunate as usone can be trapped by the headline offer. Those who do not understand the small print often end up in
Mr. Deputy Speaker (Sir Nicholas Winterton): In calling the Minister to reply to the debate, may I congratulate her on her stamina in sitting through two full debates this morning.
The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson) : Thank you, Mr. Deputy Speaker, although I must add that colleagues have joined me.
I first congratulate my hon. Friend the Member for Edinburgh, North and Leith (Mr. Lazarowicz) on being selected to lead this debate. I am glad to have the opportunity to say a few words in response because personal debt is on the increase. Indeed, hon. Members have commented on the fact that we read of it almost every day in our newspapers. The nation is increasingly using credit facilities, but the majority of the population do so successfully and can cope with their repayments. It is the use of credit as a toolan enablerthat is increasing, and credit is a growing part of our day-to-day lives, but most of us can manage our loans or other credit without difficulty.
Borrowing can be a useful tool; it can help households to smooth their incomes over time, and such debt is not necessarily a problem. Manageable debt is not the same as unmanageable over-indebtedness. Debt becomes a problem only if people cannot afford the repayments, and when that happens it turns into over-indebtedness. Such debt has a cost. It has an impact on people's lives, and a cost to industry in terms of outstanding loans and goods not paid for.
We need to ensure that all consumers can manage their credit effectively. The Government want to build a nation in which all consumers understand that it is important to be able to master their finances and know how they might achieve it. People need to be able to make appropriate decisions about their finances and understand the choices open to themand their implications.
Ultimately, individuals have a responsibility to manage their own finances effectively, but the Government's role is to empower them to do so. We need to be able to create the right regulatory framework to facilitate a competitive market environment and ensure appropriate consumer protection. My hon. Friend rightly pointed out that consumers need to be fully aware of what they get into when they take credit. One way in which we might help consumers is to consider how we can address the amount of small print in credit agreements, and identify ways in which lenders can minimise it and make such agreements easier to understand.
We need to ensure that individuals are financially literate. In doing so, we need to enable consumers to make informed judgments and take effective decisions. We must ensure that the appropriate generic information on financial management and products is available to them. Also, we have a role to play later in the debt cycle in dealing with over-indebtedness when it
We want to ensure that the Government's many initiatives that are designed to empower the sensible use of financial services are joined up, and that as a Government we always work in partnership with consumer groups, the voluntary sector and the credit industry to ensure that we get things right. I join several of my hon. Friends and other hon. Members in paying tribute to the work of citizens advice bureaux, National Debtline and others that provide invaluable advice and assistance to consumers with debt problems.
I want to address the debt statistics. Although I do not deny that there are some concerns, hon. Members' worries may be unduly out of kilter with the overall debt environment. Although the sum of money owed is clearly rising, as are the number of calls to citizens advice bureaux, the number of accounts in arrears is equal to that in some previous years. County court judgments are falling. The percentage of accounts in arrears for one to three months was lower in July than it was in November 1996. I could give other figures, but I shall not spend time on them. The facts suggest that we use more credit facilities, but not necessarily that consumers are in general increasingly over-indebted. That is not to minimise the problems of over-indebtedness and the difficulties that several hon. Members have set out in persuasive detail.
The immediate question raised today is about irresponsible marketing. Two years ago, the Government set up an over-indebtedness taskforce to examine credit industry marketing techniques, among other things. I published the taskforce's first report in July 2001. At that time, the taskforce recommended that all relevant trade associations should either agree a general code of practice on marketing credit or develop their existing codes to cover best practices by no later than March this year. The taskforce agreed that best practice included, among other things, not giving the impression that easy credit was readily available and encouraging consumers to consider fully whether they could afford repayments. It concluded that the Office of Fair Trading should ensure relevant principles of marketing best practice when endorsing credit industry codes. The taskforce was reconvened this summer. It reviewed the progress of industry codes since its first report, and I expect to receive its second report soon.
An additional recommendation of the taskforce in 2001 was that a DTI working group, which includes representations from the credit industry, regulators and consumer groups, should be set up to examine specific marketing techniques. Those include the sending of unsolicited, pre-approved loansthey have been much mentioned by my hon. Friend the Member for Edinburgh, North and Leith and other hon. Memberscredit card checks and overdraft facilities. The marketing techniques working group met several times between autumn 2001 and summer 2002. Its recommendations have been considered by the reconvened over-indebtedness taskforce.
The 2001 report also recommended a review of advertising regulations as part of the review of the Consumer Credit Act 1974, which hon. Members have mentioned. I am proposing to consult on reforming advertising regulations in the spring, with the aim of
I turn to one further aspect of over-indebtedness. I refer to the performance and innovation unit's report, "Lending support: Modernising the Government's use of loans", which recommended a review of Government policy on over-indebtedness. The review, which is co-ordinated by the DTI, will investigate the demand for debt advice and financial literacy programmes. It will clarify the roles and responsibility of Government Departments on over-indebtedness, including the role of the social fund, which was mentioned by the hon. Member for Angus (Mr. Weir). It will make recommendations on future Government policy on reducing over-indebtedness.
The Government have a key role to play in ensuring that the market framework is right and that there is the right regulatory framework to foster a competitive and innovative financial services industry with proper consumer protection.
As hon. Members are aware, I have undertaken a radical shake-up of our consumer credit laws, which are now some 30 years old. The review of the Consumer Credit Act will ensure that it is up to date and relevant to today's modern environment, and will deliver the Government's manifesto commitment to improve protections against loan sharks. I have already consulted on increasing or removing the Act's financial limit, and I expect to publish our response to the consultation shortly. Before the end of the year, we will publish our proposals for allowing credit agreements to be made online. Most crucially, improvements will be made to the consumer credit licensing regime to make it more focused on enforcement and on strengthening consumer protection against extortionate credit of the kind that hon. Members have described.
I agree with my hon. Friend the Member for Edinburgh, North and Leith that it is too easy to get a credit licence. As part of my review of the licensing regime, I am also considering introducing a fitness test for applicants and an increase in the licence fee to enable the Office of Fair Trading and local trading standards departments to undertake effective enforcement in the marketplace. I shall consult on that issue before the end of the year.
As for legislating on loan sharks, I expect to make legislative changes next year. How that will be achieved will depend on the outcome of consultations that will be undertaken this year and early next year, but I expect some of those changes to be made through secondary legislation or through regulatory reform orders.
On the question of whether the big financial institutions are equally to blame for getting people into debt, I do not think that interest rate ceilings are the best way in which to deal with extortionate credit. The National Association of Citizens Advice Bureaux concluded in a report entitled "Daylight Robbery" that a ceiling rate could not operate effectively in the United Kingdom. I shall consult shortly on toughening the protections under the Act against extortionate credit, thereby making it easier for consumers to ask for the agreements to be re-opened. That will tackle the
Citizens advice bureaux do an excellent job in helping vulnerable consumers with debt and other problems. The Government give significant financial support to the service through a grant to NACAB, which amounted to nearly £17 million last year. Individual bureaux provide a local service, however, so it is right that they should be funded locally to provide services appropriate to their local communities.
My hon. Friend the Member for Stroud (Mr. Drew) mentioned the role of financial education and literacy. There are many issues to consider, not least that some 7 million adults in Britain have literacy skills below those expected of the average 11-year-old. An even greater number have a big problem with numbers. Research shows that adults with the poorest skills are those least likely to have savings and investments and those more likely to admit to being in debt. That is why we are working to improve financial literacy and to ensure that consumers have easy access to information. Students have the opportunity to be taught personal financial education in school through key stages 1 to 4 in the school curriculum. An adult basic skills agency is working on financial literacy and basic skills and we are working with the FSA in the ways that hon. Members mentioned.
May I conclude by drawing attention to work being done
Mr. Deputy Speaker : Order. I regret that the Minister will not be able to complete her speech because time is up. We thank her for her reply, and we come to the next debate.