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I am pleased to say that the Under-Secretary of State for Justice, my hon. Friend the Member for Lewisham, East (Bridget Prentice), recently announced in response to the consultation paper “The debt claim process” that in future people in debt would always be offered advice from creditors to help them to avoid court proceedings. I believe that all creditors will be required to give debtors a chance to discuss their problems, and to provide details of people who can give free advice, before legal action is taken. I fear, however, that the advice will be made available only when legal proceedings are already on the horizon. I want people to be given help earlier, so that they do not get into that position.
Too many organisations use our television channels to offer debt consolidation services and other easy ways out of debt problems, and I suspect that many are not being frank with their potential clients. Too few seem to be making it clear that if someone has a debt problem, consolidating the debt without addressing why the problem arose in the first place could well prove disastrous, and could put that person on the slippery slope towards becoming a funt. In my view, someone seeking to consolidate debt could well already have a problem. It is at that early stage that people should talk to someone who will not pull their punches.
Citizens Advice has provided me with a perfect example. A citizens advice bureau in Norfolk reported that a couple owing more than £62,000 had approached a secured-loan company seeking a consolidation loan. They had surplus income of £427 per month, but the repayments were £702 per month—a shortfall of £279 per month. The loan also put the clients into negative equity because they were in a shared ownership scheme with only £10,000 equity after the first charge. That company’s website has a budget planner that asks for figures on income, expenditure and the amount to be borrowed, but the company itself did not seem to use it when making lending decisions. The CAB felt that that amounted to encouraging irresponsible borrowing and I entirely agree. On the subject of advice and awareness, perhaps there should be a financial education programme for people who want to understand their options better or just feel they need some help with learning how to balance their books.
I would also like the Government to review the information that we receive on credit card bills because building up debt on credit cards is often the first step to building up a serious debt problem. I recently noticed that my credit card bill gave the advice—in tiny writing—that if I repaid only the minimum amount, it might take “a long time” to repay the outstanding sum. That is not wrong; given the rate of interest of many store cards, repaying the minimum amount each month could mean that it would take years to repay the debt. Why do we not insist that each credit card bill states the minimum amount to repay each month, plus how much would need to be paid each month to repay the loan in one year, and how much would need to be repaid to clear the debt in two years? That might stop some people getting into trouble by encouraging them to face their debt at a much earlier stage.
The key point that I want to make is that the financial services sector needs to be made to recognise there is a big difference between funts who have been irresponsible and those who have faced up to their problems. Some funts have indeed been financially irresponsible, but
some have been oversold credit or have been unfortunate. Some “funts” have faced their problems honestly, while others have not. There are easy ways to identify those who deserve to be cut some slack and those who do not, but, at present, the system treats people who have used bankruptcy as an easy way to avoid their debts almost the same as it treats those who spend years of their lives repaying as much as they can afford to those to whom they owe money.
I would like those who work to repay their creditors to be offered the incentive of a clean credit record, with no black marks, no being treated as financially untouchable, and no waiting six years for credit blemishes to be overlooked. Such an incentive would mean more people paying more of their debt, so the financial services sector itself would benefit. It would also take advantage of the fact that people going through an individual voluntary arrangement or working through a debt management plan would learn budgeting skills and how to avoid the mistakes that they made earlier in life. Such an incentive would be a matter for the financial services sector, but the Government could encourage it to introduce that voluntarily.
Failing that, there is a regulatory opportunity that would allow the Government to insist on such a reform. The Ministry of Justice is at a very early stage of consultation on the possibility of regulating debt management. The regulatory regime could be stretched to include the treatment of debtors by creditors and a credit repair provision for “funts” who do their best to repay what they owe. At the very least, the consultation could be used to stimulate a review by the industry of the issue and its attitude to people who have faced up to their responsibilities.
Creditors must accept that if they do not agree to reasonable offers to repay debts, but take draconian enforcement action instead, they are piling on the pressure for consumers who can pay and want to do so. People in financial difficulties need support and understanding if they are to deal effectively with their debts. Those who want to be responsible need to be given an incentive, rather than being punished irrespective of what they do.
My right hon. Friend the Minister might not be able to respond to all my points in his speech, especially because there is cross-Government responsibility for these issues involving his Department—the Department for Work and Pensions—the Department for Business, Enterprise and Regulatory Reform, the Ministry of Justice and the Treasury. However, I would welcome a letter from him after he has had a chance to consult his colleagues.
The problem is serious for many of our constituents and it is getting worse by the day. Being a “funt” can mean losing one’s home, or being denied a mortgage or re-mortgage, or even rented accommodation. It can mean not getting a new job, being denied insurance, or not getting a credit card, and thus being denied access to the bargains available via internet shopping. It can even mean being denied a pension policy or savings account. That might be a proportionate response to the behaviour of a feckless few, but it is extreme, even for them. For most “funts”, who I am convinced have learned a lesson and are proving they are willing to do their best to repay their debts, such a response is disproportionate and unfair. I hope that my right hon. Friend and the Government will help them.
7.15 pm
The Minister for Employment and Welfare Reform (Mr. Stephen Timms): I thank my hon. Friend the Member for South Thanet (Dr. Ladyman) for raising this important issue and drawing it to the attention of the House. It is, of course, extremely important that consumers have access to affordable credit for all the reasons that he spelled out. It is also important that credit and mortgage markets are well-regulated, so that lenders lend responsibly, borrowers borrow responsibly and consumers receive appropriate protection.
It is important that we understand the economic context of this debate and the steps that the Government are taking to safeguard financial stability in the UK, and I want to say a little about that before moving on to the direct steps that the Government are taking to address the concerns that my hon. Friend has raised. We are of course seeing global economic turbulence affecting markets right across the world. Problems that began in the US sub-prime housing market have led to a global contraction in the supply of credit in the UK; as one of the world’s leading financial centres, we are no exception. In the light of what has happened, banks have started to take a more cautious approach to credit risk. Lenders trying to raise funds face restricted sources of funding and higher costs for that funding. As a result, lenders are re-pricing risk, increasing the cost of lending, with consequences for UK borrowers.
I need, however, to underline to the House the fact that we are dealing with a completely different situation from the one that we saw in the early 1990s. The employment figures published last week broke the record once again for the number of people in work in the UK—up to 29.55 million, the highest it has ever been. Historically low interest rates and a decade of relatively low inflation remain in place—a point perhaps underlined, rather than undermined, by the degree of attention paid yesterday to inflation going above 3 per cent. The rate of repossessions in 2007 was about a third of the rate in 1991. The Bank of England’s “lending to individuals” data, published just a fortnight ago, show that re-mortgaging rates across the market remain resilient. The Council of Mortgage Lenders reports that
“contrary to popular belief, customers coming out of fixed rates in 2007 and 2008 appear to be managing the adjustment well so far”.
Nevertheless—my hon. Friend has rightly drawn the House’s attention to this—some borrowers are certainly facing problems. We want to safeguard economic stability and fairness, and to make sure that support is in place for households who may need it right now.
We are taking steps to provide stability in the mortgage and credit markets for the long term. In April, the Financial Stability Forum presented to the G7 its report on the underlying causes of recent market turbulence, which proposed appropriate responses. G7 Finance Ministers committed to full, rapid implementation of the report’s recommendations, which require action by national authorities, international bodies and participants in the market. In the UK, for our part, we have committed to rapid implementation, too.
We announced in April that Sir James Crosby would lead a group to advise on options for improving the functioning of mortgage finance markets, working closely with market participants, the Treasury, the Bank of
England and the Financial Services Authority. Sir James is considering a range of market-led initiatives to improve the robustness of securitisation markets in the medium and longer term. He will initially report to the Chancellor during the summer, and he will then present his proposals at the time of the pre-Budget report, later on this year.
My hon. Friend has reminded the House of cases in which borrowers with poor credit histories may not be able to access mainstream borrowing options. He has introduced me—and may well have introduced others in the House—to the term “funt”, which I had not come across before. However, it perhaps rather vividly captures the predicament that people find themselves in. I think that he suggested that 500,000 people a year might find themselves in that position. That sounds a very large number to me, although I do not know.
Where my hon. Friend and I will agree is that, in these circumstances, it is very important that borrowers do not turn to loan sharks. The Government have rolled out a project to close down illegal moneylenders in every region of the country. Those projects should reduce the vulnerability of financially excluded people—or “funts”—to borrowing at unaffordable interest rates and to the risk of intimidation or violence, which too many of them have faced. We are keen that there should be a decent alternative to those illegal sources of credit, so we have supported an increase in the capacity of affordable credit providers in the third sector.
As part of our work to ensure greater financial inclusion we have committed £80 million, to date, to provide extra funding for third sector lenders. That is being delivered through a growth fund, which was launched two years ago and is administered by the Department for Work and Pensions—I think that that is the justification for my responding to this debate rather than any of my colleagues to whom my hon. Friend referred. In Bristol, about 1,500 loans have been made to low-income borrowers from the growth fund, and Hampshire Credit Union has made thousands of loans to people in Portsmouth and it will be expanding to deliver thousands more in Southampton. In December, we announced a commitment by the major retail banks to supporting third sector affordable credit providers, including action to develop new provision for affordable credit in 25 high-priority areas.
My hon. Friend rightly underlined the importance of financial literacy, which the Financial Services Authority has a statutory obligation to promote and takes very seriously. I hope that those in the FSA who are responsible for these matters will want to examine the points that he has made. He rightly says that we could avoid many of these problems if people knew what they were getting into when they were considering taking out some of the products that are offered to them.
On industry action, we have asked the mortgage industry to work on improving its voluntary arrangements for borrowers throughout this period, including those seeking to refinance fixed-rate deals, so that borrowers receive early advice and support. We hope that they will thus be able to avoid landing up in the situation that my hon. Friend has described. We welcome the statement by the Council of Mortgage Lenders that was published on 8 February, which sets out the steps the industry is taking to help avoid repossessions. Those include the following: joint working with debt advisers; proactive
identification of at-risk borrowers; and considering repossession only as a last resort.
Following recent meetings involving the Chancellor, the Chief Secretary to the Treasury, the Housing Minister, the Council of Mortgage Lenders, the Finance and Leasing Association and myself, the industry is committed to reviewing its framework of support, to working with consumer groups, including strengthening its guidance and information for consumers, and to improving the arrears practices of lenders.
The Government have put in place statutory regulation of mortgages and credit to help ensure responsible lending. In 2004, we extended the scope of FSA regulation to cover mortgages. We expect lenders to continue to fulfil all their obligations to borrowers under statutory regulation, so that they are afforded appropriate protections and repossession is considered only as a last resort.
The Office of Fair Trading, which my hon. Friend mentioned, reports to the Department for Business, Enterprise and Regulatory Reform and regulates other consumer credit business. It is there that many of my hon. Friend’s suggestions and ideas should be considered. The regulation of consumer credit is undergoing extensive changes following the Consumer Credit Act 2006, which received Royal Assent in March 2006 and will be implemented by October 2008. The new legislation enhances and updates consumer credit regulation by providing consumers with access to an alternative dispute resolution mechanism via the Financial Ombudsman Service, strengthening the consumer credit licensing regime and abolishing the previous £25,000 limit on regulated credit agreements.
It is important that the regulatory framework remains effective for lenders and borrowers. The FSA and OFT are committed to working closely together to align their approaches on mortgage arrears. The Prime Minister announced in his legislative programme speech that the Government will look at whether further action is necessary to protect borrowers in the second-charge lending market.
Some borrowers will experience financial difficulty, and that is why the Government are taking steps to help to address debt problems, including by providing good debt advice and improving financial capability in the longer term. We recently announced—on top of earlier announcements—a new £10 million package of measures to support home owners who may be facing difficulties with their mortgage. The announcement will also ensure additional debt advisers in citizens advice bureaux and other third sector organisations, and expanded access to free legal representation at county courts throughout England for households at risk of repossession.
I noticed that the briefing from Citizens Advice to which my hon. Friend referred specifically welcomes the funding for additional county court advice desks on mortgage possession hearing days as part of that package. I also join him in congratulating Citizens Advice on the vital work that it does in this area. That welcome is underpinned by the increasing financial commitment that we have made to supporting such work.
As part of the package, we have also strengthened the National Homelessness Advice Service to provide a new
comprehensive debt advice service that draws on the expertise of the two partner organisations, Shelter and Citizens Advice. The package also includes more specialist training for citizens advice bureaux staff and local authorities on debt advice to help families get their finances back on track.
My hon. Friend referred to work in the Ministry of Justice. Following consultation in July 2004, several measures were included in part 5 of the Tribunals, Courts and Enforcement Act 2007. We are introducing an enforcement restriction order to provide those who run into sudden and unexpected short-term problems, and who have realistic chances of recovery in a short period, time to overcome problems without the threat of enforcement, so avoiding running into the problems that my hon. Friend has highlighted. As he mentioned, a consultation on the parameters for those orders ran from January to April this year, and he commented on what the Ministry of Justice said in response.
Dr. Ladyman: My right hon. Friend is right that these measures might stop someone facing legal proceedings, but they will not necessarily stop someone becoming a “funt”. The fact that they have defaulted on some payments can be used against them by the financial services sector when they subsequently come to apply for credit again. As welcome as it is that people are given the advice and help they need to avoid court, I still ask my right hon. Friend to talk to colleagues to ensure that they are thinking about the possibility of putting in place a mechanism so that someone in that position can repair their credit rating after they have sorted out the problem.
Mr. Timms: My hon. Friend makes an interesting suggestion and I will ensure that my colleagues who are responsible for this issue look specifically at that suggestion. He asked me to write to him, but I should probably arrange for the appropriate colleague to write to him. I accept his point of correction. Although the package will in some cases stop people becoming “funts”, it will not invariably do so, and I take his point that we need to consider what more can be done.
My hon. Friend pointed out, and I agree, that the industry needs to play its part in supporting borrowers—both those in difficulty and those who might get into difficulty—so that they have the information they need to make judgments about how quickly to repay debts, or whether to take out debts and loans in the first place. We have therefore called on the mortgage industry to work on improving its voluntary arrangements for borrowers, so that they receive early advice and support. I hope that the industry will consider with interest the suggestions that my hon. Friend has made tonight, as they are the sort of ideas that work well—
The motion having been made at Seven o’clock, and the debate having continued for half an hour, Mr. Deputy Speaker adjourned the House without Question put, pursuant to the Standing Order.
Adjourned at half - past Seven o'clock.
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