| UK report Damon Gibbons, Debt on our Doorstep |
Introduction
The UK has experienced a significant growth in the level of consumer and mortgage lending since the deregulation of financial services in the 1980’s. Both types of credit are now avail-able from a myriad of providers, including banks, the remaining few mutual building societies, and specialist lenders – including specialist sub-prime lenders and those engaged in preda-tory lending.
At the end of February 2006 the total UK personal debt was £1,174bn. This has grown by 10.3% over the previous 12 months, and comprises of total secured lending of £981.8bn (up 10.6%) and consumer credit lending to individuals of £192.6bn (up 8.7%).
Average household debt in the UK is approximately £7,796 (excluding mortgages) and £47,546 including mortgages. The average owed by every UK adult is approximately £25,195 (including mortgages).
Average consumer borrowing via credit cards, motor and retail finance deals, overdrafts and unsecured personal loans has risen to £4,131 per average UK adult at the end of February 2006. This has grown by 52% in 5 years.
The ratio of debt to income has been increasing significantly over the past 10 years, as indi-cated in figure 1, below, and now stands at 150%.
Despite this, the Government has been at pains to point out that the debt to wealth ratio – which takes account of property values and the level of financial assets such as savings – has not increased significantly, largely because of the recent buoyancy of the UK housing market. In effect, the increase in house values has offset the increased level of indebted-ness taken on by UK households.
However, in the past six months, mortgage advances have been increasing in excess of house price inflation, and financial assets (savings) of households have been reducing whilst unsecured consumer credit lending has continued to grow. The net effect of this situation is a reduction in the net wealth of UK households as a whole over the latter period.
It is also clear that UK households are now more sensitive than ever to movements in inter-est rates – with the knock-on impact that these have on the level of mortgage repayments and the capacity of households to service their current debt levels.
There are also signs that increasing numbers of households are experiencing financial diffi-culties. The numbers seeking relief under the insolvency systems (bankruptcy and voluntary arrangements) has increased by 46% on the same period last and has been coupled with a rise in the numbers of mortgage repossession actions, although these remain at historically low levels as expected during a period of low unemployment.
The levels of growth in consumer credit, and a number of highly publicised instances of indi-vidual over-indebtedness that have led to suicides, have created a pressure on the Govern-ment to act against ‘irresponsible’ lending. In particular, the Government is working with len-ders in the mainstream sectors to improve the sharing of data so that assessment can be made of borrowers’ complete indebtedness before loan approvals are made. However, this is not a legislative requirement at this point, and progress across the industry has been slow.
Sub-Prime and Exclusion from Credit
The loss of many homes in the 1990’s caused many people to acquire impaired credit rat-ings, and this has fuelled a growth in sub-prime lending. There have been a number of US lenders moving into the UK market as a consequence (Capital One, Citibank) and most re-cently Deutsche Bank announced that it is to establish a sub-prime mortgage lending busi-ness (‘db mortgages’) in the UK.
The scale of the sub-prime market has been estimated at £16bn per annum but this covers everything from retail credit, pawnbrokers, payday lending and home credit, and also in-cludes sub-prime mortgage lending, and does not distinguish between genuine sub-prime credit that fairly reflects increased default risks or more predatory forms of lending.
As a recent report, focused on sub-prime mortgage lending concluded,
“…sound evidence on the size of the sector, and the distribution of lending across a range of purposes and individual characteristics, is not available ”
and there is a great need for improved monitoring of the sector. This is also true in relation to the unsecured sub-prime market.
A much greater level of information is known about the extent of exclusion from financial ser-vices, with the Treasury reporting in 2004 that 1 in 12 people in the UK did not have access to a bank account of any kind, and with concerns raised that exclusion from mainstream cre-dit was leaving people reliant on the ‘alternative’ credit market where interest rates over 180%APR were routinely being charged.
The Government has attempted to address this problem by working with the banking sector to provide access to basic bank account facilities. These provide consumers with direct debit facilities, but not with overdraft credit. The Financial Inclusion Task Force is monitoring pro-gress towards take-up of these accounts, but a recent Treasury Select Committee inquiry expressed concerns that many banks were not marketing these effectively and that the vol-untary nature of the agreement between Government and banks was proving inadequate in this respect.
Access to credit from social lending institutions is also problematic. Total lending from Credit Union and Community Development Finance Initiatives amounted to less than £450 million in 2004/05, and despite the announcement of a £38 million growth fund from the Government, this sector is unlikely to be of a sufficient scale to provide the challenge required to predatory lenders.
Key Recent Legislative and Regulatory Developments
The UK Government has recently passed a new Consumer Credit Act, which introduces changes to the licensing requirements and processes for lenders – including a need for them to lend ‘responsibly’. The guidance on what constitutes ‘reponsible’ lending is currently awai-ted from the Office of Fair Trading.
The Act also outlaws ‘unfair credit relationships’, although again these have not been defined at this stage. The intention is to make it easier for borrowers to challenge unfair agreements than was the case under the previous legislation which referred instead to ‘extortionate credit bargains’ and which had been ineffective. Borrowers will be able to apply for investigations by the Financial Services Ombudsman scheme rather than go to court to obtain redress. Attempts to include a power for the Government to impose interest rate ceilings in non price competitive sectors of the market were not successful, and it remains to be seen whether or not the new test will allow borrowers to challenge high priced credit effectively.
The Enterprise Act 2002, has widened the powers of the Office of Fair Trading to investigate markets that appear to be failing consumers, and to refer cases to the Competition Commis-sion for full inquiries. There has been an increased focus on the financial services sector recently with payment protection insurance schemes, the home credit industry, store cards, and credit card default being investigated. The OFT is able to fast track complaints made by designated consumer bodies, ‘super-complainants’, such as the National Consumer Council (NCC) and Citizens Advice. This has worked well to date with the NCC submitting a com-plaint about the Home Credit industry, and Citizens Advice submitting a complaint about payment protection.
A voluntary code of practice has been in operation amongst banks, ‘The Banking Code’, for a number of years now, and an independent ombudsman monitors compliance with this. Ho-wever, the code has been very weak in some areas – notably concerning default charges – stating only that banks will be transparent in bringing charges to customers’ attentions, and not that they will ensure that default charges are not made in excess of the actual losses that are caused. More recently, the OFT has expressed the view that many credit card default charges are excessive and should not exceed £12 – the average is currently around £20, and that this is probably also the case in relation to other charges concerning overdrafts etc.
Mortgage lending, Banks and most recently Credit Unions are regulated by the Financial Services Authority not the Office of Fair Trading, and the FSA also has responsibility to im-proving levels of Financial Literacy – there are now moves to ensure that financial literacy is incorporated into the mainstream educational system and work is ongoing in this respect but has been well supported by the financial services sector.
There are no formal obligations on banks to disclose information on the extent of service provision or on lending patterns. Although credit scoring rules state that the place in which a borrower lives should not, of itself, give rise to a reduced credit score, in reality there is no way that the performance of banks can be tested in this area as there is no publicly available data.
Summary of Key Points
• The considerable growth in consumer credit lending in the UK has not been accessi-ble to all, and 1 in 12 people remain excluded from banking services.
• The market is therefore segmented, between a competitive mainstream and a less price competitive sub-prime, with predatory lenders also able to operate and charge usurious rates of interest to the poorest;
• There is evidence of a lack of price competition in those sub-prime and alternative lending sectors of the market that used by people on low incomes, and using compe-tition law to investigate this and provide remedies may be effective.
• The social lending sector in the UK remains small and current proposals will not bring this to the scale required to provide comprehensive access to affordable credit;
• Over-indebtedness is not being viewed by the Government as a major problem whilst average net wealth is increasing (mainly as a result of house price inflation) and in-terest rates and unemployment remain low.
• Further independent research is required to better understand the sub-prime and predatory lending sectors which are not being monitored closely and to assess exclu-sion from the mainstream more effectively. Disclosure of lending data remains un-available.
• New legislation has been mintroduced but the main aspects of this are not adequately defined at present, so the benefits of this to the consumer are not currently clear.
• The powers available to regulators under the Enterprise Act are valuable, and con-sumer groups are beginning to lobby for these to be focused on the financial services industry. |
| ID: |
37325 |
| Author(s): |
iff |
| Publication date: |
26/04/06 |
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Created: 26/04/06. Last changed: 26/04/06.
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