UK INITIATIVE - On the back of the successful ECRC conference in London in 2008, and severely affected UK economy by the ongoing financial crisis, UK coalition partner continues to be active in promoting the ECRC principles of responsible credit by making recommendations in a paper and being involved in shaping conditions of financing of bank bail outs. Damon Gibbons teams up with a UK member of parliament to recommend a solution to protect low income borrowers in the credit crisis. Paper calls for: UK banks to report on their actions in meeting the needs of lower income households and small businesses for access to responsible credit; Government to help establish a working group; Government to place a limit on the cost of credit that can be charged by lenders operating in non-competitive sectors of the market, including stronger measures punishing ‘illegal lending’. PROTECTING LOW INCOME BORROWERS IN THE CREDIT CRISIS A report by Rt. Hon. Ian McCartney MP & Damon Gibbons (5 December 2008) INTRODUCTION & SUMMARY OF RECOMMENDATIONS The unprecedented global credit and economic crisis that we are currently facing requires us to radically rethink the way that we regulate our credit markets. A lengthy period of easy access to credit that gave rise to an extended boom in consumer spending and in housing markets around the globe has now resulted in a worldwide banking crisis that has constrained lending – even to households and businesses that remain ‘good risks’ – and tipped the major economies of the world into recession. The inability of households and businesses to obtain credit to reschedule existing commitments is pushing an increasing number towards default, repossession, and insolvency (Consumer County Court Judgments rose by 17.4% year on year in the third quarter of 2008 to 223,519 (Registry Trust Limited); Council of Mortgage Lenders estimates that 45,000 homes will be repossessed this year, with a possible rise to 75,000 in 2009; Company liquidations are up by 26.3% on a year ago, and individual insolvencies are up by 8.8% in the third quarter of this year (Insolvency Service). Credit markets, previously viewed as primarily a matter of freedom of contract between lender and borrower, are now recognised as having wider economic consequences, requiring regulation in the public interest. Quite rightly, government is pressing hard for banks and mainstream lenders to recapitalise households and businesses following the use of tax revenues to recapitalise the banks themselves. However, more action is required if we are to prevent the crisis from adding further to the considerable number of households that have been excluded from mainstream financial services in recent years. Despite the significant success of government in reducing benefit dependency amongst low income households, we now find that low paid workers and families are faced with ‘credit dependency’ on high cost and predatory lenders. This poses a considerable risk not only for the individual households concerned but for the wider communities in which low income borrowers are concentrated. Credit dependent households are the most reluctant to risk losing their remaining sources of credit, no matter the high costs that are being charged. This results in arrears being built up in other areas of the household budget, including on rent, council tax, and fuel and utility bills and a long term overall reduction in the amount of money available to be spent locally. This can have severe implications for the funding of public services in these areas, dampens the local economic growth rates, and exacerbates the problem of child poverty. We must therefore re-double our efforts to address the damage that is being caused by these types of lending, particularly given the significant risk that the current crisis will result in a growth of these problems. WE BELIEVE THAT TWO KEY PRINCIPLES NEED TO BE ADOPTED (i) Access to responsible credit products, provided or supported by mainstream financial institutions, needs to be widened in order to allow households to restructure their current liabilities and avoid becoming trapped in credit dependency (ii) Firmer action needs to be taken to prevent harmful forms of lending, unfair pricing, and predatory practices WE RECOMMEND THAT GOVERNMENT DRAW UP A STRATEGY TO EMBED THESE PRINCIPLES IN A NEW REGULATORY FRAMEWORK FOR CREDIT We consider that they would not only prove to be effective in helping individual households from avoiding the worst effects of the current crisis, but would assist more generally in helping the UK to emerge from recession (In particular, ensuring that lower income households pay fairer prices for credit and reduce the proportion of their incomes spent on debt servicing is likely to lead to increased expenditure for consumption purposes and boost local economic growth). MORE SPECIFICALLY, WE RECOMMEND THAT: - Government, led by the Department of Business, Enterprise and Regulatory Reform (‘DBERR’) and HM Treasury, commit itself to placing banks under a clear obligation to consider the needs of lower income households and small businesses for access to mainstream financial products, including responsible credit, and to placing a requirement on banks to report on their actions to meet these needs. - That DBERR and HM Treasury jointly establish a working group, including representatives from the Financial Services Authority, Office of Fair Trading, banks, and consumer agencies to bring forward workable proposals to realise this ambition within the next three months. - That DBERR commit itself to placing a limit on the cost of credit that can be charged by lenders operating in non-competitive sectors of the market. We recommend that the time between now and the next budget should be spent preparing the ground for this policy to be brought into effect and to determine the most effective means by which this could be achieved. - That DBERR commit resources to ensure that the illegal lending units are independently evaluated in 2010/11 to inform a decision on future funding, and that this evaluation also consider whether or not a new criminal offence of ‘illegal lending’ should be introduced. See attachment for more details. ID: 42332 Author(s): DG Publication date: 28/01/09     Protecting low income borrowers in the credit crisis (Gibbons, McCartney MP, Dec08) (116758 Bytes) URL(s): Link to ECRC Principles Link to the ‘London Declaration’ on the Global Credit Crisis

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