Cicero Policy Briefer

Issue 8, January 2007

Consumer issues and the Social Market Foundation

By John Rowland

“January, month of empty pockets!
Let us endure this evil month, anxious as a theatrical producer's forehead”
- Colette

In my November article I considered whose fault it was that so many borrowers are overstretched. It was a question that I thought would be asked by MPs, who would be seeing a growing number of cases in their constituency surgeries—particularly after Christmas. It seemed clear to us at Cicero that a balance that places adequate responsibility on the individual, while also recognising that lenders have a role to play to ensure that customers do not take on excessive credit, was the answer.

But what sorts of practical steps might this involve? A panel of experts, including influential Treasury Committee Chairman John McFall MP, considered this very question at a full house at the Social Market Foundation in December. Speakers also included Stephen Knight, Executive Chairman of GMAC-RFC, Fiona Price, Director of Cross Market Interventions at the DTI and Peter Tutton, Social Policy Officer at Citizens Advice. The discussion was wide ranging, bringing in aspects of both mortgage and non-mortgage borrowing, and prime and non-prime market segments.

• John McFall MP stressed the importance of ongoing work on financial capability to ensure that consumers were well equipped to understand financial products, while warning that the Committee would be on the look-out for bad practice from industry—as it had in the case of its investigation into credit cards in 2003. Doorstep lending was also identified as an area of concern, as lack of competition here was keeping the costs of borrowing high—though it was also recognised that this form of lending provides a much needed line of credit to those who would otherwise be forced to look to illegal loan sharks.
• Stephen Knight, Executive Chairman of GMAC-RFC, looked at the concept of responsible lending from the point of view of a mortgage lender. He said that it is important for policymakers and commentators not to get sidetracked into an irrelevant debate about income multiples when talking about affordability. Modern, automated underwriting which takes into account a number of variables—including credit history—is a far more effective way of determining whether applicants could make their monthly repayments and that this was evidenced by the lender’s strong arrears performance.
• Peter Tutton of Citizens Advice, spoke of the frontline experience of dealing with some of the ‘nightmare cases’ of serious debt—including those that had been granted multiple credit cards and had run up tens of thousands of pounds of unsecured debt, which they had no prospect of repaying. He suggested that more effective data-sharing between lenders was a way to ensure that it simply wasn’t possible for borrowers to get into such a predicament by allowing lenders to more easily detect warning signs.
• Fiona Price talked through the changing nature of legislation around the regulation of consumer credit, and the moves to harmonise and update consumer credit regulation within the EU, while ensuring that regulation was not too burdensome. She said that challenges lay ahead, but that the preference was always to encourage the market to develop codes of practice rather than to regulate from above.

It was a lively and timely discussion of a pressing issue: it doesn’t take any oracular powers to see that the insolvency service figures published on 1 February will be grim and, anecdotally, the cost of living for ordinary families is rising more quickly that the official CPI measure suggests. Nevertheless the overall economic outlook is relatively benign—the service sector is galloping ahead (not least because of the strength in financial services) and Oxford Economic Forecasting predicts economic growth of 2.7 per cent this year. However, prevention is always better than cure and implementing strategies to promote responsible lending may considerably lessen the impact of any slowdown in the months and years ahead on borrowers and lenders.

A transcript of the SMF event will be available at the end of the month. If you would like a copy please e-mail John Rowland (supplies permitting).

John Rowland can be contacted on +44 (0)20 7665 9530 or click here to email.