Cicero Policy Briefer

Issue 10, March 2007

Taking responsibility for responsible lending

By Andy Love MP, Member of the Treasury Select Committee

Living without credit is unimaginable in today’s society. The opportunities open to consumers are endless, offering a bewildering range of special offers and attractive interest rate deals. And they have been taken up. In July, the Bank of England reported that consumers owed a record £1,000bn on all forms of debt.

For the vast majority, the market works tolerably well. But for a growing number of consumers the all too tempting offers of credit can become unmanageable and potentially unaffordable. This is reflected in increasing levels of bankruptcy and a doubling in the use of Individual Voluntary Agreements in the last year. Personal insolvencies have now reached record levels.

Yet this rise is not obviously due to deteriorating macro-economic circumstances. Growth in recent years has been modestly above trend and unemployment remains stable at around 5 per cent. For many the inevitable conclusion is that poor practice in the financial services industry has led to the explosion of unsustainable debt and insolvency.

Recently a major credit card company came under fire for targeting their customers with unsolicited increases in their credit limits and pre-completed credit card cheques. Although this breached the voluntary banking code it was not possible to take action as the Banking Standards Board did not have the powers to bring the company into line. Many believe that to maintain confidence the industry needs to strengthen the code and improve the protection for consumers.

At a time when it is estimated that one in five people have four or more credit cards, the need for lenders to have accurate and timely data on their customers’ credit commitments has never been more urgent. To do so requires full data sharing of their customers’ overall debt profile. Concerns around customer confidentiality or competitive pressures should not be allowed to get in the way of the need not to lend to consumers who simply cannot afford it. Anything less will further dent confidence in the industry’s reputation for responsible lending.

Of course there will always be cases where a change of circumstances—a lost job or relationship breakdown – causes a previously affordable debt to become unsustainable. This may especially be the case when a mortgage has been offered at four or five times a salary. Normally, the borrower would be advised to insure against this possibility. Yet there is growing evidence that Mortgage Protection Insurance is overpriced and offers limited protection. Both the FSA and the OFT are investigating aspects of this market and it is to be hoped that sensible reform will follow.

By common consent we are entering a period of greater economic uncertainty. Concern is growing about the potentially serious consequences should this result in a sustained increase in interest rates. As bad debt rises financial institutions will inevitably rein back their unsecured lending—but this may be too little, too late. In such circumstances the calls for Government action may become irresistible. It must surely be in everyone’s interest to work together to build a responsible lending policy that is sustainable in good times and in bad.

Andy Love is the Labour MP for Edmonton and a member of the Treasury Select Committee, and can be emailed here.

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