Author Mark Richards
The Financial Conduct Authority (FCA) has announced fresh measures to protect consumers from debt. New figures have shown that consumer debts are at levels not seen since the financial crisis. But can the FCA really do anything? Surely there will always be borrowers and lenders?
Debt clearly has its place in the world. It has enabled many of us to buy a home, buy a car and – maybe – start a business. When Shakespeare gave his famous advice – “neither a borrower nor a lender be” – he clearly did not know what was going to happen to house prices in Stratford-upon-Avon. Affordable debt, properly managed, plays an essential part in the lives of most people.
But not everyone manages their debt properly. As we have written previously, there will always be people who can sing, dance and play football better than others: by the same token, there will always be people who are good at managing their money and others who – as the old saying goes – simply have too much month left when the money runs out.
The FCA’s concerns
Now the FCA is coming up with more measures. Why? Because new figures have shown that the total amount consumers have borrowed through credit cards, car loans and overdrafts have topped £200bn for the first time since the global financial crisis. Now the FCA has said that it is reviewing the cost of overdrafts and cracking down on the car loans market, as figures from the Bank of England revealed that personal debt grew by 10% in the year to June. The last time it was above £200bn was in December 2008.
The FCA believes that one in six people (around 2.2m) who are in debt with credit cards, personal loans and car loans are in financial distress. They are more likely to be younger, unemployed, have children and be less educated than the average – but the reality is that debt worries can hit anyone: as we have written above, some people are simply bad at managing their money and always will be.
This comes as credit ratings agency Moody’s has also warned about the growing ‘household debt mountain’ saying that some borrowers will struggle to meet repayment if the economy weakens and inflation eats into their salaries. Fortunately, inflation was down to 2.6% last month, but many people are still suffering a decline in real wages as pay rises fail to match inflation.
The FCA is also targeting ‘fundamental reform’ of the charges for unarranged overdrafts. According to consumer group Which? bank customers needing as little as £100 can be charged up to 12.5 times more by their friendly, local high street bank manager than payday loan companies are legally allowed to charge.
Breaking the figures down
Most of the debt from lending to individuals in the UK (which totals around £1.5tn) is mortgage related – but the £200bn which is causing concern is non-mortgage related debt. £68bn is on credit cards, a figure which has grown by 18% over the past three years: but the real surge has been in car loans, with four-fifths of cars bought last year involving some form of Personal Contract Purchase (PCP). This tends to come from finance companies linked to car manufacturers and the FCA worries that if this type of lending is not controlled then household debt will continue to increase as a percentage of household income.
Are there any other areas of concern?
Yes, is the simple answer. The FCA is also concerned about rent-to-own schemes (typically involving white goods such as fridges) which often carry very high rates of interest, as well as home, collected credit and doorstep lending, and catalogue credit.
And then, of course, there are student loans. Currently, there is £89bn outstanding on student loans – a figure which will only go on rising, given that under the present regime most students will only ever see their loans increasing. Student loans are not included in the present review, but in my opinion, they will be one day seen as a major miss-selling scandal.
But is it the job of the FCA? Or should the lenders do more?
If we go back to 2008 there were plenty of apocryphal stories about the willingness of the banks to lend. Royal Bank of Scotland famously offered a £10,000 loan to a borrower who turned out to be the family dog and all the banks were cheerfully giving customers new loans to pay off existing loans. ‘Consolidation’ was the word used to justify it.
Mortgage lenders were happy to adopt the same attitude as well and were certainly willing to turn a blind eye to the real purpose of home improvement loans.
“If you are going to re-mortgage do you want to do some home improvements? With house prices going up you have the equity to do it…”
Thousands of people were only too happy to say yes, they definitely needed to do some home improvements – and a month later they were driving to the airport in their new Ford Fitted Bedroom, ready for two weeks on Spain’s Costa Kitchen Extension.
Now there are real worries that the lenders are repeating the mistakes of the years leading up to the financial crash. Last week the Bank of England’s head of financial stability, Alex Brazier, accused lenders of “dicing with a spiral of complacency” and warned that lending could go “from responsible to reckless very quickly.”
If you cannot legislate for human nature and the need or urge to borrow, can the FCA ever really legislate away the banks’ willingness to lend if they see a profit in it?
What about the wider economy?
The FCA does not exist in a vacuum. The UK car manufacturing industry certainly will not see eye-to-eye with the FCA about a clampdown on car loans. The sector recorded a fall of 4.4% in the second quarter of the year and dragged down the whole of the UK manufacturing sector. As the Government tries to steer a path through the Brexit negotiations and reduce the deficit, the last thing it needs is a major swathe of British manufacturing to be held back.
Then there is the UK high street. After a miserable first three months of the year the retail sector – a major employer – rebounded in the second quarter, growing by 1.5%.
You may not approve of personal debt sustaining the beleaguered high street, but it is a delicate balancing act and it is not all about debt. If the FCA cracks down too hard, then some people will lose their jobs. Right now, debt is closely bound up with the health of the UK economy. Far from the picture being black and white, there are about 50 shades of grey. Perhaps I’ll write a book about it…