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Melanie Johnson MPOverindebtedness Fact or Fiction? |
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I am delighted to be able to speak to you all today at this, the 14th Annual Conference, of the Money Advice Liaison Group. Let me thank the organisers for inviting me and for all of their hard work setting up this important event. I know that in previous years, these annual conferences have been a great success, and judging by the programme, I'm sure that this one will be a very interesting too. The subject of this year's conference - 'Overindebtedness: Fact or Fiction' - is one that I have a great deal of interest in. I am interested for a number of reasons. Firstly because as Minister for Consumers, I all too often receive letters from consumers who have debt related problems or concerns. And regrettably many of these problems are very serious indeed and causing real distress. Secondly because many of my fellow MPs also receives similar letters and are equally concerned about levels of consumer debt in the UK. Indeed earlier this month I took part in two very interesting parliamentary meetings with colleagues to hear their concerns for myself. And thirdly, I am interested because overindebtedness is a subject that frequently receives a great deal of press coverage reflecting anxieties about the level of consumer credit spending and the potential impact this may have on many households in society - not just the particularly vulnerable consumers. So I believe that this conference is an extremely important one. I hope that this conference will help us to put many of the concerns about consumer debt into perspective. I hope it will help us to consider how we can best support those who are overindebted. And how we can ensure that those consumers who currently have manageable debt continue to manage their finances successfully. To support this debate, I am pleased to announce here that I have today published a major piece of work that focuses on debt in the UK. It is the report of research into the cause, effect and extent of overindebtedness. We commissioned this research - as recommended in the first report of the Task Force On Tackling Overindebtedness, which I published last year. The research was carried out by MORI, who worked in partnership with the Personal Finance Research Centre. It is a national survey of UK households, conducted earlier this year and its findings are significant. Later this morning, Elaine Kempson, from the PFRC, will talk to you in detail about the research results. What I would like to do today is firstly to consider some of those results from the research that I think are particularly striking. Secondly, I would like to outline some of the work already being undertaken by Government either to help directly, or to support activities to help those who are overindebted. Overall, I hope that my comments will provide you all with a starting point to take a fresh look at debt at today's conference. MORI Research. The results of the MORI household survey show that the availability of credit has increased dramatically since the last comparable survey conducted in 1989. This will not be news to you. But while consumers do have access to much more credit than ever before, many of these credit facilities - particularly credit and store cards and overdraft facilities - are not being used. For example, I expect that if I asked you all to look in your wallets now, many of you would find quite a few credit cards and store cards. But of these, how many do you use regularly? Do you owe money on all of them, or just one or two? How many are there just for emergencies? How many of you have an overdraft facility that you do not use? The research showed that, four times as many households today have credit facilities that they do not use, compared to 1989. So, yes, there has been a huge increase in the amount of credit available, but in a competitive, strong economy, one would expect this to be the case. But is this, such a bad thing? Does it follow that having easy access to so many credit facilities is a problem? Certainly, the amount of money owed on unsecured debt by those interviewed in the MORI household survey, does indicate a dramatic increase in the take up of credit in the UK. This is in line with increases in official statistics. Interestingly, the research found that this increase was not due to a larger proportion of consumers in the UK owing money. But rather, those who do owe considerably more than their 1989 counterparts - even when taking into account inflation. Amounts owed on loans and hire purchase agreements have doubled to £5,000 and £3,800 respectively, while revolved balances on credit cards have trebled to just under £1,600. However, - despite the increase in amounts owed - the MORI research found that most households used credit modestly. Nearly half of credit users have only one credit commitment and they owe less than £500. It is a small minority who were heavy credit users:
Of importance to today's conference, the MORI research concluded that these figures could be used as the basis for distinguishing between unmanageable debt and overindebtedness. They are indicators of either those consumers who are probably overindebted or those who are at risk of becoming overindebted. Translated they are:
These indicators, and the figures I have just mentioned, illustrate why I have said recently, that the majority of the population manage their credit facilities successfully. Today, credit is a tool. It is an enabler. For example, many people use their credit cards to make payments on everyday items. In fact the MORI research found that increasingly consumers with credit cards paid off the whole balance at the end of each month. It would seem then, that having easy access to many credit facilities is not a significant problem at present. Does this mean we can all relax? Far from it. This can be illustrated by looking at levels of arrears. The first point to make is that these have fallen from the high levels in the early 1990s and remained relatively steady in recent years. Since November 1997, credit reference agencies' figures show that the number of credit accounts in arrears has remained much the same. Jill Stevens of Experian, will be giving us details of the way people have been repaying their credit accounts later this morning. Similarly, the number of the number of County Court Judgements has also declined since 1997. But neither the credit reference agency figures nor county court judgement statistics give us the detailed picture of how many households are affected. However The MORI survey found that 13% of all households were in arrears - mostly on one commitment. At first glance these figures would seem to contradict the message that the majority of credit users manage their payments successfully. The level of arrears seems to be a lot higher than that recorded by the credit reference agencies. However, if you look more closely at the break down of the 13% this contradiction can be explained. In fact, 6% of households were in arrears with consumer credit commitments, the rest of those in arrears owed money on household bills, such as rent and utilities. This figure is remarkably similar to that recorded by the credit reference agencies. Though the MORI research cautions that this problem is exacerbated in those households who make heavy use of credit facilities. So Where does that leave us? The MORI household survey provides us with a very balanced view and offers perspective on the use of credit. On the one hand, it shows us that, contrary to recent speculation, despite both the increase in available credit facilities and the increase in amounts owed, the majority of UK consumers use credit modestly. It is worth stressing again, that only a minority are heavy credit users. The results illustrate that credit is used as a tool. It is an enabler - one that is largely used sensibly. We can conclude from this that the majority of credit users have manageable debt. On the other hand, the MORI research also shows us that we cannot be complacent. Despite that fact that as many people got out of financial difficulty as got into it last year - 6% in both cases - and the fact that the number of households in arrears may have declined since 1997, there are still a lot of consumers in difficulty. For example those in arrears on one commitment, often a household bill. Clearly we need to make sure that those who use credit sensibly continue to do so. We also need to ensure that the numbers of those who are in difficulty is reduced. This brings me to the second part of my speech: what the Government is already doing to tackle debt. Here I want to address:
Financial Education The MORI research found the levels of credit use were highest among householders in their twenties, two thirds of whom had an average of 2.6 credit commitments. Specifically, it was young people living as independent householders who were the heavy credit users and they also ran the highest risk of being in arrears. Credit use among young people aged 18 or 19 was lower - but even so, four in ten of them owed money on credit commitments, with an average of 1.5 commitments each. These figures illustrate why it is essential that young people are properly equipped to manage their finances effectively. That is why the Government is working to improve financial literacy, and to ensure that consumers have easy access to the information they need to help manage their finances. For example, in schools, students have the opportunity to be taught personal finance education throughout Key Stages 1 to 4 in the school curriculum. For adults, the Department for Education and Skills are funding the Basic Skills Agency to develop a programme of support for financial literacy and basic skills. The programme focuses on helping financial institutions, tutors, and money advisers to recognise the basic skills needs of consumers, and thus help them to access appropriate financial services. Also, the FSA and the Basic Skills Agency are working together to develop an Adult Financial Capability Framework. The framework is aimed at all those involved in financial capability education and training, and will support the creation of learning programmes and resources. Additionally, to tackle financial exclusion, the Department for Education and Skills is funding a pilot Community Finance and Learning Initiative. This initiative will support existing trusted local community based organisations, such as Credit Unions and Citizens' Advice Bureaux, to work in partnership to deliver literacy and numeracy support, access to mainstream financial services, and access to micro-finance. Support for money advice services. The MORI research found that the two in ten households with arrears in the past 12 months had sought advice, as had a similar proportion of those currently in financial difficulty. And the proportion increased with the severity of the problems they faced - from one in ten of those who had fallen behind with payments on just one commitment in the past 12 months to nearly four times that number of households with three or more sets of arrears. The most common sources of advice were:
Interestingly, free advice agencies were the only source where use increased according to the severity of financial problems. This will not come as a surprise to many of you. These figures show us the importance of free money advice. That is why the Government is working on a number of fronts both to support this work, and to consider further how best to enable it. For example, in March, I launched a pilot project for a national debt telephone helpline. This project is funded by over £1 million pounds provided by Government, and £850 thousand pounds provided by the private sector. The aim is to determine the best way to provide debt advice to consumers in need of help: by telephone, by e-mail, or face to face. It is also seeking to determine whether telephone debt advice is more efficiently provided by a single national number, or from regional numbers. My officials are now in the process of commissioning an evaluation of this important project. The results will be known early next year and will inform the future development of this service. Furthermore, the DTI provides a block grant to the National Association of Citizen's Advice Bureaux, who provide face-to-face debt advice through local CABs. Similarly, the Legal Services Commission is funding debt work as part of its £2m per year telephone advice pilot. The scheme supplements current services, making quality assured legal advice and help available accessible to people who cannot easily visit their local solicitor or advice agency across many rural areas, such as North Wales and Northumberland. And the Scottish Executive has invested £3 million a year to fund 100 additional front line money advisers; and has provided £500,000 a year to fund central support services such as training of money advisers, and secondary advice support. How the Government is drawing these initiatives together The third area I want to focus on is the work the Government has undertaken to address the difficulties associated with the payment of household bills. As I have mentioned, the MORI research shows that this is important. It is important because of those households who were in arrears, more had fallen behind with the payment of household bills than had got into arrears with consumer credit commitments. This is not to suggest that payment of households' bills is more problematic than the payment of credit commitments. But It does illustrate why - when we are discussing debt today - we must not lose sight of household bills. That is why the utility regulators are working to tackle payment difficulties in relation to utility bills. Examples include guidance published by Oftel last month on how telecom companies can help consumers manage their telephone bills and avoid being disconnected. The aim of this guidance is to help telecom companies establish a consistent approach to debt and disconnection policies, through the production of codes of practice, and therefore provide a better deal to consumers. Another example is a discussion document on good practice guidance published last month by Ofgem and energywatch on preventing debt and disconnection. The draft guidelines draw on the experience of consumer bodies and energy supply companies who were members of the working group. The guidelines identify a range of good practice for helping customers with debt problems, including demonstrating flexibility in debt recovery, and helping customers who are unable to manage their affairs. Similar guidance has been issued by Ofwat in October 2002. The last area of Government work that I want to refer to is our work to draw together the many initiatives currently undertaken. This work is being coordinated by the DTI. It is a review of measures aimed at preventing or reducing overindebtedness of individuals in the UK. This work is in response to the Performance and Innovation Unit's Report: 'Lending Support: Modernising the Government's Use of Loans' recommended a review of Government policy on over-indebtedness. Its conclusions will be published next year. This work is important because it will clarify the roles and responsibilities of Government departments on over-indebtedness. And especially because it will make recommendations on future Government policy on reducing over-indebtedness. That is why I will ensure that the MORI research report is considered carefully as part of the review. But I would also be interested in the outcomes of today's conference and I hope that they can be fed into the review. Specifically, I would be particularly interested to know whether you think it is possible for you all to build on the MORI research report, by jointly compiling your own statistics. I say 'jointly' because it strikes me that if you all had common standards for gathering all of your statistics it would be much easier to ensure that we have a reliable ongoing source of information about the state of debt in the UK today. Such information would, I am sure, be invaluable to all of us in our work on addressing overindebtedness. Perhaps my question to you all is one you could consider during today's conference. I think that the MORI research report I have published today goes some way to helping us understand the extent and nature of debt in the UK today. The Task Force On Tackling Overindebtedness have already seen the MORI research and used its findings to inform their work. I have now seen their second and final report and I am considering my response in the context of what other work needs to be done on the Consumer Credit Act Review - for example the DTI's work on extortionate credit and the review of the licensing regime. I will publish both the Task Force's second report and my response in due course. To conclude, I believe that this research - produced by MORI in collaboration with PFRC - puts many concerns about consumer credit into a useful context. It shows us that while use of consumer credit is not perhaps as extreme as has been thought, consumer debt does, nevertheless, need to be monitored. I have outlined some of the activities the Government has undertaken to tackle debt in the UK and this research will help inform the future development of these. However, for this research to have real value we must all act on it, and I will be paying particularly close attention to work undertaken not only by Government, but by us all. No doubt this will something you will want to discuss today. I am sorry that I will not be able to stay longer and answer any questions you have. However, but Fiona Price from the DTI will be happy to do so on my behalf during the panel session later today. |
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Other speeches by Melanie Johnson MP
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