Gerry Sutcliffe MP

MALG Conference

This is my first time here, but I know that these annual conferences are always a great success, and from the looks of today’s programme I’m sure that this one will be no exception.

Before I start let me say a personal thank you to the money advisers and those who support and fund money advice here today. You all provide a fundamentally important service – one which all MPs recognize and support. You help thousands of people a year, people who are often in the most dire straits. By providing them with clear and appropriate help and advice you help them to manage their debts and deal with their situation. Thank you.

You’ve asked me to speak today on the subject of the “Nanny State – Does Debt need Nursing?”

This raises a number of questions. One. Is debt, of itself, fundamentally bad? Two. Do those people who become over-indebted, either by their own action, or due to circumstances beyond their control, need – or even deserve – help? And Three. What is the role of the Government in this, and what are its responsibilities?

If you ask most people whether debt is fundamentally bad, the majority will tell you that it is. The very concept of debt, of owing something to someone else, introduces the idea that you have in some way given up a part of your freedom. To a certain extent this is right.

However, if you ask those same people whether credit is fundamentally bad, the majority will tell you that it isn’t. Most people see Credit as the freedom to get into the market now, not tomorrow or make an investment for the future – to buy the car this year not in seven years time, to own your own house rather than rent, to buy the groceries this week rather than live on the tins in the cupboard. And this too is right.

As with all things it depends on individual perception whether you believe credit or debt are good or bad. In fact they are tools, and it’s the uses we put them to that determines whether they have a positive or negative effect.

Of course, all of this assumes that nothing unforeseen comes along to knock your plans off course

Today the total level of personal debt in this country stands at just over one trillion pounds (£1.024trillion). This is an astronomical figure, one which, I’m sure, most people have trouble visualizing. It is the equivalent of some twenty-five thousand pounds for each adult in the country.

However perhaps it helps to think in these terms. Four fifths of this figure represents investment in houses. Roughly a quarter of the population are buying their own homes, and by doing so are becoming that much better off than the generations before. This is a positive effect.

Seventy per cent of loans taken out are used to buy a car or improve property. All of which increases the net worth of the individuals. Again a positive effect. And it also drives up productivity as the demand for cars and the like provides employment and investment in the UK economy. Also a positive effect.

There are however people who use credit irresponsibly, spending beyond their means on non-essentials and there are those who lend inappropriately. For those people who have a tendency to borrow unwisely it is important that we make them aware of the dangers of their behavior.

And then there are the people who have no choice but to resort to credit in order to replace the refrigerator or cooker. And while the fact that they can replace these items is good, all too often the debt incurred can have a devastating effect on them.

My next question was whether those people who find themselves in debt either by their own action, or due to circumstance beyond their control need – help?

I can’t believe there is anyone here today who doesn’t think that those people finding themselves becoming over-indebted should not be helped?

Indeed helping the over-indebted is merely an exercise in common sense. Over-indebtedness has substantial costs for us all.

The more debt that the credit industry or utility companies are forced to write-off, the greater the cost for the rest of us of accessing credit.

This includes the costs for services such as gas and electricity.

Both of these mean there is a greater risk that consumers, particularly the vulnerable, will be unable to maintain their payments leading to further over-indebtedness.

The more people who find themselves unable to maintain payments on mortgages and other payments and become homeless, the greater the call on the resources of local government housing authorities.

And for those people who become unemployed - and potentially unemployable - due to the stress of their situation, the greater the call on Government for resources.

Who are these people needing help? It could be any one of us.

It is therefore imperative that we ensure that appropriate advice and help is available.

As I am sure you are all aware, because we have written extensively about this, we are particularly keen to ensure that such advice is available.

And it’s for this reason that I strongly welcome and support the work being taken forward jointly by the Consumer Credit Counselling Service, Citizens Advice, Money Advice Trust, Payplan and Advice UK – with support from the credit industry - to develop a gateway which will allow consumers to be referred to an appropriate service for their needs.

I’ve been very impressed by the progress which has been made in developing this Gateway so far, and I look forward to seeing the Pilot go live next year.

I strongly encourage you all to take the opportunity to speak to Steve Nicholson or Robert Skinner who are here today and running a breakout session this afternoon on the Gateway to find out more.

I’ve also been impressed with the positive response from the credit industry to proposals to build sustainable funding for the sector, recognizing that anyone who profits from the provision of credit should contribute to providing advice to its victims. I will of course be keeping a close eye on this.

Of course, even with the Gateway, there will still remain work to do in ensuring that there is adequate provision for those consumers who need face-to-face services and are unable to access the current supply.

It is clear that we will need to think in new ways, and be innovative about how to achieve this. But, quite obviously, working closely in partnership with other providers and interested parties will be fundamental. Government has made clear our determination to address this requirement in recent Budget and Spending Review announcements, and my colleagues in HM Treasury are currently working closely with our key stakeholders, including Citizens Advice, to develop proposals for the financial inclusion fund. We hope to report the conclusions of this work to you shortly.

However, while help and advice once you are in difficulties are all well and good, I am sure we would all agree that prevention is better than cure.

And this brings us to my final question: What is the role of the Government in this, and what are our responsibilities?

I am sure that there are a variety of opinions in this room on how far Government should intervene in people’s lives. These will range from those of you who feel that Government Regulation is a morass which unduly stifles companies’ ability to innovate. To those of you who believe that Government does not do nearly enough to stop the irresponsible behaviour of companies who place consumers in real peril of unrecoverable debt.

Our fundamental aim is to provide social justice for all by creating opportunities for all and building a successful modern economy.

We aim to do this by encouraging informed, empowered consumers. And ensuring companies who deal fairly and responsibly are able to operate to their fullest potential in a fair, clear and competitive market.

And the chief means of achieving this is by providing an effective regulatory framework which addresses clear market failures, whether due to a lack of information provided to the consumer, a lack of provision of services or a clear abuse.

We are very conscious of the need to only regulate to the extent necessary to address any failure. We are not in the business of introducing onerous and unnecessary regulation, but nor are we willing to introduce ineffectual regulation, with their implicit costs on society.

I am sure when I mentioned loans to improve housing earlier, at least a few of you thought about the recent Meadows case. In this case the Meadows took out a £5,450 loan - £2,000 for their home improvements and £3,450 for insurance and other charges – which due to the way in which compound interest was applied after they defaulted led to a debt of £384,000.

The Judge declared the agreement unenforceable as it had failed to correctly state the terms of the loan. He also said that the way in which compound interest was applied meant that the loan was extortionate.

This was clearly a success for the Meadows. However as I am sure you are aware this case was an exception. The record for bringing cases against companies for extortionate terms in their contracts is not particularly good, as the test is currently set too high, and this has encouraged an admittedly small number of companies to include such extortionate terms in their loans.

This is a good example of a clear market failure which we recognize needs addressing.

And this is what we have done. For those of you who did not hear the Queen’s Speech – or its edited highlights – we will be introducing the Consumer Credit Bill into this session of Parliament.

Among other things, the Bill addresses a number of the concerns and market failures identified in the old consumer credit regime, including that of extortionate contractual terms.

It introduces a new test of unfair lending which will replace the current extortionate credit test, and allows for the conduct of the lender throughout the life of the agreement to be taken into account, not just the terms of the agreement when signed.

It also introduces a compulsory Alternative Dispute Resolution scheme, which provides a quick, cheap and easy way of resolving disputes such as the Meadows’s.

These are two fundamental steps forward in empowering consumers and improving their rights and redress, encouraging fair standards throughout the industry and driving forward the responsible lending agenda.

The Bill also provides for the powers of the independent regulator to be substantially strengthened. Provisions in the Bill will allow the OFT to get the information it needs to determine and monitor the fitness of the license holder and to impose requirements on the license holder as it deems necessary. This was one of the issues arising out of the Meadows decision, where it was felt that the OFT has been prevented from acting more stringently due to the limits on its current powers.

We believe that such proportionate regulation is the way forward.

While today I have focused mainly on Government’s role in regulating against market failure, this is of course only one of the areas we are involved in. Government is also instrumental in promoting access to affordable credit, reforming the court regime for debt and developing financial capability.

For more information about these exciting developments please see our publication “Tackling Over-indebtedness: Action Plan 2004” available in the lobby on your way out.

Debt, of itself, is not fundamentally good or bad.

I think we would all agree that for the majority of people credit is particularly useful.

Unfortunately for some credit becomes unmanageable debt.

These over-indebted individuals – a large number of whom are in trouble due to circumstances beyond their control – need to be able to access help and advice to empower them to deal with their situation.

All of us and the credit industry have a duty to ensure support is available.

However, in the long run, prevention is better than cure and an effective regime of treating the causes of over-indebtedness, by defeating irresponsible lending and borrowing, and ensuring consumers take precautions, is both more cost-effective and fairer to the consumer.

We need to work together, to not only treat the symptoms of over-indebtedness, but also to ensure we address comprehensively the causes of over-indebtedness.

The need to ensure healthy, informed and empowered consumers through effective regulation has never been stronger.