[an error occurred while processing this directive][an error occurred while processing this directive] [an error occurred while processing this directive] [an error occurred while processing this directive]
Melanie Johnson MP
Financial Education and Personal Debt: The Role of the State, the Market and the Individual
|(Click picture for biography)|
Personal debt is on the increase. We read this almost every day in our papers. The amount we owe on credit cards and other forms of consumer credit is at a record high.
As a nation, we seem to be increasingly in debt.
But debt is not necessarily a problem. Debt is not the same as over-indebtedness. And while the amount of money we borrow is rising, the number of accounts in arrears remains constant.
Credit is a growing part of our day-to-day lives. Most of us have loans, or other credit, which can be managed without difficulty. And borrowing can be a useful tool to help households smooth their income over time.
So it is the use of credit as a tool - an enabler - that is increasing.
Debt only becomes a problem when people cannot afford the repayments.
And when debt does become a problem - when it turns to over-indebtedness - debt has a cost.
We want to build a generation of empowered consumers who can manage their credit effectively. Who understand why it is important for them to master their finances, and how they might achieve that. Who can make appropriate decisions about their finances. Who understand the choices open to them and their implications.
Ultimately, individuals have the responsibility to mange their own finances effectively. But Government has a role to empower them to do so.
We need to look at the big picture. Later this month I will publish research looking at why people get into to debt, how much debt they get into, and the impact it has.
And we are conducting a review of Government policy on over-indebtedness. This review will investigate the demand for debt advice and financial literacy programmes. It will clarify the roles and responsibilities of Government departments on over-indebtedness. And it will make recommendations on future Government policy on reducing over-indebtedness.
But debt cannot be seen in isolation. The Treasury are also developing a strategy on the wider picture - a Government strategy for financial information, education and advice. This is likely to focus primarily on the importance of savings, as well as looking at other financial services, including those related to credit and debt.
This ongoing work will set Government policy on over-indebtedness in context.
But there is already a clear role for Government in tackling personal debt on a variety of levels.
We need to ensure that consumers have the basic literacy and numeracy skills they need to access information and advice.
To ensure that consumers are financially literate.
To ensure that appropriate generic information on financial management and financial products is available to them.
Basically, to ensure that consumers are able to make informed judgements and take effective decisions about the use and management of money.
We also have a role to play later in the debt cycle - in dealing with over-indebtedness when it happens. We need to ensure that all consumers have access to debt advice and debt management programmes when they need it.
And we have a role to play later still, in debt collection and enforcement.
Finally, we have a role in creating the right regulatory framework - both in terms of consumer protection, and in terms of facilitating a competitive market environment.
Financial literacy and generic financial information
Up to 7 million adults in Britain have literacy skills below those expected of an average 11 year old. Even more have a problem with numbers.
Research shows that adults with the poorest skills are least likely to have savings and investment, and are more likely to admit being in debt.
We need to ensure that consumers are able to make informed judgements and take effective decisions about the use and management of money. To ensure that consumers have the basic literacy and numeracy skills they need to access information and advice.
And when consumers have these basic skills, we need to ensure that they are aware of, and understand, the options available to them.
Even when people have the basic financial skills they need, many people don't know what they don't know, or what they need to know. They don't know how advice might help them. They may think that financial advice is for rich people or means high-pressure selling. They may be baffled by financial services.
That is why we are working to improve financial literacy, and to ensure that consumers have the information that they need.
In schools, students have the opportunity to be taught personal finance education throughout Key Stages 1 to 4 in the school curriculum.
For example, the Department for Education and Skills' guidance suggests that schools teach:
Championing financial literacy in schools, the Financial Services Authority (FSA) are working with the Department for Education and Skills, the main curriculum agencies and other organisations to help teachers deliver personal finance education.
In addition, the Department for Education and Skills, the FSA and industry, jointly fund the Personal Finance Education Group, or PFEG (peefeg). PFEG aim to promote and facilitate the education of all UK school pupils about financial matters.
For example, PFEG have produced a quality mark for recommended teaching resources. This mark will help teachers to feel confident about the educational relevance of teaching materials. They are also running a major four-year project - the Excellence and Access Project - that aims to enable teachers to become skilled and confident in the teaching of personal finance.
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.
The Financial Services Authority also produce a number of free booklets and information on a range of issues about financial services, backed up with an extensive consumer web site and a financial planning CD-ROM.
And 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.
Consumers can also access a range of information in relation to credit and debt produced by the Office of Fair Trading (OFT). And the OFT have run debt awareness campaigns aimed at improving consumer understanding of credit issues, and highlighting the dangers of overindebtedness.
Finally, focusing on 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.
But the solution isn't just in the hands of Government. We need to build on existing public, voluntary and commercial sector partnerships to motivate consumers to act. To inform them about their choices. And to allow consumers to arrive at decent outcomes.
As well as financial education, Government also has a role to play where debt turns to over-indebtedness. When debt becomes a problem and people cannot afford to keep up the repayments, often through no fault of their own, we need to help consumers find a way out.
In March of this year I launched a pilot project for a national debt telephone helpline. Funded jointly by Government and the private sector, the helpline offers a real and vital helping hand to people with debt problems.
We also provide a block grant to the National Association of Citizen's Advice Bureaux, who provide face-to-face debt advice through local CABs.
Collection and Enforcement
And at the bottom end of the debt spiral, where overindebtedness leads to court proceedings, the Lord Chancellor is conducting a wide-ranging review of the Enforcement of Judgement Debts.
And for those debtors who find themselves involved in court proceedings, the Legal Services Commission is funding debt work as part of its £2 million telephone advice pilot. The scheme supplements current services, making quality assured legal advice and help accessible to people who cannot easily visit their local solicitor or advice agency across many rural areas such as North Wales and Northumberland.
And it's not just about education and advice. Government also has a role to play in making sure that the market framework is right. That the right regulatory framework exists to foster a competitive, innovative financial services industry, whilst ensuring that proper consumer protection is in place.
We've set up a Task Force on overindebtedness, looking at practical ways of achieving more responsible lending and borrowing.
I am also undertaking a radical shake up of our consumer credit laws, which are now 30 years old.
This review of the Consumer Credit Act will ensure that it is up to date and relevant for the way in which today's modern credit market functions. It will also deliver the Government's manifesto commitment to improve protections against loan sharks.
I have already consulted on increasing or removing the Act's financial limit and expect to publish our response to the consultation shortly.
Before the end of the year, we will publish our proposals for allowing credit agreements to be made online and, most crucially, improvements to the consumer credit licensing regime, to make it more focussed on enforcement and on strengthening consumer protection against extortionate credit.
And all this work is being undertaken in parallel with European developments on credit regulation.
The European Commission has recently published its proposals for a revised Consumer Credit Directive and my officials are working on ensuring that it enables the innovative and competitive credit market that operates in the UK to continue, while ensuring consumer protection measures are appropriate and effective.
Negotiating this directive is likely to be a lengthy process, but one that enables us to address the benefits we have seen for consumers and suppliers alike in this market of competition and choice.
So whilst personal debt - or rather the use of credit facilities - is on the increase, this is not the same as saying that over-indebtedness is on the increase.
Most consumers manage debt effectively. But for those who do become overindebted, or who struggle to manage their finances, the Government is working on a number of initiatives to help them. Initiatives designed to keep overindebtedness to a minimum now, and in the future.
(the following are available from the archive)