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Dr Kim Howells - Former Minister for Consumers and Corporate Affairs (Jul 1998 - Jun 2001)Overindebtedness Summit Conference |
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Like to welcome everyone to this conference on tackling overindebtedness. Consider this is perhaps a unique gathering of such a large group of representatives with a direct interest in this issue. The availability of credit is a key, possibly essential, requirement for consumers in today's society. For most it brings a means of easier access to services and goods, and provides consumers with greater flexibility in making best use of their income. I do not want to clamp down on the innovation which has enabled many consumers safely to realise their dreams. But for some consumers it can, often through a change of circumstance but also on occasions through over-commitment, result in overindebtedness. This brings misery and despair, as well as wider social issues and problems. And it is very often the taxpayer who picks up the tab through higher benefits costs, or through running the bankruptcy and courts systems. Today's conference stems from increasing concern about the number of consumers who have debt problems. I know from my mailbag as Minister for Consumer Affairs that the number of consumers with debt problems is increasing. This is underlined by my discussions with fellow MPs who report a similar surge in consumers visiting their constituency offices. Figures from NACAB bear this out with nearly a 50 per cent increase in debt enquiries since 1996. Similarly, the size of consumer debt is growing dramatically. Let me give you a few figures. The average debt for a consumer with repayment problems has increased by a quarter since 1997, and now stands at £21,000. The overall level of unsecured debt has risen 70 per cent in just five years. I want us to gain a greater understanding of the causes and effects of overindebtedness, and by means of a constructive dialogue look at how we can encourage, through practical solutions, more responsible lending and borrowing. Let me stress straightaway that this conference is not, as portrayed in some quarters, an opportunity to haul the lenders in for a bashing [I'm more than happy to reserve that for a more appropriate occasion!]. Neither do I want to promote a nanny state approach. We have created in the UK a competitive and innovative financial services market and this brings considerable benefits for consumers, but also responsibilities. What I do want to tackle is the lack of transparency in much loan information and the way in which credit is marketed. I have already taken steps in this area, such as clarifying the APR on low start and discounted mortgages. But there is scope for further improvement. It is true to say, I think, that much of the small print in agreements is unintelligible for most consumers and few, if any, lenders actually take them through the rights and obligations when concluding an agreement. In fact, few even point out the conditions on the reverse of the agreement. This is a serious failure in achieving the main purpose of agreements. I want to see this issue addressed by lenders, consumer groups and legislators working together on greater transparency. I accept that some lenders here today will state that they already lend in a responsible manner, and for many that is undoubtedly the case. However, some of the examples of lending that I see clearly show that this is not always the case, even with so called mainstream lending. The areas for improvement include credit scoring and marketing techniques and transparency of information. I want to see industry volunteering to tackle these issues and developing core principles for responsible lending. However, if this is not forthcoming I will not hesitate to consider legislating. The agenda and the timetable you all have shows the key issues I want to tackle this afternoon and I would now like to invite the Money Advice Trust and NACAB to give us short presentations on personal debt and its cause and effect before opening up the discussion. MARKETING TECHNIQUES: I am concerned over certain marketing techniques used by lenders. Much of it has a strong focus on offering credit to young people. Given their lack of credit history I would expect lending practices to be cautious but case studies such as the following do not back this up. A student with debt problems received a mailshot offering a credit card with a limit of up to £25,000. A 17 year old with a temporary job earning £5 per hour managed to obtain a £1,500 loan and later a Visa card on which he ended up owing £2,600. Similarly, interest free or low payment periods followed by a final lump sum can be misleading for consumers, and can result in deferment to high interest rate charges. I suggest that often this is the intent of the lender. Indeed, I suspect that sales staff play up the interest free option and play down the expensive credit element. I know that some lenders do little to highlight to consumers that they are coming to the end of the favourable period -sometimes less than two weeks notification is given that the borrower is about to move onto the repayment programme. I want to see much clearer and earlier notification processes adopted by lenders. And also an exercising of sensible discretion where the consumer only misses the deadline by a few days. Roll over and consolidation loans are another area where improvements in transparency need to be made. Many borrowers are encouraged to take on new loans and roll over existing ones, often on unfavourable terms. Consolidation loans can be beneficial for consumers, but sometimes it is not in their interests if this means unsecured loans becoming secured on their property or borrowing levels are increased. The marketing material I see often makes a lot of the potential reduction in monthly payments without always pointing out crucial information such as the loan becoming secured on the property or that this reduction is achieved by extending the repayment period. This in the end can mean it costing the consumer a lot more than the loans being consolidated. Other techniques are highlighted by cases such as a woman who was sent an unsolicited offer last Christmas of £300 in the form of a cheque, and a man who received an offer of a £1,000 loan with a manipulative inducement in the form of a Christmas hamper. These are not the types of marketing techniques that I associate with responsible lending. I welcome your views on improvements that should be made in the area of marketing. NEW PRODUCTS AND THEIR IMPLICATIONS: New products are constantly arriving on the market place and these are welcomed, but need to be clearly presented to consumers. For example, flexible mortgages bring many benefits for consumers, mainly by allowing consumers to adjust their repayment levels to reflect their circumstances. They often provide a package of products including the property mortgage, an additional loan facility and a credit card. Often these can all be secured on the property and I am concerned that many consumers do not understand the product package and, for example, the consequences of defaulting on any one element of the package. Similarly, there is an emerging market in credit card companies competing by offering low rates for balance transfers. While this brings undoubted consumer benefits it can also provide a means of becoming overindebted. I am not aware of any lender who requires the cancellation of the previous card and as a result the borrower instantly doubles his borrowing capacity. I am also aware of the press reports on the lack of transparency in credit payments on balance transfers, with new purchases attracting headline rates or repayments only being credited against the balance transfer. Welcome your comments and concerns in this area. CREDIT SCORING: I believe that lenders take proper account of the black data held on borrowers and suggest that greater emphasis needs to be placed on the white data such as the borrower's overall capacity to service existing and requested loans. One example of this is the case of a borrower with a net income of £2,000 per month, but had built up credit card debits of £250,000. How many lenders take a detailed look at the overall borrowing envelope of the applicant? But with that, somewhat provocative, lead in I will now invite the BBA and APACs to outline the way in which credit scoring is currently undertaken, before we explore the scope for improvement. CONSUMER EDUCATION: I have asked the National Consumers'Council to share their thoughts on actions that could be taken to improve consumer education and in particular the ways in which we can encourage more responsible borrowing. I also want to look at how we promote key questions that borrowers should ask when taking out a loan, so that they are able to make an informed decision. In addition to consumer education it is important that where consumers do get into debt problems they can gain quick access to high quality free debt advice. In this respect I am seeking funding from HM Treasury to support the piloting of proposals for the setting up of a national grid of telephone based debt advice services. However, this also requires a significant contribution by way of matching funding from the private sector. I have sought through the trade associations present today financial support for this proposal and expect that to be delivered. Considerable support has been forthcoming from some sectors of the credit industry, such as the banks, and we are very grateful for this. It is a good sign of corporate social responsibility. But all of the credit industry has to accept a responsibility for this work and its adequate funding. To that end I have asked my officials to keep me informed of those supporting this venture, and equally those who have as yet not made a significant contribution. But first, the thoughts from the NCC on consumer education. ENFORCEMENT: Enforcement is a key element in ensuring that consumers are adequately and appropriately protected. The OFT has a major role to play in this area and I will now invite the new Director General of Fair Trading, John Vickers, to outline the powers he has as well as initiatives his office have taken recently. PROPOSALS TO CREATE MORE RESPONSIBLE LENDING AND BORROWING: In conclusion I want to summarise the way forward. I see this as the start of a process of reform, not the end. There are a number of actions I see arising from today. First, I want to see a commitment to: I want to see the Task Force taken forward as a matter of urgency and meeting before Christmas. I then expect recommendations to be made to me by early Spring. But equally I want to demonstrate the seriousness with which this Government views this issue. I am personally firmly committed to taking the lead on tackling the whole issue of overindebtedness. Initiatives I am taking forward include, a review of the Consumer Credit Act to ensure that the necessary consumer protection measures are brought up to date and address the products and marketing approaches being adopted. I have already spoken about the provision of a national debt advice network. I propose a clamping down on loan sharks and also want to explore with the Office of Fair Trading the scope for further focussed action. This has been a very positive conference and a number of clear objectives and targets have been agreed. I want to ensure that the commitment gained today is not lost and together as a partnership we deliver practical solutions to tackling overindebtedness. |
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Other speeches by Dr Kim Howells - Former Minister for Consumers and Corporate Affairs (Jul 1998 - Jun 2001)
(the following are available from the archive) |
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