MPs are busy giving payday lenders a kicking for targeting vulnerable people with expensive loans. But these lenders represent just one small part of the consumer lending industry. We shouldn’t let this focus distract us from the bigger picture; the UK’s economic ills are inexorably linked to the debt crisis facing many households.
A long overdue report by parliament’s Public Accounts Committee (PAC) on Regulating Consumer Credit chastises the Office of Fair Trading for failing to properly clamp down on the doorstep and payday lenders. And the report offers recommendations for the Financial Conduct Authority (due to take over as regulator in 2014) including: better industry oversight, more clarity in the disclosed terms of credit agreements and better consumer protection.
However, these recommendations amount to nothing more than an expressed hope that the consumer credit industry will eventually stop its most abusive practices.
Facing up to the problem
The Committee chose to frame “the problem” in terms of the contract between an individual and a lender, rather than the wider issues of indebtedness facing households. This is an excellent demonstration of the political elite’s unwillingness to face the full extent of the UK’s private debt problem.
For example, in March 2013 total outstanding unsecured (consumer credit) lending stood at £158 billion. In comparison, the NHS budget last year was £108.9 billion. However, the consumer credit figure excludes securitised debts — those moved off the lenders’ balance sheets — which means that total consumer debt is likely to be a great deal more.
While we don’t know exactly how much households owe, we do know that consumer credit is a highly profitable business. With the Bank of England doing everything to keep interest rates at zero, margins on consumer lending are very impressive.
The distribution of net lending to individuals by UK banks and building societies reflects this. In March this year, total lending rose by £0.9 billion. More than half of this rise, £0.5 billion, was made up of short-term, high-profit consumer lending, rather than the longer-term and less profitable secured (mortgage) lending.
In their report summary, the PAC claims that “as banks lend less, and consumers are increasingly turning to other providers it is essential that the regulator is aware of emerging risks and is proactive in protecting the consumer from malpractice.”
It seems parliament has acquiesced to banks’ unwillingness to lend and never ventured as far as to question how and why lenders are using taxpayer-subsidised easy credit to rebuild their balance sheets in this way.
The problem is this: debt is profitable for lenders, but it seriously undermines the financial health of households and is creating a drag on the economic recovery.
The charity Credit Action calculates the average amount owed per UK adult (including mortgages) is £28,969. This is almost 119% of average earnings.
But individual debt levels alone do not tell us enough about the problems facing the household sector (which makes up three-quarters of GDP). As debt levels increased, savings rates declined, and property prices became highly volatile. These trends have wrought havoc on household finances and are reasons for to the ongoing crisis of the British growth model.
Households are feeling the strain, with 49.4% reporting their financial debt a burden, and 18% claiming their debt repayments are a heavy burden. This is indicative of the so-called “balance sheet” recession that we now find ourselves in, and we must question whether economic recovery will even be possible with such a large debt overhang. Households face a double bind: pay down debts and further exacerbate the economic slowdown, or continue to borrow heavily and risk insolvency.
The Public Accounts Committee can be applauded for taking issue with payday loans. We should celebrate their efforts to promote greater financial literacy, and access to mainstream financial services for the poorest and most vulnerable.
But the PAC fails to acknowledge that even these services are simply offering the poorest households a way into debt. The net result is that the poor will simply end up just like middle-income households — up to their neck in debt, with no way out.