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The Lord Bishop of St Albans
To ask Her Majesty’s Government what is their assessment of the risks posed by current levels of household debt in the United Kingdom.
The Lord Bishop of St Albans
My Lords, I am deeply concerned—as I know are many other Members of this Chamber—about rising levels of household debt in this country. Households in the UK are taking on far more debt than they used to and overall are taking on more debt than they bring home in income. While the ratio of household debt to income has not yet eclipsed the 160% peak hit in early 2008, it currently hovers around 140%, a dramatic shift from the ratio of 95% in 1997.
Of course there are good reasons why families in this country choose to take on debt—perhaps to buy a house or another form of secured debt—but, nevertheless, we know that for some people the prospect of saving for a house is inconceivable and that those who are lucky enough to purchase a house take on an extremely high level of mortgage debt. This burden, especially for young people, should be recognised.
Even more concerning are rising levels of unsecured debt. Figures from the FCA last month indicate that a quarter of UK adults have been overdrawn in the past 12 months, and that more than 4 million people have already failed to pay domestic bills or meet credit commitments in three or more of the past six months. Forty-seven per cent of renters say they would struggle to meet their rent if payments went up by more than £100 per month. This heavy reliance on credit and lack of savings is understandably a source of vulnerability and anxiety for many and limits the ability to invest and make wise long-term financial decisions.
Debt is more than just a political or economic issue. It is also a pressing spiritual and social issue, both for the whole of society and individuals. The Bank of England, and particularly its Financial Policy Committee, will invariably have comments on the broader macroeconomic risk the increase in unsecured debt may pose. In September of this year, the Bank’s Financial Policy Committee warned banks that the rapid growth of consumer credit,
“is a risk to (Banks’) ability to withstand severe economic downturns”,
and,
“they have been underestimating the losses they could incur”.
The banking industry has an obligation to heed these warnings and act responsibly. I hope that deep and productive partnerships can be formed between financial institutions and the FCA to make changes that benefit consumers and encourage them to save, and that the Government will step in to regulate if needed.
For many, the experience of debt is profoundly destructive, isolating and surrounded by a significant and dangerous stigma. Five in every six over-indebted people who are struggling to make repayments do not get help for a wide range of reasons. A charity I know well—Christians Against Poverty—which operates 293 debt centres across the UK, including nine centres in my diocese, reports that one in 10 of the people it helps has previously attempted suicide. Tragically for many, the issue of household debt can literally be one of life and death. A survey conducted by Christians Against Poverty found that 40% of the people it helps have mental health problems and two-thirds have skipped meals due to debt—often parents who are not eating to provide for their children.
Coming from my position, noble Lords will not be surprised that I am interested in what the Christian tradition has to say about money. It affirms that each person has a moral responsibility to live within their means. That is a fundamental principle. However, illness or unforeseeable events can strike sometimes, which may result in unexpected debt. That problem is also addressed in the Scriptures: Nehemiah orders the cancellation of onerous and exploitative debt. In the Gospel of Luke, Jesus Christ says he has been sent by God to proclaim the year of the jubilee, referring back to the command given to the Israelites to forgive debt in recognition of their liberation from slavery in Egypt.
For many years, the Church of England has been at the forefront of both extending charity and finding solutions, particularly on a global scale, such as the work done by the Jubilee Debt Campaign around the millennium. The most reverend Primate the Archbishop of Canterbury’s more recent Just Finance Foundation has also been working nationally and with local churches to grow credit unions and support the community finance sector. The Church has produced resources to help congregations to run debt awareness and signposting workshops. We produced a financial education and school banking programme for primary schools, called Lifesavers, to build financial capability and encourage saving from an early age. If noble Lords have not been into a school to see one of the credit unions working there, it is worth going just to see the work they do to help young people to support themselves through being financially responsible and planning properly for the future.
I hope the Government can support that work and account for the burden that debt places upon families in the UK. The Financial Guidance and Claims Bill is a good start, but more work needs to be done. I welcome the recent announcement of the consultation on a breathing space for those dealing with debt, and I hope the Minister can assure me that this much-needed legislation will be introduced as soon as possible. I also trust that the Government will consider the effects of current welfare reforms, in the light of the current high level of debt of many families in this country. We are all hearing reports of numbers of people falling into rent arrears as a result of the extended waiting period before the first payment of universal credit, which are extremely worrying. There is much that is good in the universal credit proposal but it would be a great shame if, instead of simplifying the benefits system and incentivising work, the policy was remembered for driving people into greater debt—the effects of which can be prolonged and far-reaching—exacerbating mental health problems and, in the most extreme cases, leading to homelessness and family breakdown.
When we think about the Government’s upcoming Budget and hear news reports about inflation and interest rates, it is all too easy to forget that behind that, real people and families are struggling. They are not just statistics. In introducing the debate—I thank noble Lords who will speak in it—I hope that we can make a frank assessment of the risk posed to our nation and individuals by current levels of debt, and be able to work together to find solutions to this pressing social problem.
Baroness Donaghy (Lab)
My Lords, I thank the right revered Prelate the Bishop of St Albans for initiating the debate. I speak about personal debt from some experience. For most of my life, I was the best friend of credit card company directors. I helped to buy their limousines and holiday homes and to pay for their alimony. I had friends who had maxed out on all their credit cards and could not afford even the minimum monthly payments on any of them. I considered myself better off because I always paid above the minimum suggested payment. I was fortunate because there came a day when I could pay off all my cards; I made a vow that those credit card directors would never again get a penny from me in interest. In the presence of the right reverend Prelate, I would not go so far as to say that I hope they are all poor and homeless, but they are certainly less well off without me.
It is too easy to borrow. If a friend suggests borrowing, they are possibly receiving a bung from the lending company for introducing you. Advice agencies are underfunded, and the one dread that all Governments have is that people will stop spending, because that is considered more important than household debt. First, a number of people are given a higher ceiling on their credit card spending without asking for it. Will the Minister say whether the Government are prepared to ban that activity? Secondly, a number of companies offer customers cash to persuade others to take out loans. For example, BrightHouse, which has already been in the regulator’s bad books, offers £220 to introduce a friend, who will have to pay back money at anything up to 99.9% interest. BrightHouse has said that that is common practice among retailers. Will the Minister say whether that unethical practice should be banned? My third concern is whether the various unbiased money advice organisations are receiving adequate funding. Is the Minister satisfied that those organisations are receiving sufficient funding to do their job, and that their ability to campaign on the issue of debt has not been reduced by government legislation?
On the broader issues, the Bank of England indicates that household debt is now about £1,558 billion—one of the reasons why Bank of England rates were increased. That figure represents 135% to 140% of household post-tax income. Some commentators try to reassure us that this can be set against household wealth, which is more than £11 trillion—10 times more than the household post-tax income. Unsecured debt has accounted for a third of the rise in household debt in the past five years. Some of that is because of low interest rates and the way people are financing their car purchases. Bank of England research has shown a new kind of borrower: people who are comparatively well-off, have savings and wish to take advantage of the favourable rates available.
Perhaps we should worry only about the losers: people who borrow because of delays in their benefits or who have faced some catastrophic change in their circumstances. The Money Advice Service said that there are now 8.3 million people in the UK with problem debts. Andrew Bailey, the chief executive of the Financial Conduct Authority, said that he was concerned by the number of people who need loans to keep going, particularly those working in the gig economy. He also said:
“I don’t think we have a sustainable solution, in terms of the provision of credit where needed”.
He has called for government involvement. Can the Minister say in what way the Government are involved, as has been suggested by Mr Bailey?
There are individual tragedies of homelessness and depression at the extreme end; too many people are at that end. I suspect that the Government would be more worried about spending slowing down than household debt. Consumer confidence is weak and sales are down. To paraphrase Robert Browning, “What of soul was left, I wonder, when the spending had to stop?”
Lord Sharkey (LD)
My Lords, I too congratulate the right reverend Prelate on securing this debate, on his eloquent and forceful open speech, and perhaps on setting a record for two QSDs in one week. Today’s debate is timely. The problems presented by household debt appear to be mounting and are certainly very serious. The CEO of the FCA, Andrew Bailey, discussed the issue in his Mansion House speech on 3 October. He noted that the rapid growth in consumer credit now stood at around 10% per annum. He acknowledged that there are risks to consumers, with the total stock of consumer credit standing at £200 billion. Of this, £68 billion is credit card debt; £58 billion is motor finance debt; £15 billion is in various forms of high-cost credit; £7 billion is in overdraft credit by high-street banks; and the rest—an astonishing £52 billion—is mostly in unsecured personal loans. This is a mountain of debt. It does not include any council tax, council rent or utility arrears.
Two kinds of risk are illustrated by these figures. The first is a possible systemic risk to the financial system itself—a sort of mini-version of the sub-prime mortgage financial crash of 2007-08. This arises from the size and rapid growth of the use of personal contract purchases to buy cars. Right now, 86% of new cars bought in the UK are bought this way. There are some direct risks to the consumer in this. Failing to read and understand the small print may result in large and unexpected bills. For some, that may mean effective default and premature return of the vehicle. Since the business model of the finance providers of PCPs depends critically on prices in the used car market, a sudden increase in volume via premature returns would pose an existential threat, as would the sudden and large-scale offloading of diesel cars—something widely predicted. Together, or even individually, these factors could trigger acute financial and systemic distress. Of course, the most indebted households would be most vulnerable to any new systemic crisis, as they were in the last. I am very interested to hear the Minister’s views on the PCP market, his assessment of the risks involved and the actions necessary to contain them.
These high-level risks pose a potential threat to us all, but the current state of household indebtedness is already a real and present problem. Too many people and too many households are overextended. Too many are using debt to bridge the increasing gap between real wages that are in decline and prices that are increasing. Signs of distress are evident. Council tax arrears have risen by 5% in the last five years and utility arrears are rising as well. The water industry, for example, is showing a 17% increase in arrears over four years. In all, as other Lords have mentioned, household debt as a percentage of disposable income has risen steeply over the last year and now stands at 140%. That should come as no surprise because we know how hard the less well-off are being squeezed. We know that too many have no real financial resilience—30% according to the FCA’s recent, landmark Financial Lives Survey.
Regrettably, there are no real signs that the situation will improve. The Bank of England’s November Inflation Report forecasts a decline in the already low level of household savings. The OBR’s website shows RPI remaining above 3% for each of the next four years and household debt rising every year in the same period, reaching 153% of income. All this is bad news for many households, but that is not all the bad news. It is still the case that organisations take advantage of the most financially vulnerable. For example, the FCA has said it remains concerned about the rent-to-own sector. It is also concerned about unarranged overdraft charges, which are often higher than for payday lending, about poor lending decisions, sales and collection practices in the home-collected or doorstep lending businesses, and about catalogue credit. The FCA has added to its action list a further investigation of debt management companies.
Those are a lot of things to be concerned about, all of them presenting obvious risks, especially to the most vulnerable. It would be good to hear from the Minister the proposed timetable for action on all these areas, but there is one fundamental question: does the Minister think that the annual 10% growth in consumer credit is sustainable? If not, what do the Government propose to do to bring it down?
Lord Haskel (Lab)
My Lords, I too congratulate the right reverend Prelate on tabling the Question. He really has been a persistent campaigner on household debt. Sadly, he does not seem to have much support from the Government Benches this evening.
In this House, we have frequently heard how household debt is incurred not through reckless spending but by borrowing to pay for the necessities of life and for expenditure on basic living—costs such as food, clothing and accommodation. Quite rightly, noble Lords speak of the risks. The problems of household debt are rarely contained within the household. The risk is that they spill out into the rest of the community and become society’s problems in the form of broken families, disruption of work, homelessness, stress and mental ill-health. These problems are passed on to the next generation. We are told that more than a third of British children will soon be growing up in relative poverty. Surely this transcends left/right politics.
A third of households with serious debt problems have people in work. The Government are proud of the employment figures, but there is something wrong with an economy where working people cannot afford to live. Yes, the Financial Guidance and Claims Bill should help by improving the quality of assistance and, I hope, by providing some respite to desperate people, but such a large number of working households in this kind of financial difficulty must indicate that the minimum wage, tax credits and housing benefits are just not working.
Surely another indication that the system is not working is the fact that four years ago there were hardly any food banks. Today, there are 2,000. Another indicator is the rise of a third in county court judgments regarding consumer debt. Yes, tax credits are being merged into universal credit with the intention of improving the incentives to work, but the right reverend Prelate and several reports have shown that this is not working either.
Economics will not solve this problem quickly. Household incomes are virtually static. Inflation is rising and the recent interest rate rise will not help. The Office for Budget Responsibility has given up forecasting a meaningful rise in productivity. So we fall back on government action. That is why the Government should support the Living Wage Foundation, which encourages companies to pay the voluntary living wage, which is above the national minimum wage. Some 3,600 companies have signed up to it, including some FTSE 100 companies. Many companies have found that it also makes good business sense. The living wage is independently calculated and reflects the real cost of living. Yet many of our largest companies still pay people less than the independently calculated living wage, preferring bogus self-employment or having low pay subsidised by us, the taxpayer, in the face of soaring executive pay and aggressive tax avoidance. No wonder the present system is under attack. Obviously the Government have to get it to work better.
All noble Lords who have spoken have mentioned the concerns of the Financial Conduct Authority. The Monetary Policy Committee is in charge of monetary policy and the Financial Conduct Authority in charge of financial conduct, but clearly they are in conflict. As we have heard, the FCA is very concerned about the rise in private debt. The Monetary Policy Committee is concerned about inflation and the money supply. There is clearly a conflict in achieving both objectives. Have the Government issued any guidance as to where the priorities lie and whose concerns in fairness should take priority? Or are the Government just drifting along hoping for the best and waiting to see what happens?
The right reverend Prelate is right. Insupportable household debt is a big contributor to the economic and social conditions causing the alienation and discontent which have captured our political life. Action is required, and quickly. What are the Government going to do?
Baroness Coussins (CB)
My Lords, I, too, am grateful to the right reverend Prelate for introducing this important debate, and I remind the House of my interest as president of the Money Advice Trust, the charity that runs National Debtline and Business Debtline. Last year, these free advice services helped 200,000 people by phone, with 1.3 million visits to their advice websites—figures which point to the scale of the UK’s household debt problem.
Levels of household debt are indeed increasing significantly, as noble Lords have already heard, with consumer credit growth at around the 10% mark, and more than £204 billion in outstanding credit card, personal loan and other balances. Of course, this paints only a small fraction of the picture, because we are talking not only about mortgages but increasingly about arrears on household bills. The proportion of calls to National Debtline about council tax arrears, for example, has risen from 14% a decade ago to 25% last year, so it is essential that any debate around household debt reflects all these problems and not just consumer credit.
Our debate this evening is on the Government’s assessment of the risks posed by household debt levels, and they are substantial. This is true in an economic sense, as the Bank of England’s Financial Policy Committee has warned, but it is true also in a personal sense for those struggling to cope with their finances. Debt problems can have severe consequences for relationships, employment, mental health, physical health and a person’s general well-being.
The high level of parliamentary interest in this issue is given welcome focus in the other place by the Treasury Select Committee’s new inquiry into household finances, and in this Chamber through the passage of the Financial Guidance and Claims Bill. The new single financial guidance body, working in partnership with advice charities such as Citizens Advice, the Money Advice Trust and StepChange, will be key in reducing the risk that household debt poses to people’s well-being.
The “breathing space” proposals, which have already been mentioned, are also a positive development and were discussed in detail in your Lordships’ House at the Report stage of the Financial Guidance and Claims Bill. As I said during that debate, it is essential that any breathing space scheme include public sector debts, too, such as council tax. We must get this scheme right so that the risks of household debt both to individuals and to the economy as a whole are reduced.
There are many other things that the Government could do to reduce this risk still further. I want briefly to mention just two. The first concerns the recommendations of the group of charities behind the Taking Control campaign, which seeks fundamental reform of the regulation surrounding enforcement agents—the people we used to call bailiffs—whose actions can cause significant distress and detriment to people already in a vulnerable situation. Research by the charities found that reforms passed in 2014 and intended to protect people from unfair practices in this industry have been only partially successful, and in some cases have created new problems. I urge the Government to incorporate bailiff reform of the kind advocated by the Taking Control report published in March into their wider approach to the problem of household debt and in addition to a breathing space scheme. I would be grateful if the Minister could address this specific point in his reply.
Secondly, I welcome the financial inclusion policy forum that the Government are to establish. This follows the recommendation of the Financial Exclusion Committee of this House. I would be grateful if the Minister could indicate the timetable for setting up this forum and say whether the debt advice sector will be represented on it.
Baroness Lister of Burtersett (Lab)
My Lords, I, too, am grateful to the right reverend Prelate, not least as I am unable to take part in Thursday’s debate on universal credit. It is on universal credit that I want to focus, because, as Citizens Advice and the National Federation of ALMOs have warned, UC is exacerbating household debt and rent arrears.
It is hardly news that the built-in six-week wait for the first UC payment is the source of many of the immediate problems being reported. It is therefore encouraging that there are strong hints that the Government will think again and reduce that wait to four weeks, as recommended by the Work and Pensions Committee. However, at the risk of appearing ungrateful, I fear that, while it will mitigate UC’s problems, it will not solve them.
Even a four-week wait will cause serious difficulties for many people moving on to UC. The Citizens Advice survey found that only one in six were able to rely on their own resources from savings or final wages to tide them over. This is not surprising given that the FCA found that nearly one-third of UK adults show low financial resilience for reasons such as inability to cover living expenses for even a week if they lost their main source of household income. Recent evidence from KPMG, the Living Wage Foundation and StepChange underlines the extent of debt and reliance on high-cost credit such as payday loans just to get by among those in low paid and/or insecure employment. Do the Government have any information about the number of people claiming UC who are already in debt or arrears? Even if not in debt, they are unlikely to have savings to fall back on, as was clear from the impact statement on the increase in the number of waiting days.
Despite the Government’s assurances, additional payments are not the answer; they are deductible loans and a recent Smith Institute study found reluctance to borrow from the Government, as they saw it, among some UC claimants. Beyond the six-week wait lies a more fundamental problem: the monthly assessment and payment of UC. The Government insist on this on the grounds that it will increase financial responsibility and readiness for the labour market, but the latest ONS statistics show that nearly one-quarter of those in the lowest pay quintile are still paid more frequently than monthly and according to the Resolution Foundation nearly three-fifths of new UC claimants moving from paid work in the last tax year had been paid more frequently than monthly. Those in the Citizens’ Advice survey who were struggling with monthly payments faced an increased risk of financial hardship. While the majority might be able to cope, some are clearly finding it really difficult. At the very least why can they not be given the choice to receive fortnightly payments, as in Scotland? Instead, those who struggle are offered help with budgeting, which is quite insulting to those who managed their money reasonably when it was received more frequently.
This brings me to the issue of universal support. In the recent Commons debate, the Minister responded to lain Duncan Smith’s call for,
“extra effort, focus—and money, when necessary”—[Official Report, Commons, 18/10/17; col. 883]—
for the rollout of universal support alongside UC, with an assurance of the Government’s continued focus on it and recognition of its “absolute value”. However, when I talk to people working on the ground they just laugh at the mention of universal support and say that the resources are quite inadequate and its remit too restrictive. Will the Minister ask the DWP to provide us with a report on how universal support is working? Not only does universal support appear inadequate to the task but, as predicted in your Lordships’ House, the replacement of the Social Fund by discretionary local welfare assistance schemes without any ring-fenced funding has meant that in many areas this is no longer an alternative source of support in face of debt, because many authorities have closed or significantly cut back on their schemes. According to the Centre for Responsible Credit this,
“has left people facing destitution for lengthy periods of time”.
This underlines how we need to put the rollout of UC in the wider context of social security cuts since 2010, totalling a cumulative £27 billion a year by 2020-21. Analysis from a number of organisations indicates that these cuts, including and especially cuts to UC itself, will have a seriously adverse impact on child poverty. This can only mean that the problem of debt and arrears will get worse, with all the consequent human suffering and adverse effects on physical and mental health that this entails. It is in the Government’s hands to prevent such an outcome, starting in next week’s Budget.
Lord McKenzie of Luton (Lab)
My Lords, it is a pleasure to follow my noble friend Lady Lister. I, too, welcome the focus of the right reverend Prelate the Bishop of St Albans’s Question, which chimes with some of the discussion we have had in recent weeks on legislation. The right reverend Prelate asks for the Government’s assessment of the risk associated with current levels of household debt. As a recent Guardian article sets out, at a time when the Government are planning to cut the annual deficit year on year, the debt of Britain’s households is going in the opposite direction. We have heard some of the statistics already.
The House of Commons briefing paper tells us that household debt as a percentage of disposable income started rising in 2016 and stood at 140% of disposable income in Q2 of 2017. At the end of 2016, it amounted in total to £1,825 billion with mortgage debt making up 87% of that amount. We are also reminded that individual insolvencies in England and Wales in the first three-quarters of this year were the highest since 2014. It is the rise of non-mortgage forms of credit that is fuelling the rise in borrowing, especially arrears of household bills and utility bills. This is across the piece, including council tax and water company bills. Rent arrears, as we know, are rising dramatically. At a time of low wage growth and freezing of benefits, consumers are turning to credit to buy essentials. So we have an economy being built on debt when this was supposed to be an era of business investment, higher productivity and export growth.
What are the risks? We should first recognise that borrowing can be good for the economy—for example, if it is enabling consumer spending to be smooth—but high levels of household debt can also create problems for the economy and for individuals. There are obvious risks of increased default on loans, especially if interest rates are to rise with wages stagnating. There will be risks to the economy as a whole where individuals divert resources to dealing with secured debt and cut back on other consumer spending.
The Money Advice Service defines overindebtedness as including keeping up with domestic bills and credit arrangements being a heavy burden, and missing credit commitments or domestic bills in any three or more of the last six months. The FCA has a concept of potential vulnerability, which is a wider concept, covering those with low financial resilience, low financial capability, an experience such as divorce or bereavement, or health issues. Its 2017 survey identified that 8% of the UK adult population, or 4.1 million people, have not paid domestic bills or met credit obligations in three of the last six months. This has implications for the revenues of local and central government. Just under 8 million people are overindebted, while 4.5 million people say that they have been declined a financial services product in the last two years.
Whatever measure is used, there are millions of people in this country living hand to mouth, struggling or unable to pay their way, with many having to resort to food banks to survive. Of course we know that the misery caused by unmanageable debt is not just the financial strain it puts on households, consigning them to a future of accessing high-cost finance. It puts strains, sometimes unbearable strains, on household relationships. It affects people’s self-esteem and health, particularly their mental health.
Does it have to be like this? Of course it does not. For a start, the Government could make speedier progress on introducing their manifesto commitment, referred to by others, to provide a breathing space for those struggling with debt. I leave it to my noble friend Lord Stevenson, who has been at the forefront of pushing this issue and to whom I pay tribute, to say more on this. The Government can also ensure that the new single finance guidance body is robustly introduced as soon as possible to secure a smooth transition from the existing money advice services. There is also work to do around financial education and financial capability.
But there are more profound matters. We know that the build-up of council tax arrears has arisen as a result of passing the buck to local authorities and the continuing squeeze on their finances. We know that the payment architecture for universal credit, as my noble friend Lady Lister has just said, is fuelling rent and other arrears. We also know that a decade of draconian cuts to the social security system has thrown millions into poverty. The Government have the power to change all this. They do not have to accept, for example, the grotesque juxtaposition of growing domestic debt levels when they see billions washing around in offshore centres. The risk to our economy and the well-being of those mired in debt are in the Government’s hands to address.
Lord Stevenson of Balmacara (Lab)
My Lords, I too congratulate the right reverend Prelate the Bishop of St Albans on the first of the double header that he has this week. He has been very successful and he must tell us how that is done. It would be much easier if one could get more opportunities to raise issues under the QSD heading. I think that he will be happy with the speeches in the debate so far, which have been wide-ranging and covered a lot of ground. They have picked up on the points that he outlined and I look forward to the Minister’s response.
Of course, this is a tragic situation. The current levels of household debt are extraordinary and will be a real problem in the future. Moreover, the human cost, which everyone has mentioned, is important. Anyone who, like me, has listened in at the sharp end to phone calls from the Money Advice Trust, Christians Against Poverty or StepChange, of which I am the former chairman, will have heard the agony of people who are struggling with debt that they want to clear but simply lack any ability to do so. It is a really awful situation.
What do we do about it? I have five things that I want the Government to do: first, we have to look at pay. If there is not more money circulating in the economy, there will not be the resources to pay back the debts that are necessary for people to enjoy the lives that they want. The living wage would be a start, but there is also training to get people better jobs, along with better management of those jobs. Secondly, affordable credit needs to be made much more widely available. The problem is that people are squeezed to get the credit they want and have to pay far too much for it. It is too easy to borrow, as has been said, but we should be thinking about how to ban the usurious rates that are used. We still have problems with payday loans and we still have problems getting information around, so we need real-time credit sharing information. Consumers must also be treated more fairly by the regulator concerned. The regulator must stop being dominated by the fair markets and look at what consumer needs are. They do not require high-end usurious products.
The information that is available is one thing, but the financial products people need must also be made available on a fairer and more equitable basis. I take as an example insurance. Of course there is compulsory insurance, but there is also the discretionary kind, in particular household contents insurance. Would it not be fantastic if people could have access to what they actually need, but 39% of UK adults do not have household contents insurance, a figure that rises to more than 72% for those in rented accommodation? That is 10.5 million people without the basic cover required if they suffer a fire or are burgled. They cannot afford it. I do not have to remind the party opposite that it was people like Churchill who saw this early, going back almost 100 years. He wrote:
“If I had my way, I would write the word ‘insure’ over every door of every cottage and on the blotting pad of every public person because I am convinced that for minor sacrifices, families can be secured against catastrophes which otherwise would smash them forever”.
Mr Churchill got a lot of things right, and I commend him.
We need proper debt advice and insolvency arrangements. We have talked about bailiff reform, which is also important, to which I would add the breathing space issue raised by my noble friend Lord McKenzie. That needs to come in under the Bill that is before us and I hope that will be the case. The Government need to focus on this. I noticed that in their response to the excellent report by the Select Committee of your Lordships’ House on financial exclusion, the Government repeated a lot of the problems that that committee was trying to get at. In particular there is the worry about why the Government split their responses to financial inclusion, which is run by the Treasury, from those to financial exclusion, which is run by DWP. This is not helpful and we need something done about it.
We also need to pay more attention to the paradigm under which we operate. The Minister needs to respond to some of the worries about this. The paradigm under which most people tend to operate is to try to get as much education as they can and then to borrow a loan for a house, for instance. They then repay that over the years as they get better jobs and when they are able to repay the borrowing, they eventually retire on their pensions. I do not think that paradigm works any more and I wonder what thinking the Treasury is doing about which paradigm should replace it. My children do not expect to be in jobs for the rest of their lives—they do not expect to be in careers, in the tradition that we had when we were growing up. They are very worried about how they are going to survive. The Government have a responsibility to lead on this and explain what they want people to do, so that they do not have the worry and distress that is so common and which has been exemplified by the speeches today.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, I join other noble Lords in paying tribute to the right reverend Prelate, not only for securing this debate but for the work he has done in this area over many years to highlight a major problem. It is a social and a spiritual problem in many parts of this country. I thank him for securing this debate, as I thank noble Lords for their contributions.
Perhaps I may begin by setting one or two things in context and then come to some of the points that have been raised. In the UK, we have seen the financial positions of households improve substantially since the financial crisis. The right reverend Prelate the Bishop of St Albans mentioned that in the late 1990s, the level of debt per household was in the 90% range. It then went up to 160% at the time of the financial crisis in 2008. It has come down now to 140% but it is still at a historically high level.
Mention has also been made of debt interest payments. Those payments are of course coming down, as we have seen historically low interest rates. Whereas interest payments as a proportion of income were 4.3% in the first quarter of 2017, that is a fall from 10% in quarter 1 of 2008, as a result of the fall in interest rates. I put these points on record simply to place some context for the debate and not in any sense to detract from the major issues, which I will come to later.
Ongoing financial and economic stability is an essential priority for this government. That is why, following the financial crisis, the government set up the Financial Policy Committee to monitor and assess potential risks, and to take any action necessary to mitigate them. In 2014, the Financial Policy Committee acted to guard against any potential risks associated with the build-up of mortgage debt and prevent a significant rise in the number of highly indebted borrowers. The right reverend Prelate referred to responsible lending, and mortgage lenders are now required to place a limit on lending at loan-to-income multiples at 4.5 or above. That is a particular focus for the FPC, which also offered guidance to mortgage lenders on affordability testing to ensure that new borrowers would be able to afford their repayments if interest rates were to rise, as they did earlier this month. In June 2017, the Financial Policy Committee assessed that the growth in consumer credit represented a pocket of risk and that increased vigilance was warranted. The noble Lord, Lord Sharkey, referred to that point.
Let me come to some of the points which were raised. The noble Lord, Lord Haskel, asked whether we support the living wage. He is a generous Member of this House, and I am sure that he would recognise that the Government deserve some credit for introducing the living wage, which is equivalent to a £910 pay rise for those who are in full-time work and were previously on the minimum wage. We have also raised the tax threshold so that many people on the lowest incomes have either been taken out of tax altogether or have had a reduction of £1,000 in their tax bill.
This brings me to a key point raised by the noble Lord, Lord McKenzie, the right reverend Prelate and the noble Baroness, Lady Lister. They spoke about why people get into debt. The primary reason why people are driven into debt is job loss. Second to that, but some way behind, is the onset of sickness or disability. There is also persistent low income and relationship breakdown. These are points that the noble Baroness, Lady Donaghy, touched upon as she looked at those areas. The noble Baroness, Lady Coussins, asked about public sector debts and what we are going to do in respect of breathing space. Several noble Lords referred to that. The Government have published their call for evidence. We will not prejudge the outcome of that, but we believe it is an extensive consultation and we are looking forward to receiving the evidence. The Government have recently called for that evidence to be provided in respect of the six-week breathing space. I heard what the noble Baroness, Lady Lister, said about the level it should be, but we are calling for that. This call for evidence is the next step in implementing our manifesto commitment. It is important that we get this right, so we are seeking to take views widely in this regard. After considering all responses to the call for evidence, the Government will bring forward a consultation on the specific policy proposal soon with a view to publishing draft legislation by the end of next year and certainly no later than 2019.
Lord Stevenson of Balmacara
I appreciate the Minister giving way as this is a time-limited debate. I wonder whether we can reflect for a minute on that. We have tabled an amendment for Third Reading of the Financial Claims and Guidance Bill, which was referred to by the noble Baroness, Lady Coussins. What the Minister has just said does not square with where we think we are on that issue.
Lord Bates
The consultation period is ongoing now. There is a schedule coming forward for Third Reading, which will be discussed. I was outlining the call for evidence that we have had and the consultation that we will have upon it. Of course the Government will make their position clear in respect of any specific amendment that may be brought forward at Third Reading.
The Monetary Policy Committee has made its decision to raise interest rates on a broad set of economic data, working closely with the Financial Policy Committee to understand its impact on households’ balance sheets. The independent FCA is responsible for the regulations in place to protect customers in their dealings with financial services firms. They include at their heart the requirement that firms must deal fairly with customers in payment difficulties. Its rules require lenders to consider a variety of options to help a borrower cope with difficulties. The right reverend Prelate paid tribute to a number of organisations that are working in the area of debt resolution. I pay tribute to the work of the noble Lord, Lord Stevenson, with StepChange and that of the noble Baroness, Lady Coussins, with the Money Advice Trust. I have seen the work of Christians Against Poverty. What it is doing is quite extraordinary, but more needs to be done.
The noble Baroness, Lady Coussins, asked when the financial inclusion forum will be set up. The forum’s objective is to bring together Ministers in departments with a remit to promote financial inclusion, regulators, especially the FCA, and key stakeholders to address financial exclusion. The financial inclusion forum will be co-chaired by the Economic Secretary and the Minister for Pensions and Financial Exclusion. The forum will be attended by Ministers from other departments, regulators and representatives from industry and consumer groups. It will meet on a biannual basis and review recent initiatives and progress.
The noble Baroness, Lady Donaghy, asked how concerned the Government were about the rapid growth in consumer credit as a potential risk to the economy. The FPC’s most recent assessment of the growth in consumer credit is that it does not present a material risk to economic growth, as consumer credit represents 11% of overall household debt. But again, that is not to suggest that we do not consider that it is a significant factor. The noble Baroness, Lady Donaghy, also asked what the Government are doing about the high cost of credit. The Government have transformed regulation of consumer credit through the use of the Financial Conduct Authority’s review of high-cost debt. We put a cap on payday lending and the egregious interest rates that were being charged there, which has led to payday loans halving in number since it was introduced.
The noble Lord, Lord Sharkey, asked specifically about car finance. Car finance companies are required to meet the standards the FCA expects of lenders, including making affordability checks and providing adequate pre-contractual explanations to customers. The FCA’s chief executive, Andrew Bailey, who the noble Lord referred to in his speech, said that he does not see the growth in personal contract purchase finance as a problem per se, as it recognises that a car is an asset. The FCA is looking at the car finance market to assess whether consumers are at risk of harm. The FCA is focusing on four areas: affordability checks; conflicts of interest between lenders and dealers, a point raised by the noble Baroness, Lady Donaghy; quality of information from firms to consumers, and whether firms are adequately pricing risk.
The noble Baroness, Lady Donaghy, asked whether advice agencies have enough funding. We set up the Money Advice Service, which has spent £49 million, and over 440,000 free-to-client debt advice sessions have been undertaken. We are setting up a new single financial guidance body, bringing together the Money Advice Service, Pension Wise and the Pensions Advisory Service. This will be more efficient, and I think less confusing for customers, and will direct money to front-line services.
The right reverend Prelate, the noble Baroness, Lady Lister, and the noble Lord, Lord McKenzie, referred to universal credit. DWP research shows that the majority of people claiming universal credit are comfortable managing their budget, and any need for financial or budgeting support is discussed at the outset. For those who cannot wait until their first payment, advances are available which provide up to 50% of a claimant’s indicative award straightaway, although I accept the point made by the noble Baroness—
Lord Stevenson of Balmacara
I am very grateful to the Minister for giving way. I gather that what is called inspiration may have arrived from the Box in response to my earlier point, and I would like to give him the opportunity to correct the record before we finish.
Lord Bates
I am very grateful for that. In response to the noble Lord’s earlier intervention on breathing space, the position has changed since that section of my speech was last drafted, and I will write to him—this is dynamic government, unfolding by the minute and of course responding, as always, to the reasoned arguments presented by the noble Lord.
The noble Baroness, Lady Donaghy, asked what we are doing to ensure that workers in the gig economy are protected from problem debt. Information, advice and guidance is available for free from the Money Advice Service, which provides specialist support for the self-employed through its funding of the Business Debtline, which supports sole traders in dealing with debts that they may incur. Around 25,000 small business owners were supported by Business Debtline last year, and 90% of those who accessed support from it stabilised or reduced their debt after its help. Again, that relates to the right reverend Prelate’s point that people out there who are facing considerable distress need to recognise that help is available and that the sooner they call on that help, the easier their problems will be to solve.
Finally, the right reverend Prelate asked whether the Government will be bringing forward legislation on a breathing space. I do not want to go over that territory again, so I will simply say that it has been a fascinating debate for all Members of the House, not least the Minister. I thank the right reverend Prelate for pursuing this matter, giving us the opportunity to debate these important issues which touch many people’s lives, and we look forward to continuing our discussion.