Household Debt

Lord Sharkey Excerpts

Monday 13th November 2017 Lords Chamber

[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?