Loan Protection Gap

John McDonnell Excerpts

Tuesday 6th May 2014 Westminster Hall

[Mr Andrew Love (Edmonton) (Lab/Co-op)]

I belatedly welcome the hon. Member for South Northamptonshire (Andrea Leadsom) to her new position as Economic Secretary to the Treasury. She served with some distinction for four years on the Treasury Committee. As a continuing member of the Committee, I congratulate her on her appointment and welcome her to what I think is her first Adjournment debate.

More than 80% of borrowers have no form of protection to safeguard their loans, and the number of those in that position is on the increase. The disparity between the number of vulnerable consumers who need loan protection and those with an insurance policy is referred to as the loan protection gap. In this debate, I intend to raise five key issues involving loan protection insurance policies. First, I will draw attention to the significant minority of vulnerable consumers who continue to experience the damaging effects of excessive debt on their work, health and family life. Given that the squeeze on real incomes continues at a time of increasing consumer expenditure, the problem is likely to intensify, especially for those on the bottom half of the income scale.

There are any number of surveys confirming the squeeze on living standards. I will refer to just three. The first, a 2013 study carried out by the university of Birmingham on financial inclusion, showed that the real value of wages in 2012 had fallen back to 2003 levels. In this year’s “Green Budget”, the Institute for Fiscal Studies confirmed that living standards have declined over the past five years, and the Office for Budget Responsibility, the Government’s own independent forecaster, confirmed in its recent budget report that living standards will not recover to 2008 levels until 2018. Incidentally, in relation to loan protection, the OBR also forecast that the level of household debt will increase each year over the forecast period to 2018.

Secondly, I will show that the payment protection insurance mis-selling scandal has led to a collapse in trust and confidence in protection products and that, as a result, such policies have been withdrawn from the market by all but the very small, bespoke, specialist providers. PPI mis-selling is the biggest financial services scandal ever. It has affected every major bank, £13 billion has been paid in compensation and the bill is still rising. I asked the House of Commons Library to survey the market for protection policies. I would never call it a scientific study, but it gives a representative idea of what has happened in the marketplace. Unsurprisingly, the findings are somewhat depressing. PPI is seen as toxic, with little or no prospect of the main players re-entering the market. As a result, provision has declined significantly. Some policies are still provided, but mostly by small specialist providers.

[John McDonnell (Hayes and Harlington) (Lab)]

One of those specialist providers is CUNA Mutual. CUNA is working with the largest credit union in my area, Plane Saver, which brings together British Airways staff and has been running for a number of years, and has developed what seems to be a way forward that provides at least an element of protection: the debt waiver system, at least for credit union services. Has my hon. Friend come across that? I would welcome discussions with the Minister, maybe involving a visit to my constituency to meet the Plane Saver group to examine this potential way forward.

[Mr Love]

I have indeed heard of the Plane Saver credit union, and I have been in touch with CUNA Mutual as well. I will talk later about the debt waiver system that they have introduced; it is one of a selection of protection products that should be available more widely in the market but are not. I will discuss some of the reasons why.

Payment protection insurance is currently provided only by small, specialist providers. As a consequence of that and of the lack of competition in the market, it has increased in cost. At a time when incomes are being squeezed, expensive income protection policies are an unwelcome additional cost for consumers.

Thirdly, surveys confirm that financial insecurity is on the rise. At the same time, protection products are totally absent from the market. The result has been the creation of a protection gap. Is the Minister aware of those developments? What steps are being taken to address this clear market failure?

In 2013, CUNA Mutual carried out a survey of financial insecurity in more than 2,000 households. Its findings were stark: two out of three were concerned about losing their job; six out of 10 were anxious about their financial affairs; 20% would find themselves in financial difficulties within a month of losing their job, rising to 30% in some regions of the country; 44% claimed that they were cutting back on heating and 59% on food, simply to make ends meet. Other surveys confirm that the number of borrowers safeguarding new loans or income has collapsed to less than 1%. Taking all those changes into account—I hope that the Minister will be sympathetic to my view—the Treasury, as a matter of urgency, should conduct a review of the state of consumer protection in credit markets to determine a plan of action to close the protection gap.

Fourthly, with traditional income protection policy tarnished, what new models of loan protection can fill the gap? Guidance was provided some time ago by the Financial Services Authority on a suite of transparent, fair and affordable lending policies, but it has had little impact on the market. The Government must show leadership by promoting the introduction of policies that will provide solutions to the protection gap. CUNA Mutual suggests that 95% of mortgages are currently sold to customers without any insurance.

This issue is not just about consumer protection. In a recent survey, 70% of respondents said that they do not trust the banking and financial services sector. Loan protection can act as a form of stimulus to get lending going again. The credit union mentioned by my hon. Friend the Member for Hayes and Harlington (John McDonnell) has experienced a boost in the number of mortgages due to the protection policy that it provides.

On the positive side, there have been some modest developments. In 2011, CUNA Mutual asked the FSA to test the debt waiver before CUNA took it up. It tested successfully and, as I will discuss, it has been introduced in a number of mutual organisations. In its 2013 report on loan protection, ResPublica, the well-known think tank, recommended that the Government should encourage the Royal Bank of Scotland and Lloyds, the two banks with major public involvement, to adopt the debt waiver. I concur with that recommendation, but little has been done to follow up on it.

Fifthly, the mutual sector is leading the way in tackling the protection gap through the use of the debt waiver in its lending. This shifts the emphasis on to the lender to indemnify the loan, rather than placing the emphasis on the customer to insure their ability to pay. What steps are being taken to encourage the financial services industry to follow the guidance of the FSA regarding the debt waiver and other similar products, so as to help to tackle the protection gap?

The debt waiver is relatively new to the UK, where it has been introduced in a number of organisations, but it has a long and successful track record since the 1930s in north America. Incidentally, it was introduced at the height of the great depression, to help try to restore confidence among the public in lending. In its 2013 report, ResPublica recommended that the regulator fast-track the debt waiver and other similar products, but nothing much seems to have happened. Three mutuals, including the one referred to by my hon. Friend, have introduced the debt waiver very successfully, in one case providing coverage for accident and sickness for up to one year, through the debt waiver, at no cost to the borrower. In my view, that is a very good deal for the consumer.

However, all these things are, of course, just the tip of the iceberg when set against the 95% of people who simply do not have any coverage at the moment. That is the argument; that is the need; and that is what I hope to get a response on from the Minister.

In conclusion, the challenge for the Government, the financial services industry and indeed all stakeholders is to recognise the dramatic impact that mis-selling PPI has had on the market for protection policies; to quantify the resulting loan protection gap; and, most importantly, to challenge the industry—all those lenders out there—to take the necessary action to tackle the gap. I hope that the Minister will concur and will take steps to address this problem.

--- Later in debate ---

[Andrea Leadsom]

The hon. Gentleman make a very good point. Since I am extremely new in the job, I hope that he will forgive me because that is a point that I cannot answer. Nevertheless, it is an excellent idea and perhaps I can write to him on it. I would certainly take such a good suggestion forward.

[John McDonnell]

The Minister may well gain inspiration on that while I am talking. I requested earlier that she come to meet the Plane Saver credit union in my constituency. That group meets the objectives she mentioned not just by providing protection; we have found that it is also encouraging more savers to join the credit union. It seems to tackle both issues at the same time, so perhaps that is a model she would like to explore in more detail.

[Andrea Leadsom]

I am grateful to the hon. Gentleman for his invitation. I am keen to become more closely involved in such an important issue and so will discuss with my team whether I can come to meet his constituents. I thank him again for the invitation.

Finally, I want to mention the provision of debt advice. Where people get into financial difficulty, the Government are committed to ensuring that they can access free help and advice on managing debts. That is why the Government have put funding for debt advice on to a sustainable footing.

In conclusion, I thank the hon. Member for Edmonton again for instigating this debate on such an incredibly important issue. We know that times have been extraordinarily tough and continue to be so for many people in the United Kingdom, and we are determined to do more to ensure that consumers get the advice and support, the responsible lending, and the suite of products that they need to enable them to manage their own financial affairs more effectively.