Debt Advice and Debt Management

Paul Blomfield Excerpts

Thursday 1st December 2011 Commons Chamber

[Yvonne Fovargue (Makerfield) (Lab)]

It is a pleasure to follow the hon. Member for Chatham and Aylesford (Tracey Crouch), who made a thoughtful contribution; I agree with most of what she said. I congratulate my hon. Friend the Member for Stockton North (Alex Cunningham) on securing the debate, which is timely, as Christmas is coming up, although that is not traditionally a time when the advice agencies see people who are in debt; they see them in January, once the debts have come through.

The number of people finding their debt unmanageable can only increase; that is beyond doubt. My hon. Friend mentioned the Financial Inclusion Centre’s recent report, “Debt and the Generations”, which says that a £50 per month drop in disposable income, due to any one of a number of factors—a small drop in hours, increased pension contributions, increased child care costs, or a rise in rent—would result in 3.2 million people who are just about coping and keeping their head above water no longer being able to pay all their creditors. As has been said, we are not talking about being profligate, and buying designer trainers and large flat-screen TVs; we are talking about paying the heating bills, paying for food, and buying school uniforms. Research from the Joseph Rowntree Foundation shows that only one person in six seeks advice from any source. If we accept that, it means that a further 500,000 people would seek debt advice if incomes dropped by only £50 a month.

We need to target the people who are not seeking advice, as the research proves that people who receive advice manage significantly better than those who do not. The Money Advice Trust has done an interesting report called “Facing the squeeze”, which indicates that many families are managing at the moment only because they have low interest rates, are taking on additional sources of credit—some of which, unfortunately, are payday loans—or are cutting back on essential expenditure to the point of deprivation. All of us will have visited constituents like the one I visited the other week, who said, “I’ll put the heating on while you’re here, but I’ll turn it off when you’ve gone, because I want to save the money.”

It is incontrovertible that debts do not come singly, and that early intervention when there are debts saves money. Government policy is slightly short-sighted in removing the majority of debt issues from the scope of legal aid, and in leaving things until the point of eviction.

[Paul Blomfield (Sheffield Central) (Lab)]

Does my hon. Friend share the concerns of Peter Hemmingfield, a debt team supervisor in my constituency who works, under the community legal advice contract, with the Legal Services Commission to provide specialist debt advice? He is very concerned that the service that he provides will practically disappear as a result of the intended legal aid cuts. He says in a letter to me:

“A substantial amount of our work is involved in helping many clients who have mental and physical health problems, who are aged”—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. Unfortunately, interventions have to be short; I am sure that the hon. Gentleman is just coming to the end of his.

[Paul Blomfield]

You are absolutely right, Mr Deputy Speaker; I was just coming to the end. Peter Hemmingfield talks about people who are unable to manage their debts alone. Should we not be concerned about the impact on the most vulnerable?

[Yvonne Fovargue]

I agree with my hon. Friend. As for the idea that people can manage by themselves, that is not happening at the moment, and as a result of the cut to legal aid, 100,000 of the poorest people will lose access to advice. We need to look at where they will go, and how they will be helped in future.

Of course, there is a cost to free debt advice, and it is estimated at about £150 million a year. The credit industry contributes 3% of that amount. I would like the Minister to investigate further how a levy on the credit industry could be made to work without affecting the business model of companies such as the Consumer Credit Counselling Service, which relies on a “fair shares” principle to fund its work; I would not like such companies to go because we were looking at a levy on the credit industry. However, it is not sustainable that the industry should pay just 3% of the £150 million.

On the latest figures, Citizens Advice deals with 8,910 new debt problems each working day. The reason why it deals with that many cases, and why people go to it, is brand awareness. Some 97% of people recognise Citizens Advice, although they might not always know what it does; they sometimes say, “It tells people where to go, doesn’t it?”—well, it does not tell people where to go very often. However, people recognise Citizens Advice, and I am concerned about the Money Advice Service spending its hard-earned money on building a brand that people will recognise. I would question the need to build yet another brand. Why not use a trusted brand to deliver money advice services on the high street?

I am pleased that there is more research on why people get into debt, and I do not think that the reasons have changed significantly over the years. As I have said, they include low income, sudden changes in income, changes in family circumstances, illness, divorce and so on. However, the type of credit that people access has changed. One form of credit that has exploded over the past five years is payday loans. There is evidence of people relying on that type of credit when they max out their credit card and have been denied other avenues of mainstream credit. They use their credit cards regularly to pay their bills.

Only this week I attended a fascinating presentation facilitated by the Centre for Responsible Credit on the international experience, particularly in the US, which is an interesting place, because different states have different regulatory regimes, so the way in which they work can be compared. The former secretary of the securities and banking council who presented the report was adamant that the sector needs to be regulated. He said that as an American citizen he is no fan of regulation, but that regulation needs to be enforced, and the regulator has to have the power to suspend companies where necessary.

I urge the Minister to consider the report and its conclusions, including limiting the number of roll-overs and a cooling-off period so that people cannot immediately take out another loan when the first one ends, then take out another one to pay off the second one. Evidence from Florida shows that capping the total amount that people can take out in any one period—for example, $500 in a year—improves their ability to pay back that loan. We asked whether that sent people into the hands of illegal lenders, but we were told that the average amount that people take out in loans in Florida is $388, which is quite a bit below the $500 limit. People do not max out their loans, which may mean that they do not go anywhere else. In California, however, where maximum loans are much lower at $250, people take out $249, which is evidence that they will look elsewhere quite quickly. It is an interesting report.

We should also consider setting up a real-time database owned by the regulator, but funded by payday loan companies, that stores basic data, including the number of loans and amounts, so that easy referrals for debt advice can be made.