Covid-19: Household Debt

Peter Bone Excerpts

Thursday 8th July 2021 Westminster Hall

[Mr Peter Bone (in the Chair)]

I remind hon. Members that there have been some changes to normal practice in order to support the new hybrid arrangements. Timings of debates have been amended to allow technical arrangements to be made for the next debate. There will also be suspensions between each debate.

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[Stella Creasy (Walthamstow) (Lab/Co-op) [V]]

It is a pleasure to take part in the debate, and I pay tribute to the work that my hon. Friend the Member for Makerfield (Yvonne Fovargue) has done on these issues for many years.

I agree with every word from the hon. Member for Blackpool North and Cleveleys (Paul Maynard); I fear that consensus will break out in the House on the need to act. Whether we have different ideas on how we should act may be another matter, but I think the concern that debt has been the quiet winner of the covid crisis is widely shared across the House. The two excellent previous speeches reflect that. The talk of people saving more may well be true, but we know that, in our communities, many people are drowning, not waving. Frankly, they were already in deep water before the pandemic hit.

The two previous speakers gave some excellent statistics on the debt in our country. I am mindful that StepChange tells us that more than 19 million adults have experienced a loss of income during the pandemic, while 11 million people have built up £25 billion of arrears and debt—not because they have been sat at home ordering consumer goods to entertain themselves, but to pay for essentials. As we know, those debts are not equally distributed within our communities. In particular, renters, those from minority ethnic communities, and women and mothers, as Women’s Budget Group research shows, have borne the brunt of the debt crisis that is building up in our communities. In April, a quarter of mothers from black and ethnic minority community backgrounds reported that they were struggling to feed their children, and 32% of young women said that they were finding it hard to pay for essentials.

So, the question for us all is, what are people doing to make ends meet? Some 26% of those affected by coronavirus have borrowed money to make ends meet, most commonly through credit cards or an overdraft facility, and a million of those people have used some form of high-cost credit product. Crucially, Citizens Advice research also shows that people from shielded groups are four times as likely as others to be behind on utility bills such as council tax.

Understanding the nature of the credit tsunami that is coming towards us due to the debt that underpins our economy and underpins the response to credit is vital not only for people’s individual lives, but for our public sector. The reality is that research increasingly paints a grim picture for many of our constituents. Some 48% of consumers told the FCA review of high-cost credit that they had to cut back on other spending to make their loan bills, while 37% said they missed payments on their rent or mortgage or on utilities, with council tax the top payment that many are forgoing. Some 16% of customers reported that their most recent borrowing was to repay debt that they had already taken on. People were being drawn into a spiral whereby they were borrowing from Peter to pay Paul, from Paul to pay Sarah, and from Sarah to pay Peter.

The truth is that this is not a new phenomenon in our country. We have always had an economy that was increasingly reliant on consumer debt, and we have always had millions of people for whom that reliance was toxic. As my hon. Friend the Member for Makerfield set out so well, it is very expensive to be poor in this country. Credit cards and high-cost credit, whatever form it takes, are expensive for people on low incomes. Indeed, a sub-prime credit card costs around £200 more a year, and personal loans cost around £500 more a year. The issue is not just about the credit that people can access, but about the way utilities are sold. Being on the best energy pre-payment tariff could still be £131 more expensive than the best online-only tariff.

We must not be complacent—I know the Minister is not—and we must not encourage a consumer spending bubble. I urge the Treasury to change tack and be like the Grinch, but for good cause, owing to the problems in our communities. The debt advice services tell us that they have not yet seen hundreds of thousands of people coming to them, but we know it takes time for people to get to the point when they admit that they need help. The true impact of the pandemic on debt advice is yet to be seen, although we are already seeing some incredibly worrying trends. The Financial Wellness Group tells us that around 24% of the customers it has advised on utility debts each owed about £1,000 in arrears, but that has risen to £2,000 over the last year. We can see that when people seek help, they are already in a position whereby it is much more difficult to help them. In particular, they flag up housing costs.

I recognise the point about incomes made by my hon. Friend the Member for Makerfield, but I represent a community in London—supposedly an affluent area—that has the 10th-highest level of child poverty in the country due to the cost of housing and of keeping a roof over people’s heads. We must focus on the poverty that we see in our communities and on the impact it has on people’s spending. With the eviction ban ending, with no end in sight for high rents and with no action taken on them, it is clear that people will struggle to manage the cost of trying to stay in the community where their children go to school and where they can be as close as possible to whatever work they can get, especially if they have experienced unemployment during the epidemic. Indeed, the Financial Wellness Group tells us that more than one in three customers to whom it has provided free debt advice have had negative disposable incomes—their priority living costs exceed their income. For many of those people, it is about housing costs.

Like others, I welcome the Breathing Space process, but I believe we need to have a much more fundamental rethink of how we help people to manage their finances and how we put consumers front and centre in what is often an unfair fight. I recognise the point made by the hon. Member for Blackpool North and Cleveleys about not taking a whack-a-mole approach, but I hope he will forgive me if I take a bite out of some legal loan sharks that I have been concerned about and spoken about to the Minister for some years now—the “buy now, pay later” industry, which has been one of the overall winners in the pandemic.

Since the pandemic started, there has been a massive increase in people using “buy now, pay later”, because they have been able to do online shopping. It has even been suggested that £1 in every £4 spent last Christmas was “buy now, pay later”. Several years ago, few of us had heard much about that industry. It is now huge.

As my hon. Friend the Member for Makerfield said, the impression being given is that the issue is all about fast fashion and young women buying too many pairs of shoes, but the brutal reality coming from the research is that it is not about that at all. People are using the options provided by websites to make ends meet because there is too much month at the end of their money. In particular, families are suffering and having to use that form of credit. As my hon. Friend said, the Which? research is incredibly compelling. People are using “buy now, pay later” to access credit at a stressful and challenging time in their life—for example, when they face redundancy, or when they might not have been able to access help because they are one of the 3 million excluded in our country, in particular those who have children to keep clothed, fed and warm.

Missing a credit bill or payment can be a major life event. The odds of using “buy now, pay later” go up by about a third when someone is made redundant, has a baby or has to move because they can no longer afford to live in their home. We know that, as a result, those people’s credit records are affected. We know they have been referred to debt collection agencies and that they have experienced mental distress. We know that it does not have to be that way.

I welcome the fact that, over the past year, the debate has changed from the idea that this is somehow just a new wacky way to use the internet to shop more simply to a recognition of the damage and the danger that this form of credit, which is unregulated—and still is unregulated today—represents. The FCA report was clear about that.

We know from Citizens Advice that almost 40% of people who have used “buy now, pay later” did so without realising, as a lot of the retailers push people to use that as the first option on their sites because they are officially paying the fees for it. Almost the same number of people thought it was not proper borrowing and really did not understand what they were signing up for. If we consider the research from the Money and Mental Health Policy Institute, which shows that 3 million people with mental health problems have found it much harder to control their online spending since lockdown, in part because of the design of online retail sites, the need for urgent action grows ever stronger. As I have repeatedly said to the Minister, we have to learn the lesson of the payday lending industry. We did not act quickly enough, so even now we are seeing millions of people who still have problems as a result of borrowing seven or eight years ago through payday lenders.

The public know that we need to act because they do not believe the adverts. They know this is a problem. Indeed, the Hastee Workplace Wellbeing Study showed that 59% of workers had applied for high-cost credit knowing that they would struggle with repayments, but feeling that they had little option. Yet over the past couple of months, rather than the industry recognising its responsibility to its consumers and recognising the support from across the House that the Government would have for regulation, we have seen it simply changing the wording. Such entities no longer call themselves “credit”. They call themselves “a money management tool”. They offer debt advice themselves. It really is turkeys talking to us about how going vegan at Christmas is a good idea. The industry is moving quicker than the Government. That is why I urge the Minister, when he knows he has cross-party support and when he has the evidence, that there should be no further delay in regulating those companies on the issue.

We need to tackle the way in which the companies see affordability. It is clear from the evidence that their definitions of affordability are not ones that we accept in other industries. We need to challenge the product design and how those companies are evolving so quickly to evade what is commonplace evidence about credit regulation—many of the things the Advertising Standards Authority has tried to pick them up on. However, they are moving quicker than Government. We need to make sure that we have a proportionate regulatory process.

One of the things I am extremely concerned about is hearing Ministers suggest that somehow these companies would not have to follow the same rules around credit regulation as other companies, as if they were special and as if they were not as bad as some others. There are two things about that. I hope the Minister will set out for us why he thinks there might be exemptions. What particular elements of our consumer regulation would he not apply to “buy now, pay later” industries? Why does he think that would not create a race to the bottom across the consumer credit industry, as companies variously tried to argue that they were not the bad guys ripping off our constituents? Has he spoken to the Competition and Markets Authority about this? Setting out a situation whereby we allow companies to pick and choose which regulations they abide by is not going to help our constituents.

On that point, I agree with my hon. Friend the Member for Makerfield that we need to review the FCA. The failure to act quickly enough on Wonga, BrightHouse and Amigo Loans is an example of why we need the regulator to be better. Too often, the Financial Ombudsman Service has intervened on behalf of our constituents, rather than the regulator, which has been working with the companies. It is right to review now the FCA and whether it is working effectively, when people are without the compensation they are due from those companies, many of which have gone bust. Some people are not going to get the compensation they are entitled to, but they are also being chased by the creditors of those companies because they owe the companies money. Something is fundamentally wrong in that balance.

Finally, I again agree with the hon. Member for Blackpool North and Cleveleys that we need to ensure that there are good credit options, which is why I urge the Minister to talk to his colleagues—not just in the Treasury, but in local government—about our credit union movement, which is on its knees as a result of the pandemic. As a proud Co-op MP, as well as Labour, I believe that social finance initiatives are critical to helping people out of this crisis. Minister, the people who are drowning, not waving, need us to offer more than a life raft such as Breathing Space. They need us to deal with all these legal loan sharks, which are circling them and pulling them down—once and for all, in truth. The Minister will have my support, and I know the support of Members across the House, if he takes that robust, proactive approach, but right now all we can see is more fins in the waters ahead.

[Mr Peter Bone (in the Chair)]

It might help Members to know that five Back Benchers want to get in before I have to call the Front Benchers at half-past the hour; if people keep their remarks to five minutes or less, we will get everyone in.