Responding to the Financial Conduct Authority (FCA)’s review on high cost credit the End the Debt Trap campaign, supported by the New Economics Foundation, say the proposals set out today will not solve the deep, systemic and growing problem of household debt in the UK.

The End the Debt Trap campaign is now calling for Parliament to intervene and force the FCA to extend the cost cap imposed on payday lenders in 2015 to all forms of consumer credit.

The End the Debt Trap campaign is a new coalition of organisations formed to put an end to the debt trap in which many people find themselves caught. Despite some positive steps forward, the FCA’s review on high cost credit will not End the Debt Trap says the coalition, because it does not limit the prices that can be charged and allows lenders to continue to exploit people in financial difficulties.

Work by both members of the coalition and New Economics Foundation shows that there are currently record levels of consumer debt and weak wages – with people that need credit the most being targeted and paying an exorbitant cost for the credit they need just to get by. Meanwhile, wealthy and high-income households are privy to historically low levels interest.

The campaign has today released its analysis of household debt surveys, which indicate that it is the poorest who pay the most in interest rates and costs for their borrowing.  The analysis shows that:

  • Households in the UK currently owe £1.6 trillion in outstanding debts, which is 13% higher than at the time of the 2008 great financial crisis.
    Unsecured consumer credit stands at £239 billion, also exceeding the pre-crisis peak by 4.6%
  • An estimated 7.6 million people owe the equivalent of at least a third of their entire annual incomes, and nearly 9 million people are spending more than a quarter of their income on debt repayments.
  • The poorest are in the greatest financial difficulty.  Just under half (44%) of all households spending more than a quarter of their income on debt repayments have incomes of less than £15,000 per year.

The coalition proposes that the FCA need to extend the cap to all forms of credit, and help end unjust and immoral system, of predatory and exploitative lending where the poorest people pay the most to borrow.

Further analysis from the New Economics Foundation shows that the poorest fifth of households with credit cards typically spend around 20% of their monthly income on credit card payments with middle to higher income households spend around 5-10%.

The analysis, using the latest Wealth and Assets Survey, also shows that the poorest fifth of households who have personal loans spend around 14% of their monthly income on loan payments. Middle to higher income households spend around 5-8%, highlighting that the amount of monthly income spent on debt is doubly burdensome for the poorest households.

Hanna Wheatley, Researcher at the New Economics Foundation said:

“Levels of private debt are higher than they were before the 2008 financial crash. This should set alarm bells ringing at the FCA, especially in light of the harmful burden of this debt on low-income families. This private debt is depressing local economic activity and growth in poorer communities, and acting as a major drag on the wider economy. All of this, combined with the impact of welfare changes and cuts, falling real-terms wages, underemployment and precarious work, means that millions are becoming ensnared in the debt trap: with many having to take out high cost loans to pay off old debts and cover basic needs.  
 
We need the FCA to treat the problem with the urgency it requires and introduce a cost cap across all forms of credit.”

Sarah-Jayne Clifton, Director of the Jubilee Debt Campaign said:

“The FCA has a duty to protect households, that is part of its core purpose. But this review outcome suggests it’s more concerned with protecting the profits of banks and reckless lenders. We need the FCA to step up and use its powers to protect the poorest households from predatory and exploitative lending by capping the cost of all forms of household debt, not just rent to own. Anything less than this would represent a major failing in its duty and responsibility as a regulator.”

Fanny Malinen, Researcher at Research for Action said:

“Whilst it is good to see a proposed cap on rent to own, the details about how it would be applied are thin. A rent to own cap must be retrospective and set at a level no higher than one hundred percent of the initial loan. The FCA must take decisive action and ensure that the proposed cap on rent to own is as effective as possible.”

Damon Gibbons, Director of the Centre for Responsible Credit said:

“The FCA’s proposals to address the rotten lending practices currently endemic in Britain are woefully inadequate.  Serious questions now need to be asked about whether the FCA has the resolve required to stand up for lower income consumers.  In our view, it is now clear that Parliament will have to intervene, as it did with payday lending, and force the FCA to act.”

Sian Williams, Director of Policy at Toynbee Hall said:

“Every day we see clients who are struggling to buy food, heat their homes or pay their rent because they are overpaying on high-cost credit, with disastrous consequences for people’s mental and physical well-being. Too many people have to meet basic needs on inadequate and unpredictable incomes; access to fair and affordable credit is a vital tool to helping people smooth out lumpy household budgets. We want to see a fair cap on all forms of consumer credit to protect consumers from this kind of distress.”

Notes
The End the Debt Trap campaign is a coalition of civil society organisations campaigning for a cap on all forms of consumer credit. It is composed of the New Economics Foundation, Centre for Responsible Credit, Jubilee Debt Campaign, Toynbee Hall, and Research for Action.