Do the FCA's proposals to take action on harmful lending go far enough?
07 August 2017
Abdul became an Uber driver after losing his job in the financial crash. He quickly found himself in financial difficulty, as the cost of renting the car to do his job combined with an unexpected fall in the number of driving jobs he was able to take. After accepting a welcome offer of a credit card, Abdul eventually found himself in £25,000 of debt. He sought debt advice, and the interest charges on Abdul’s repayments were frozen – but now he expects to be saddled by repayments for the next 30 years. Abdul fears what will happen to him when he gets a stable income and the creditors expect higher payments. Every day he feels the massive power imbalance between banks and ordinary people trying to keep afloat – and he wants to change the way it works.
The harmful effects of debt do not begin and end with financial strain. A cycle of debt has profound social ramifications. It harms individuals’ and families’ physical health, mental health, relationships and working lives, as well as putting community wellbeing and cohesion at risk. “As debt increases and you lose control you become depressed and anxious,” one debtor told me. “The lack of a way out affects your mood and creates psychological problems.”
The voices of debtors like Abdul are seldom heard. For him, like many others, there are very few means to stand up to lenders and defend their rights. Even when national agencies like the Financial Conduct Authority (FCA) explicitly recognise the imbalance of power between borrowers and lenders – as they did this week – people like Abdul struggle to get a hearing.
The FCA has extended the cap on payday loans and is considering action in other areas, including unarranged overdrafts.
This is welcome recognition that consumer credit has got dangerously out of hand. By the end of last year the amount of personal debt – including credit cards, bank and payday loans, car finance and overdrafts – hit a record £236.5 billion, exceeding the pre-crisis peak of 2008 by 4.6%. With wages stagnating in real terms for almost a decade, millions of families on low and middle incomes have been forced to turn to debt in order to cover essential living costs.
An estimated 7.6 million people in the UK are spending more than a quarter of their income on debt payments. The Bank of England and debt advice agencies including Citizens Advice, Stepchange and Money Advice Service have all raised serious concerns that the high levels of debt are both unsustainable and deeply damaging. Many people are being faced with a situation which is spiralling out of their control.
But is the regulator’s response sufficient? And will they move fast enough?
At the New Economics Foundation we are working alongside the Centre for Responsible Credit to demand that the 100% cap on the total cost of credit currently in place for payday lenders and other high-cost, short-term products should be extended to the credit card market. The FCA’s own research shows that people with persistent credit card debts are paying a massive 250% in interest. And it is people on lower incomes who are more likely to be charged higher interest rates – people whose repayments would be far better spent on meeting basic essential needs.
Clearly some of this debt is fundamentally unjust. When debt repayments mean people can’t afford essentials, or are trapped in a cycle of indefinite repayments, that should not be allowed to stand.
Of course it is not just about the harmful effect of unsustainable debt on individuals – it’s also about the wider economy. People with expensive debt payments are unable to spare much money on goods and services, which is stifling economic growth, increasing inequality and transferring wealth from the productive ‘real’ economy into the financial sphere.
This deepening debt crisis is not sustainable. We are inching closer to the tipping point at which debt starts to trigger economic decline. Warnings from the Bank of England have grown stark. This week ratings agency Moody’s downgraded the outlook on bonds backed by credit card customers and car loans, warning that some British borrowers will struggle to repay their debt as the economy weakens.
We know from low inflation numbers and the lack of growth in real wages that these debts are not going to disappear any time soon. And that creates real risk for the wider economy. Given that much of this debt is fundamentally unjust, there is surely a case for writing off some of it. This could be achieved in several ways – from the FCA requiring creditors to wipe unjust debts, to the government negotiating with creditors either directly or through the secondary market.
Regulation of the kind proposed by the FCA this week has a role to play. But the debt crisis is urgent – for individual borrowers and for the wider economy. The first step to doing something about it is to listen to the voices of borrowers themselves. Because when you hear Abdul’s story, you know that inaction cannot be the answer.
End the Debt Trap
Banking & finance
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