On Monday 13th November the Bishop of St Albans, Rt Revd Alan Smith, led a debate in the House of Lords on the levels of household debt in the UK. His opening speech is below, along with the responding speech of the Government Minister (all the speeches in the debate can be read here).
The Lord Bishop of St Albans: To ask Her Majesty’s Government what is their assessment of the risks posed by current levels of household debt in the United Kingdom.
The Lord Bishop of St Albans: My Lords, I am deeply concerned—as I know are many other Members of this Chamber—about rising levels of household debt in this country. Households in the UK are taking on far more debt than they used to and overall are taking on more debt than they bring home in income. While the ratio of household debt to income has not yet eclipsed the 160% peak hit in early 2008, it currently hovers around 140%, a dramatic shift from the ratio of 95% in 1997.
Of course there are good reasons why families in this country choose to take on debt—perhaps to buy a house or another form of secured debt—but, nevertheless, we know that for some people the prospect of saving for a house is inconceivable and that those who are lucky enough to purchase a house take on an extremely high level of mortgage debt. This burden, especially for young people, should be recognised.
Even more concerning are rising levels of unsecured debt. Figures from the FCA last month indicate that a quarter of UK adults have been overdrawn in the past 12 months, and that more than 4 million people have already failed to pay domestic bills or meet credit commitments in three or more of the past six months. Forty-seven per cent of renters say they would struggle to meet their rent if payments went up by more than £100 per month. This heavy reliance on credit and lack of savings is understandably a source of vulnerability and anxiety for many and limits the ability to invest and make wise long-term financial decisions.
Debt is more than just a political or economic issue. It is also a pressing spiritual and social issue, both for the whole of society and individuals. The Bank of England, and particularly its Financial Policy Committee, will invariably have comments on the broader macroeconomic risk the increase in unsecured debt may pose. In September of this year, the Bank’s Financial Policy Committee warned banks that the rapid growth of consumer credit,
“is a risk to (Banks’) ability to withstand severe economic downturns”,
“they have been underestimating the losses they could incur”.
The banking industry has an obligation to heed these warnings and act responsibly. I hope that deep and productive partnerships can be formed between financial institutions and the FCA to make changes that benefit consumers and encourage them to save, and that the Government will step in to regulate if needed.
For many, the experience of debt is profoundly destructive, isolating and surrounded by a significant and dangerous stigma. Five in every six over-indebted people who are struggling to make repayments do not get help for a wide range of reasons. A charity I know well—Christians Against Poverty—which operates 293 debt centres across the UK, including nine centres in my diocese, reports that one in 10 of the people it helps has previously attempted suicide. Tragically for many, the issue of household debt can literally be one of life and death. A survey conducted by Christians Against Poverty found that 40% of the people it helps have mental health problems and two-thirds have skipped meals due to debt—often parents who are not eating to provide for their children.
Coming from my position, noble Lords will not be surprised that I am interested in what the Christian tradition has to say about money. It affirms that each person has a moral responsibility to live within their means. That is a fundamental principle. However, illness or unforeseeable events can strike sometimes, which may result in unexpected debt. That problem is also addressed in the Scriptures: Nehemiah orders the cancellation of onerous and exploitative debt. In the Gospel of Luke, Jesus Christ says he has been sent by God to proclaim the year of the jubilee, referring back to the command given to the Israelites to forgive debt in recognition of their liberation from slavery in Egypt.
For many years, the Church of England has been at the forefront of both extending charity and finding solutions, particularly on a global scale, such as the work done by the Jubilee Debt Campaign around the millennium. The most reverend Primate the Archbishop of Canterbury’s more recent Just Finance Foundation has also been working nationally and with local churches to grow credit unions and support the community finance sector. The Church has produced resources to help congregations to run debt awareness and signposting workshops. We produced a financial education and school banking programme for primary schools, called Lifesavers, to build financial capability and encourage saving from an early age. If noble Lords have not been into a school to see one of the credit unions working there, it is worth going just to see the work they do to help young people to support themselves through being financially responsible and planning properly for the future.
I hope the Government can support that work and account for the burden that debt places upon families in the UK. The Financial Guidance and Claims Bill is a good start, but more work needs to be done. I welcome the recent announcement of the consultation on a breathing space for those dealing with debt, and I hope the Minister can assure me that this much-needed legislation will be introduced as soon as possible. I also trust that the Government will consider the effects of current welfare reforms, in the light of the current high level of debt of many families in this country. We are all hearing reports of numbers of people falling into rent arrears as a result of the extended waiting period before the first payment of universal credit, which are extremely worrying. There is much that is good in the universal credit proposal but it would be a great shame if, instead of simplifying the benefits system and incentivising work, the policy was remembered for driving people into greater debt—the effects of which can be prolonged and far-reaching—exacerbating mental health problems and, in the most extreme cases, leading to homelessness and family breakdown.
When we think about the Government’s upcoming Budget and hear news reports about inflation and interest rates, it is all too easy to forget that behind that, real people and families are struggling. They are not just statistics. In introducing the debate—I thank noble Lords who will speak in it—I hope that we can make a frank assessment of the risk posed to our nation and individuals by current levels of debt, and be able to work together to find solutions to this pressing social problem.
The Minister of State, Department for International Development (Lord Bates) (Con): My Lords, I join other noble Lords in paying tribute to the right reverend Prelate, not only for securing this debate but for the work he has done in this area over many years to highlight a major problem. It is a social and a spiritual problem in many parts of this country. I thank him for securing this debate, as I thank noble Lords for their contributions.
Perhaps I may begin by setting one or two things in context and then come to some of the points that have been raised. In the UK, we have seen the financial positions of households improve substantially since the financial crisis. The right reverend Prelate the Bishop of St Albans mentioned that in the late 1990s, the level of debt per household was in the 90% range. It then went up to 160% at the time of the financial crisis in 2008. It has come down now to 140% but it is still at a historically high level.
Mention has also been made of debt interest payments. Those payments are of course coming down, as we have seen historically low interest rates. Whereas interest payments as a proportion of income were 4.3% in the first quarter of 2017, that is a fall from 10% in quarter 1 of 2008, as a result of the fall in interest rates. I put these points on record simply to place some context for the debate and not in any sense to detract from the major issues, which I will come to later.
Ongoing financial and economic stability is an essential priority for this government. That is why, following the financial crisis, the government set up the Financial Policy Committee to monitor and assess potential risks, and to take any action necessary to mitigate them. In 2014, the Financial Policy Committee acted to guard against any potential risks associated with the build-up of mortgage debt and prevent a significant rise in the number of highly indebted borrowers. The right reverend Prelate referred to responsible lending, and mortgage lenders are now required to place a limit on lending at loan-to-income multiples at 4.5 or above. That is a particular focus for the FPC, which also offered guidance to mortgage lenders on affordability testing to ensure that new borrowers would be able to afford their repayments if interest rates were to rise, as they did earlier this month. In June 2017, the Financial Policy Committee assessed that the growth in consumer credit represented a pocket of risk and that increased vigilance was warranted. The noble Lord, Lord Sharkey, referred to that point.
Let me come to some of the points which were raised. The noble Lord, Lord Haskel, asked whether we support the living wage. He is a generous Member of this House, and I am sure that he would recognise that the Government deserve some credit for introducing the living wage, which is equivalent to a £910 pay rise for those who are in full-time work and were previously on the minimum wage. We have also raised the tax threshold so that many people on the lowest incomes have either been taken out of tax altogether or have had a reduction of £1,000 in their tax bill.
This brings me to a key point raised by the noble Lord, Lord McKenzie, the right reverend Prelate and the noble Baroness, Lady Lister. They spoke about why people get into debt. The primary reason why people are driven into debt is job loss. Second to that, but some way behind, is the onset of sickness or disability. There is also persistent low income and relationship breakdown. These are points that the noble Baroness, Lady Donaghy, touched upon as she looked at those areas. The noble Baroness, Lady Coussins, asked about public sector debts and what we are going to do in respect of breathing space. Several noble Lords referred to that. The Government have published their call for evidence. We will not prejudge the outcome of that, but we believe it is an extensive consultation and we are looking forward to receiving the evidence. The Government have recently called for that evidence to be provided in respect of the six-week breathing space. I heard what the noble Baroness, Lady Lister, said about the level it should be, but we are calling for that. This call for evidence is the next step in implementing our manifesto commitment. It is important that we get this right, so we are seeking to take views widely in this regard. After considering all responses to the call for evidence, the Government will bring forward a consultation on the specific policy proposal soon with a view to publishing draft legislation by the end of next year and certainly no later than 2019.
Lord Stevenson of Balmacara: I appreciate the Minister giving way as this is a time-limited debate. I wonder whether we can reflect for a minute on that. We have tabled an amendment for Third Reading of the Financial Claims and Guidance Bill, which was referred to by the noble Baroness, Lady Coussins. What the Minister has just said does not square with where we think we are on that issue.
Lord Bates: The consultation period is ongoing now. There is a schedule coming forward for Third Reading, which will be discussed. I was outlining the call for evidence that we have had and the consultation that we will have upon it. Of course the Government will make their position clear in respect of any specific amendment that may be brought forward at Third Reading.
The Monetary Policy Committee has made its decision to raise interest rates on a broad set of economic data, working closely with the Financial Policy Committee to understand its impact on households’ balance sheets. The independent FCA is responsible for the regulations in place to protect customers in their dealings with financial services firms. They include at their heart the requirement that firms must deal fairly with customers in payment difficulties. Its rules require lenders to consider a variety of options to help a borrower cope with difficulties. The right reverend Prelate paid tribute to a number of organisations that are working in the area of debt resolution. I pay tribute to the work of the noble Lord, Lord Stevenson, with StepChange and that of the noble Baroness, Lady Coussins, with the Money Advice Trust. I have seen the work of Christians Against Poverty. What it is doing is quite extraordinary, but more needs to be done.
The noble Baroness, Lady Coussins, asked when the financial inclusion forum will be set up. The forum’s objective is to bring together Ministers in departments with a remit to promote financial inclusion, regulators, especially the FCA, and key stakeholders to address financial exclusion. The Financial Inclusion Forum will be co-chaired by the Economic Secretary and the Minister for Pensions and Financial Exclusion. The forum will be attended by Ministers from other departments, regulators, and representatives from industry and consumer groups. It will meet on a biannual basis and review recent initiatives and progress.
The noble Baroness, Lady Donaghy, asked how concerned the Government were about the rapid growth in consumer credit as a potential risk to the economy. The FPC’s most recent assessment of the growth in consumer credit is that it does not present a material risk to economic growth, as consumer credit represents 11% of overall household debt. But again, that is not to suggest that we do not consider that it is a significant factor. The noble Baroness, Lady Donaghy, also asked what the Government are doing about the high cost of credit. The Government have transformed regulation of consumer credit through the use of the Financial Conduct Authority’s review of high-cost debt. We put a cap on payday lending and the egregious interest rates that were being charged there, which has led to payday loans halving in number since it was introduced.
The noble Lord, Lord Sharkey, asked specifically about car finance. Car finance companies are required to meet the standards the FCA expects of lenders, including making affordability checks and providing adequate pre-contractual explanations to customers. The FCA’s chief executive, Andrew Bailey, who the noble Lord referred to in his speech, said that he does not see the growth in personal contract purchase finance as a problem per se, as it recognises that a car is an asset. The FCA is looking at the car finance market to assess whether consumers are at risk of harm. The FCA is focusing on four areas: affordability checks; conflicts of interest between lenders and dealers, a point raised by the noble Baroness, Lady Donaghy; quality of information from firms to consumers, and whether firms are adequately pricing risk.
The noble Baroness, Lady Donaghy asked whether advice agencies have enough funding. We set up the Money Advice Service, which has spent £49 million, and over 440,000 free-to-client debt advice sessions have been undertaken. We are setting up a new single financial guidance body, bringing together the Money Advice Service, Pension Wise and the Pensions Advisory Service. This will be more efficient, and I think less confusing for customers, and will direct money to front-line services.
The right reverend Prelate, the noble Baroness, Lady Lister, and the noble Lord, Lord McKenzie, referred to universal credit. DWP research shows that the majority of people claiming universal credit are comfortable managing their budget, and any need for financial or budgeting support is discussed at the outset. For those who cannot wait until their first payment, advances are available which provide up to 50% of a claimant’s indicative award straightaway, although I accept the point made by the noble Baroness—
Lord Stevenson of Balmacara: I am very grateful to the Minister for giving way. I gather that what is called inspiration may have arrived from the Box in response to my earlier point, and I would like to give him the opportunity to correct the record before we finish.
Lord Bates: I am very grateful for that. In response to the noble Lord’s earlier intervention on breathing space, the position has changed since that section of my speech was last drafted, and I will write to him—this is dynamic government, unfolding by the minute and of course responding, as always, to the reasoned arguments presented by the noble Lord.
The noble Baroness, Lady Donaghy, asked what we are doing to ensure that workers in the gig economy are protected from problem debt. Information, advice and guidance is available for free from the Money Advice Service, which provides specialist support for the self-employed through its funding of the Business Debtline, which supports sole traders in dealing with debts that they may incur. Around 25,000 small business owners were supported by Business Debtline last year, and 90% of those who accessed support from it stabilised or reduced their debt after its help. Again, that relates to the right reverend Prelate’s point that people out there who are facing considerable distress need to recognise that help is available and that the sooner they call on that help, the easier their problems will be to solve.
Finally, the right reverend Prelate asked whether the Government will be bringing forward legislation on a breathing space. I do not want to go over that territory again, so I will simply say that it has been a fascinating debate for all Members of the House, not least the Minister. I thank the right reverend Prelate for pursuing this matter, giving us the opportunity to debate these important issues which touch many people’s lives, and we look forward to continuing our discussion.