The Treasury Select Committee published today its report Household Finances: Income, Saving and Debt and in this blog I focus on its consideration of household debt and overindebtedness. The Committee notes the debt driven model of the UK economy, the low savings ratio, and the fact that “substantial numbers of households are over-indebted or at risk of it and are vulnerable to aggressive debt collection”. The increasing significance of debt arrears to the central and local state have raised concerns about the heavy handed approach to debt collection by some of these state agencies.
On high cost credit it concludes that the apparent success of the FCAs payday loan price cap suggests that ‘there is not always a trade-off between regulating harmful credit products and denying access to credit to those who need it’. It encourages the FCA to move forward with its proposals on other forms of high-cost credit, but also observes that Parliament could move faster, given the relatively drawn out rulemaking process of the FCA and the potential for judicial review. This might be appropriate if the objective is to establish appropriate across the board norms, rather than the discrete market focus of the FCA.
On the protection of the overindebted it endorses the ‘breathing space’ promoted by debt advice agencies. But it has nothing to say about how this will fit into the existing complex of debt remedies for the overindebted.
The Committee considers the seemingly intractable problem of providing reasonably priced credit for lower income consumers–the FCA recognises that even with price controls individuals using payday loans remain lower income, with 68% struggling to repay their bills from time to time–the main reason for taking out a payday loan being to pay for living expenses. The Committee repeats previous Committee’s proposals for further development of credit unions (see here) which remain a very small part of the lending landscape, but is ambivalent about including rental payments in credit rating assessments as a means of extending access.
The Committee’s recommendations break little new ground. However, the Committee does suggest that the Treasury take greater responsibility for monitoring, reporting and discussing issues of household debt and savings including in its Budget statements, something that the Treasury is unlikely to embrace enthusiastically. In addition, the Committee’s conclusions confirm the possible sea change in thinking about interest rate ceilings in the UK, at one time shunned by regulators, (see here) but now accepted more as a useful regulatory tool.
The Committee failed to consider the role of personal insolvency and the rules on writing down debt. It seems unaware that these rules are important parts of the ground rules of the credit market. It regrets the insufficient nature of free debt advice but makes no connections between existing rules on debt relief and the need for extensive advice. Straightforward access to debt relief reduces the need for extensive assistance by debt advice agencies and can provide significant economic and social benefits. The English system is unnecessarily complex, increasing the need for objective advice. Preliminary findings from my research on Debt Relief Orders suggests that the complexity of the means testing and liability limits substantially increase the costs of advice agencies, so that bankruptcy is in fact a simpler remedy for individuals– a clearly unintended consequence of the legislation.
While the Committee clearly wishes to give an up-to-date snapshot of issues, this has the effect of obscuring the fact that the issues considered have a history, with previous reports at the national and international level. Thus it focuses on definitions of over-indebtedness as if these have not been considered before, and fails to refer to the fairly exhaustive consideration of this question by the EU in 2013 (see here). It argues for greater co-ordination between government departments but does not remember the failed attempt at an overindebtedness strategy in the 2000s (see National Audit Office).