Debt: Who is responsible for making sure millions of Britons don’t go bust?
The Financial Conduct Authority’s chief executive is so concerned about rising levels of household debt, he has asked the Government to step in
Who is responsible for ensuring millions of Britons don’t go bust? The Financial Conduct Authority’s chief executive Andrew Bailey is so concerned about rising levels of household debt that in September he called for the Government to step in. Having put consumer credit at the top of the FCA’s agenda for 2017 – culminating in a warning this week that half of all adults in the UK, some 26.5 million people, could be “financially vulnerable” – Mr Bailey argues that the problem is simply too big for any one agency or regulator to tackle by itself. “I am not convinced that we have an appropriate system in this country for the sustainable supply of [household] credit,” he says. “The FCA alone cannot make this happen.”
For ministers, however, these are tricky waters to navigate. For one thing, the Treasury is acutely aware that resilient consumer spending has been a major factor in helping the UK to avoid the sort of recession that was predicted in the immediate aftermath of last year’s Brexit vote; such spending may have been powered by soaring borrowing, but the Government has been grateful for it nonetheless, and there’s no-one else on the horizon riding to the economy’s rescue.
Moreover, the FCA itself has conceded that credit now plays a crucial role in the lives of millions of Britons making their way in an uncertain financial environment. The growth of self-employment, the development of the gig economy and the advent of zero-hours contracts mean that many people’s incomes are erratic and unpredictable. Credit may be their only option for smoothing out their zig-zagging finances.
The bigger question is whether the Government really could make meaningful inroads into household debt, even if it wanted to do so. Having let the genie out of the bottle more than three decades ago, attempts to persuade it back in look destined to fail.
There was a time when policymakers were able to manage personal borrowing. Throughout the 1970s and the first half of the 1980s, household debt levels in the UK remained pretty constant, at between 30 and 35 per cent of the country’s GDP. Then the figure began to rise – reaching 60 per cent in the early 1990s, 80 per cent in the early 2000s and peaking at just over 97 per cent in 2010; today it stands at around 90 per cent.
What happened to prompt this change? Well, in 1986, the then Conservative Government passed a series of laws to deregulate the financial service industry; it aimed to stimulate competition by relaxing the rules to allow more firms to offer mortgages, loans and other types of credit – and to allow these firms to borrow themselves to finance their lending.
The result was the UK moved away from a system where banks largely limited lending to overdrafts and small personal loans, and most people took a mortgage from a building society with which they stayed for the lifetime of the loan. Lenders offering products such as credit cards, store cards, personal loans – and more recently payday loans and car finance plans – proliferated and launched proactive marketing campaigns to drum up business and take market share from one another.
Reversing those reforms today would be practically impossible. That limits official interventions to more strategic, targeted initiatives. For example, the FCA has already cracked down on payday lenders, capping the interest rates they can charge two years ago; credit card borrowers have also been given some protection while the regulator is also investigating the car loan market.
Nor is the FCA the only public-sector agency focused on household debt. In September, the Prudential Regulatory Authority, responsible for policing around 1,500 financial services firms, introduced new rules for the buy-to-let market, which make it tougher for would-be landlords to over-extend themselves with very large mortgages.
The Bank of England itself is also considering taking action. Its Financial Policy Committee said in September that banks had not made sufficient provisions for possible losses on consumer credit and ordered them to increase their capital buffers by £10bn. One effect of that move will be to limit the ability of lenders to make new advances for consumers.
Meanwhile, the Bank’s Monetary Policy Committee, is also poised to intervene. Its members have been dropping very public hints that the first interest rate rise in more than 10 years could come as soon as November – partly because inflation, at 3 per cent, is at a five-year high, but also because the Bank is keen to discourage consumers from taking on yet more debt. Increasing the cost of their existing borrowing, as well as new lending, is one way to do that.
No doubt more could be done. Simon Westcott, consumer credit leader at PwC, which this week warned unsecured personal debt in the UK is now closing in on a record £300bn, argues for more education to ensure financial literacy. “The industry, regulators and government need to work together to ensure people are equipped with this crucial life skill, especially as the debt burden increases,” he says. In addition, Gillian Guy, chief executive of the charity Citizens Advice, says not enough is being done to tackle sharp practice. ““It’s clear that irresponsible lending is contributing to the rising levels of consumer debt,” she warns.
Certainly, it is in the Government’s interests to try to get on top of household debt. While borrowing may be ensuring consumer spending can keep the economy afloat, economists believe this model only deepens the crisis in the end. “Recessions preceded by larger run-ups in household debt tend to be more severe and protracted,” warns the International Monetary Fund. “Government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt.”
In practice, however, those policies will be discharged through agencies such as the FCA, the PRA and the Bank of England. A more centralised Government response to the debt crisis looks both impractical and unlikely. The FCA’s Andrew Bailey shouldn’t get his hopes up.