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.