OFT consults on Financial Sector Strategy

The OFT has launched a consultation on its proposed financial services strategy which sets out its approach to the sector in response to the current economic crisis, and also announced a review of the unsecured consumer credit market.

The OFT is asking interested parties to comment on its proposal to focus on two inter-related themes:

• The prioritisation, in the short term, of promoting fairness and responsibility between the credit industry and consumers, and

• advocating choice and competition to ensure that public decisions made to deal with the current crisis do not harm competition in the long term to the detriment of consumers.

The consultation will run until 12 June 2009, and the consultation document can be downloaded here.

A review of the unsecured credit market is also being scoped out, with details available from:

www.oft.gov.uk/oft_at_work/markets/services/credit-sector/.

Comments are currently being invited concerning this until 8th May, with the full review expected to start in the summer.

Consultation on Administration Orders: Weakening Protection?

The Ministry of Justice is currently consulting on proposals to limit the types of debts that can be included in future Administration Orders as part of its wider review of assistance to people in debt problems, which will include the introduction of Enforcement Restriction Orders.

The consultation paper includes proposals to weaken the assistance available to debtors by excluding rent arrears, council tax, and magistrates fines arrears from future Administration Orders.

Debt on our Doorstep will be responding, and welcomes input from Money Advice Agencies and other community groups. The full consultation paper is available from:

http://www.justice.gov.uk/docs/cp0108.pdf

The deadline for responses is 16th April and we would welcome comments from supporting agencies to inform our response by 31st March.

Bradford & Bingley Reveals Trouble Ahead

Bradford and Bingley yesterday revealed a halving of profits as a result of failed investments in the U.S sub-prime housing market, and a surge in mortgage arrears with its UK borrowers to 40%. The declaration has caused some commentators to accuse B&B's management of a lack of 'credibility', and caused a meltdown in the value of B&B's shares (which lost a quarter of their value in a single day), and casts doubt on claims that the UK's lenders have been more responsible than their US counterparts.

The backdrop to the announcement from B&B is a combination of rising respossessions and falling property values, with the ratio of secured debt repayments to income at its highest level since the housing market crash in the early 1990's. In addition, the credit crunch is now starting to have an impact on businesses and employment. Although yesterday's figures revealed that unemployment continues to fall, business optimism is on the floor with an increasing number of employers forecasting that they will be laying workers off at some point in the next 12 months.

Despite these warning signs, the UK has not started to consider the types of support packages that will be required to protect consumers from the impact of a sharp downturn in the housing market.

In the US, steps have now been taken by lenders to restrict mortgage foreclosure actions and commitments given to take additional steps to help borrowers in difficulty as a means of preventing a flood of respossessed properties from further depressing house prices. As yet, no such discussion has been initiated by lenders in the UK. Neither has Government considered how it can improve assistance to borrowers that fall into arrears - for example by increasing the level of mortgage assistance available to the newly unemployed.

In the light of the Bradford and Bingley announcement, Debt on our Doorstep calls for a tri-partite forum involving lenders, Government, and consumer agencies to be convened as a matter of urgency to develop a package of support measures and improved protocols for dealing with consumers in arrears and to make recommendations to improve responsibility in lending.

One million householders use credit cards to pay mortgages or rent

More than a million householders have used credit cards to pay their mortgage or rent in the past 12 months, according to a new survey published today by Shelter in its magazine ROOF.

In a desperate attempt to stay on the housing ladder a growing number of young people, including first-time buyers, are turning to credit cards, with almost seven and a half per cent of people aged 18 and 24 saying they had done so in the last 12 months.

The survey, conducted by YouGov for ROOF magazine, polled two thousand households following the Northern Rock crisis. Six percent of respondents who pay mortgages or rent said they had relied on a credit card to make payments, equating to a national figure of more than a million householders.

Shelter chief executive Adam Sampson described the results as shocking, and added: “The number of people hit by the credit crunch, interest rate hikes and unaffordable housing costs are rapidly rising.

“For many people trying to keep a roof over their head desperation is driving them to short-term, high-cost borrowing. Ordinary people are being forced to seek more risky and expensive ways to stave off the threat of eviction and repossession.”

Most credit card companies charge interest at between 15 and 18 per cent – nearly 50 per cent above even the highest mortgage interest rates of 11 or 12 per cent in the sub prime sector.

But for people with poor credit ratings the card companies can charge interest rates of up to 40 per cent, a staggering five times above the average mortgage rate.

Stuart Freeman, director of services at Community Housing Advice Service, which offers advice on housing and debt, said: “There is such pressure on people’s budgets that paying your mortgage or rent by credit card, then paying that card with another card is becoming the norm for many people.

“It leads to an ever spiralling maze of debt, and eventually the credit simply runs out.”

The poll also found the practice more prevalent in men than women with seven per cent of men admitting to using credit cards compared to six per cent of women.

The situation is worst in the Midlands and Wales with nine per cent – almost one in ten – households in the region using credit cards to keep a roof over their head. Northern England and London were closer to the national average at six per cent whilst Scotland polled at just three per cent.

Part of the problem stems from irresponsible mortgage lending allowing people to overstretch themselves financially, forcing them to use credit cards to stay afloat. However Heather Keates, Director of Community Money Advice, said lenders shouldn’t shoulder all the blame.

“If someone is making minimum payments on their credit card and they have four or five cards, when they are credit checked they don’t look like a bad risk because companies don’t have the whole picture.

She added: “It’s fine if you pay off the balance every month, but I would suggest that the majority of people don’t – they just pay off the minimum, so the debt starts to spiral.”

Shelter’s Adam Sampson continued: “Clearly this is a huge problem which will only become more widespread as housing costs continue to rise.

“We would urge anyone struggling with the cost of their mortgage or rent to seek independent financial advice or log onto www.shelter.org.uk urgently before resorting to such desperate, and ultimately more expensive, measures.”

In the ROOF magazine article, Damon Gibbons, Chair of Debt on our Doorstep comments:

"One in ten is a phenomenal figure and shows that people are significantly overcommitted. It shows they are concerned that they could face repossession action for not paying their housing costs and are keen to try and maintain those payments if at all possible."

He called for a national strategy for debt advice services to ensure access to assistance for those in financial difficulties:

"What is clear is that better advice is needed to help people rearrange their finances and pay less on unsecured credit before this problem escalates. We don’t have a national strategy for debt advice provision and somebody has got to address this issue fast."

Debt & Financial Inclusion in Leicester - 6th June

Leicester Money Advice Ltd, and the East Midlands Money Advice Partnership are holding a one day conference on debt and financial inclusion at Leicester City F.C on Wednesday 6th June.

The event will hear from speakers including Joanna Elson, Chief Executive of the Money Advice Trust and Mark Lyonette, ABCUL and a member of the Financial Inclusion Task Force. The conference will raise awareness of debt issues across the city and county and aims to develop an integrated partnership approach to tackle debt and financial inclusion problems.

To register for the event, which is free, contact Richard Rippin on 0116 242 1150 or by e-mail at richard.rippin@leicestermoneyadvice.org.uk

Dood Reveals 'Debt Tax' on Poorest Households

Debt on our Doorstep today released an analysis of household debt in the UK showing that one third of the U.K’s poorest households are paying over 11% of their annual incomes servicing unsecured credit debts.

The move comes prior to the start of the ‘UK Credit Options’ Conference, organised by Citizens Advice Scotland and Debt on our Doorstep for 28 /29th May 2007, which will bring together over 100 delegates per day to discuss the need for responsibility in lending.

Our analysis shows that whilst poorer households are less likely to get access credit (37%) than their richer counterparts (60%) – they take on a greater level of debt relative to their income. This translates into higher debt repayments as a % of their income for poorer households, making debt act as a form of taxtion on the poor.

Damon Gibbons, Chair of Debt on our Doorstep, commented:

“Repaying a growing debt burden reduces the disposable incomes of the poorest households more than it does those of their richer counterparts. For the poorest 20% of households with debts, the growth in debt repayments will completely offset any growth in their income as a result of tax and benefit changes that have been made in the past 6 years and pull households back under the Government’s poverty line.”

“Because debt is not spread evenly across households, it acts like a form of regressive taxation, magnifying existing inequalities in the income distribution. Further investigation by the Government is urgently required. To date, none of their official reports on indebtedness have looked at this issue”.

A full copy of the paper, which was presented to a conference on Responsible Credit at the University of Trento, Italy, earlier this week is available here.

ITV Need You!

Problems with debt?

ITV is making a programme about debt and its affect on families.

Are you struggling to make the repayments on the credit you owe?
Have you got the debt collectors at the door?
Are you tired, angry, upset and feel you have nowhere else to turn for help?

We would like to hear from you.

Please contact, IN STRICT CONFIDENCE:
020 7737 8455childissues@granadamedia.com

Download a copy of their flyer for your noticeboard here

Government Remains Complacent about Debt Problems

The Government's latest report on household debt levels retains its complacent attitude to Britain's credit problems. In line with the approach taken in previous reports, no analysis of the extent of debt problems by income group is undertaken, and only general remarks concerning average debt levels is provided.

As debt levels have risen, the Government argues, so too has wealth - in the form of house prices. Additionally, the DTI report stresses that, on average, the ratio of savings to debt has remained constant - so people have the ability to use savings to cover immediate problems in debt repayments.

However, this ignores the fact that for the poorest the position with mortgages, house prices and saving is irrelevant - they rent their homes and half of them have no savings at all. For this group, the growth in their unsecured debt burden in recent years now represents a form of additional taxation that must be paid from their future incomes, deepening effective child poverty levels. Although the general level of unsecured debt has not increased in the last six months, this is unlikely to be evenly distributed across the income scale, with a greater increase in the debt burden of the poorest entirely possible even though the average has remained static. This is borne out by an earlier Bank of England report (based on data from the NMG survey in 2006), which reported that the unsecured debt burden for renters was continuing to increase.

Whilst the Bank of England dismissed this increase as largely irrelevant in terms of its impact on the macro-economy due to the relatively small level of total debt owed by renters compared to mortgagors, it is still extremely relevant to the Government's achievement of its child poverty targets and should not be ignored by the DTI report which is published as part of the Government's broader over-indebtedness action plan.

In relation to mortgage lending, the report fails to note that effective interest rates are at their highest level since 1991, due to the fact that secured lending has outstripped both retail price inflation and the growth in wages. As a result, relatively small increases in interest rates now have a greater impact on those mortgage holders that cannot afford to move themselves onto fixed rates.

In response to the situation, Debt on our Doorstep have today written to the DTI requesting that they provide an analysis of household debt by income level in all future reports and explain why effective interest rates are not reported.