Tuesday, 24 June 2014

Waving and drowning

Whilst government ministers trumpet improvements in the UK economy, they are undoubtedly out-of-touch with the difficult reality for most households.

The headline employment figure may be up, but that is because of big increases in part-time and self-employment and zero hours contracts. The rate of inflation may have reduced but, for the last 4 years, most people’s earnings have been well below inflation, leaving them worse off. There has been a 60% increase in the number of working households getting housing benefit to help pay the rent.

Low income working households have been the hardest hit by a combination of wage freezes, big increases in energy and rent costs – whilst the energy companies and some landlords have made exceptional profits, and cuts in benefits.

Now, the Governor of the Bank of England is signalling early increases in interest rates. Undoubtedly, many households have been cushioned from the global economic crisis by, historically, very low interest rates. Increasing rates will undoubtedly feed in to mortgage interest rates and, it is estimated, that this will cause real problems for more than to million home-owners who are just managing to keep their heads above water at the moment.

In this situation, you would think that Cameron and Clegg would want to stop those falling in to, or in danger of falling in to, debt from being exploited. However, this is clearly not the case. Parliament is currently debating a Consumer Rights Bill and opportunities are being missed.

Everyone knows that log-book loans make pay-day lending look prudent. Logbook loans are a form of high cost credit, secured against the value of a motor vehicle. They are underpinned by ‘bill of sale’ agreements, a type of contract that goes back to the Victorian era and has no modern day consumer protections.

The Financial Conduct Authority (FCA) thinks that around 40,000 consumers took out logbook loans in 2013, typically borrowing £1,000 a time- although some lenders offer sums of up to £50,000. In 2010, the market was estimated to be in the region of £38m-40m, when the Office of Fair Trading reported more than 1,000 consumer complaints. These related to the lack of protections available to people if they fall into arrears, unfair collection practices, the complex and confusing nature of the language used in the agreements and the excessively high cost of the loans.

The Financial Conduct Authority says
‘…….logbook lenders have borrowers over a barrel’.

The Chief Executive of the Citizens Advice Bureaux says
‘The logbook industry is still in the dark ages and has been getting away with lawless practices. It is absolutely absurd that a firm should be able to take away someone’s possessions without any due legal process. High interest rates and lack of affordability checks as well as threatening practices and phantom charges mean logbook loans are a toxic mix of the worst parts of payday loans and unruly bailiffs.”

Yet the government not only refuses to abolish logbook loans, it is also voting against these Bill of Sale agreements having the same protections that apply to other contracts.

Then, some people in financial difficulty turn to companies which claim to be able to help them manage their debts. In fact, a staggering 5% of British adults - 2.5 million people - are currently on a debt management plan. But, in many cases, this can make things worse not better. 

Fee-charging debt management plans often prolong customers’ debts or increase them.  Some ‘cowboy’ firms are keeping up to 90% of money consumers give them to repay their debts as fees for their services rather than using it to help pay off creditors.

For a debt of £30,000, a client of a typical debt management company would pay almost £6,000 extra in fees, over and above repayments to creditors. This would extend the plan by approximately 18 months compared with a Stepchange organized debt management plan, which is free.

Ministers have admitted that there was evidence that the fees, which debt management companies were charging, were abusive but allow this to continue. The government is opposing measures which would allow the courts to scrutinise the fairness of these contracts.

Ministers are also opposing an increased levy on payday lenders to pay for the provision of independent and free debt advice and affordable alternatives like Credit Unions.

Ministers fail to recognise that many people are waving because they fear they are drowning. They need a lifebelt rather than to be left to the whims of the pirates.

The Condition of Britain

Last week, think-tank the Institute for Public Policy Research (IPPR) published its Condition of Britain report.

It’s an important contribution to the debate about how to build a better society in tough times. It sets out some valuable principles for reform around devolving power, rewarding contribution, and building institutions.

We’re in an economy where a minority are doing very well, but the majority are finding the household budget more difficult to balance than it was five years ago as price increases have outstripped income changes. In addition, there is a significant part of the population who see themselves as locked out of the opportunities available to the rest. That gap, and the level of inequality, is increasing.

The report proposes that we must all work together to build a stronger society on three ‘pillars’:
  • spreading power,
  • fostering contribution, and
  • strengthening shared institutions.
It then goes on to make 28 specific recommendations about:
  • Families: Raising children and nurturing relationships
  • Young people: enabling secure transitions into adulthood
  • Working life: promoting work and rewarding contribution
  • Housing: mobilising local leadership to build more homes.

These are big issues requiring tough decisions. Inevitably, some of the recommendations have received more publicity than others.

For instance, young people and their parents will be particularly interested in the proposal that 18-21 year olds who aren’t work ready should be in training and not on benefits. Therefore, they should be assisted to get good qualifications and/or work experience. Support would be given to those whose parents can’t support them through training, in the same way as we currently do for those in higher education. Exceptional support would be given to those who genuinely can’t live at home. But, otherwise, entitlement to Job Seekers Allowance should end.

What do you think?

You can read the report, in full or in summary, at