Britain’s debt time​bomb: FCA urges action over £200bn crisis

The government needs to step in to help tackle the mountain of debt being racked up by the most vulnerable consumers in Britain, the chief financial regulator has warned, as new data shows that personal debt burdens are continuing to rise.

New figures seen by the Guardian showed the worsening consequences of Britain’s borrowing binge. According to the Money Advice Service, there are now 8.3 million people in the UK with problem debts.

The debt charity StepChange, which has also released fresh data, said the percentage of its clients falling behind on payments went over 40% in the first half of 2017, while the average debt of the people it helps has also risen, from £14,251 in 2016 to £14,367 in the first half of the year.

Andrew Bailey, chief executive of the Financial Conduct Authority, told the Guardian – at the start of a series examining the £200bn in unsecured consumer credit amassed by households in Britain – that he was concerned about the sheer number of people who needs loans to make ends meet. He pinpointed gig economy workers, who do not have guaranteed hours, as in special need of credit to smoothe their incomes.

StepChange highlighted young people and renters as increasingly vulnerable, with many needing to borrow to cover the most basic everyday bills.

Bailey told the Guardian he had visited debt charities across the UK and that many people were facing difficulties with“frontline debt” such as council tax and utility bill arrears. He said organisations extending that kind of credit were often faster to recoup their losses, which can involve bailiffs, court orders and repossessions, than traditional lenders.

“I don’t think we have a sustainable solution, in terms of the provision of credit where needed,” said Bailey. “No one body might solve it on their own,” added the FCA head, who has put the issue of consumer credit at the centre of the watchdog’s agenda this year.

FCA chief executive Andrew Bailey underlined the problem of ‘frontline debt’.
FCA chief executive Andrew Bailey underlined the problem of ‘frontline debt’. Photograph: Richard Saker for the Guardian

Consumer credit, which covers personal loans, credit cards and borrowing for cars, is rising at just under 10% a year, at a time when wages are falling at 0.4% a year taking inflation into account. Some 86% of cars are now bought on PCP (personal contract purchase) credit deals, which effectively leave borrowers leasing their vehicle. Meanwhile, nearly half of all borrowers on credit cards are on zero interest rate offers.

Bailey said people working in the gig economy with erratic incomes were in particular need of access to credit, especially those with rent-to-own deals used for buying household items like fridges and washing machines.

“There is a really big question around how do you provide credit. There is a case for people [needing loans] having access to credit, particularly in a world where earnings are more erratic.” Referring to the “so-called gig economy”, he added: “Credit is a means of smoothing [erratic incomes] but the question is how do you structure it in a sustainable fashion,” said Bailey.

“It needs government involvement,” said Bailey. The regulator has been collecting information about the diverse consumer credit market which spans credit cards, car loans and other forms of lending such as rent to own.

With warnings from the Bank of England that interest rates could rise from their current record lows of 0.25% as early as November, there are concerns that heavily indebted consumers could start to run into difficulty on their loan payments.

StepChange said it was concerned about a steep increase in the number of under-40s and renters who were struggling to make ends meet, adding to the trend for low-income families to rely on credit to buy essential items.

Figures from its review of client visits and phone calls in the first six months of the year shows that households were also increasingly falling behind on payments for council tax, water rates and other household bills.

More than 80% of new cars in the UK are currently financed through personal contract plans (PCPs).
More than 80% of new cars in the UK are currently financed through personal contract plans (PCPs). Photograph: Matt Cardy/Getty Images

StepChange said the average council tax arrears declared by its clients has risen from £756 in 2013 to £1,012 this year. For electricity bills, arrears have risen from £521 to £668.

The FCA’s research shows that one in six people with debt on credit cards, personal lending and car loans – which amounts to 2.2 million people – are in financial distress. They are more likely to be younger, have children, be unemployed and less educated than others.

The FCA has already cracked down on payday lenders – from 2015 capping the rate of interest they can charge – and also announced a series of measures intended to help credit card customers laden down with persistent debt.

A review into the car loan market is under way. “I don’t think that (PCPs) are irrational at all,” said Bailey, but the regulator is on alert for deals consumers do not understand, particularly regarding mileage limits and the condition of the car, which can result in unexpectedly large demands for payments at the end of the term.

Bailey said he was also using the regulator’s “convening” powers to summon charities and other industry bodies to discuss the state of the rent-to-own market, but said the watchdog would not intervene in any way that would restrict this form of credit. .

The credit card market has already been scrutinised, particularly in relation to zero-interest rate balance transfers – when credit card debt is rolled over onto a new card – which can provide free borrowing for up to 43 months. Some 45% of the £65bn of credit card debt is on zero balance transfers and at the end of the interest-free period half the balances are at the same level as when the offer began.