Ever since the amount of consumer credit in the UK topped £200bn in June of this year – the same level as it was in 2008 – there has been a growing amount of press and focus on the health of the UK consumer and risks to the economy. As an organisation committed to helping improve the financial stability of people’s lives in the UK, we have a keen interest in this area. We wholeheartedly agree with Mr. Bailey at the FCA that we need a more sustainable solution and with MP Reeves that “no one in debt or financial difficulty will find it easier to make ends meet just because a report confirms the problem.”
However, we believe that conversations about a “debt timebomb” must be had with due acknowledgement of the day-to-day realities of living in the present economic environment. Savings are at generational lows due to a combination of declining real wages and historically low interest rates. Combined with increasing inflation and an eroding safety net in this age of austerity, the current environment makes it very difficult for a significant part of the population to live without relying on credit, even for day to day living expenses.
Until real wages start going up, this problem of relying on credit is not going to go away. If people need to borrow to cover basic living expenses, they can’t just be told not to borrow. They need to live.
The only real solutions to this problem are to pay people more or make the cost of living more affordable. Paying people more would be a great solution but not always practical. Making the costs of essential goods and services cheaper is also not realistic, especially with Brexit looming and continued inflationary pressures. In this environment, we think people need to be more practical and recognise that credit will continue to be used to cover living expenses.
So, let’s start thinking of ways to make credit better and safer for consumers.
We are 100% behind the range of regulatory measures that the FCA has put in place and is currently considering for the consumer credit market, but we do worry about the potential for unintended consequences – in particular, the risk that new policies might be put in place that restrict access to consumer credit for a big chunk of the population that both need it and can afford it. As Mr. Bailey recently said, “there is a really big question around how do you provide credit…Credit is a means of smoothing [erratic incomes] but the question is how do you structure it in a sustainable fashion.”
We agree with Mr. Bailey and therefore believe it’s time for a revolution in consumer credit. Consumer credit has barely evolved in decades, and has many old-fashioned inefficiencies. It’s time for a fundamentally different proposition – a form of consumer finance that works for people and directly improves their lives while aligning incentives of both borrowers and lenders
In conclusion, we don’t think all debt is an absolute bad. And until wages go up or cost of living decreases, debt levels are unlikely to go down. The current focus on consumer credit offers us all an excellent starting point to discuss not just the absolute level of debt, but to have more detailed conversations about the different kinds of consumer credit and how they can be improved.