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Consumer Credit & Debt Market Assessment 2007
Key Note Publications Ltd, Nov 2007, Pages: 280
Key Note believes that, rather than the debt crisis worsening overall, there are localised issues associated with specific groups of borrowers. In Key Note's view, these problems are exacerbated by easy access to `cheap' money, and by the marketing efforts and encouragement of financial-services providers.
Another negative issue affecting the industry is that, in 2007, the Office of Fair Trading (OFT) is taking legal action against the largest banks, over alleged unfair overdraft charges.
However, leading banks are keen to express their responsible lending policies, and devote considerable effort to their corporate responsibility for good lending practices.
Consumer borrowing continues to rise, despite higher base rates, and there are still many lenders in the market.
In 2002, the then Department of Trade and Industry (DTI) — which has since been replaced by the Department for Business, Enterprise and Regulatory Reform (DBERR) — set up its working party on overindebtedness. Overindebtedness remains a major problem, as more people carry increasing levels of debt. Many measures have been implemented over the past 5 years, focused on advice services, revision of the Banking Code and financial education. In addition, commercial debt reconstruction services have mushroomed.
It is arguable that many of those who have high levels of debt are well able to sustain repayments, given the growth in real earnings from 1997 to 2007, and high levels of employment. The worst effect of debt is its influence in terms of the insecurity of individuals, who may reduce their spending and become more averse to risk. If this effect becomes widespread, the economy will grow more slowly and unemployment will rise, creating real problems of unsustainable debt. A fall in house-price growth, following the US crisis in subprime mortgages (lending to individuals with poor repayment records or with low incomes), would have severe consequences for a highly geared consumer market.
Financial-services providers that supply consumer credit include banks, building societies, finance houses (often owned by banks), insurance companies and retailers. The market is dominated by banks, and new market entrants are often subsidiaries of banks that offer niche products. These include US subsidiaries that have longer experience of subprime lending from the larger US market. UK banks compete for personal loans based on competitive interest rates.
Building societies have a small but robust share of the credit market, whereas retailers have a shrinking share, and increasingly outsource their credit offerings to banks as versions of mainstream credit cards, rebranded.
Debit cards have long overtaken credit cards in terms of popularity with consumers, and merchants frequently charge extra, in real terms, for a credit-card purchase. Banks are reluctant to issue credit cards to lower-earning customers with low credit scores.
Store-card operators have been under pressure from regulatory and consumer groups to reduce their interest rates. The Consumer Credit Act 2006 (passed in April 2006) has increased the freedom for borrowers to take out larger sums on an unsecured basis. However, the Act requires lenders to make their interest rates clear.
Credit-card lending is highly competitive between UK banks and US rivals such as American Express, Citibank and Morgan Stanley. Supermarkets and other partners and affiliates of banks also issue a wide selection of cards at a range of interest rates, offering a variety of inducements.
Banks, in particular, have made significant profits from secured and unsecured lending, and continue to gain interest income from lending to prosperous and optimistic customers at high interest rates. Lenders differ in their approach: some focus on better debt management; others continue to market their credit products; while others refocus on other, less risky, markets (such as expansion abroad). A shift to more expensive lending has been forecast, but evidence of this remains lacking, as liquid funds are easily and cheaply available.
Exclusive consumer research conducted for this report revealed that, for a significant minority (20.7%) of those questioned, debt was a worry — although the highest proportion of respondents (86.6%) believed it was far too easy to get credit. These figures have changed slightly (and for the better) since Key Note's 2006 report on Consumer Credit & Debt. The consumer credit industry shows little sign of worry so far.
Debt is being tackled in several ways, and lenders charging high interest rates have been singled out for regulatory investigation. Yet it is unlikely that interest rates will be capped (as 75.1% of Key Note's survey respondents recommended).
Regulatory pressure has been exerted on lenders by the Financial Services Authority (FSA) and other agencies, in order to inform customers of the implications of credit. OFT and Competition Commission findings have shown that there has been little movement to increase competition in interest rates for store cards and in other sectors. Industry self-regulation is still promoted by industry bodies, such as the British Bankers' Association (BBA).
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