Though Cowards Flinch

This Thursday a motion from Stella Creasy MP and Justin Tomlinson MP will be moved in the House of Commons calling for Government to give regulators the power to cap the total cost for credit.

In brief (and as I’ve written before), the consumer credit (regulation and advice) bill seeks to integrate credit services with the post office network, impose a levy on consumer credit agencies to fund debt counselling and advice services, and give councils greater powers to regulate the amount of credit agencies in their local area.

Creasy has received support for her bill from the End Legal Loansharking Campaign, and though the emotive word “end” – as in to ban – has been used, in actual fact what the bill recommends is far more clever in that it seeks to find a mechanism to reduce unrealistic rates attached to many high-street lenders, with the aim of reducing credit dependency altogether.

During her adjournment debate held on 9 November 2010 in the House of Commons, Creasy noted 1 in 10 customers of legal loan sharks earn under £11,000 per year, and that even lenders playing by the book are able to okay loans at 272% APR (compared to 9-10% by mainstream lenders).

The inclusion of a Tory MP (Tomlinson, who is MP for Swindon North, who has recently set up a Personal Finance Education Group) will help give the bill cross-party appeal, but the very notion of “regulation” seemed to be met with resistance from some Conservatives – peculiar, seeing as at the heart of the bill is a commitment towards bringing down personal debt, and providing a gateway towards a more savings-based culture (something the Conservative Party were once geared towards).

Personal Debt

According to Credit Action the total UK personal debt at the end of November 2010 stood at £1,454bn – which amounts to more than the whole country produces in a year. Additionally, total consumer credit lending to individuals was at £214bn.

David Willetts MP, Minister of State for Universities and Science, wrote for Bright Blue Magazine saying: “It is widely understood that what has broken our economy is our dependence on debt and borrowing. This is revealed in extraordinarily low levels of saving over the past decade.” We mustn’t avoid factoring in economic inequality to a broken economy, nor assume there is only one viable plan available to fix it with, but certainly the credit experiment hurt the worst off hardest.

By coincidence, Willetts was present at Creasy’s adjournment debate last November (he stepped in last minute) and noted that the points she raised in her bill would certainly be considered in the government’s ongoing credit review. Clearly Creasy’s recommendations are in step with his concerns about debt dependence and low levels of savings.

Willetts is not the only high-ranking Conservative politician who has spoken out on this issue. Before he was Prime Minister David Cameron addressed an audience on progressive conservatism, rallying against “Too much banking debt, too much personal debt and too much government debt”. Uncontrollable personal debt is clearly at odds with modern conservatism; Creasy’s bill should be seen as a solution.

Credit Unions or P2P

Part of the bill includes the recommendation that a levy be drawn up against lenders to afford financial literacy classes – for much the same reasons that alcoholic drink producers are obliged to promote the drink aware campaign on their advertising material. While P2P (peer-to-peer) lending may undercut illegal loan sharks, there can be no way for it to offer the kind of financial literacy advice that debt-dependents need.

Debt dependency will not disappear overnight. Credit unions are well placed to get people creditworthy, thus disincentivising use of illegal loansharks, or payday loan shops that charge astonishingly high APR rates, while simultaneously offering the kind of advice which will drive down personal debt in the future.

Savings culture

As Respublica researcher Sandra Gruesco noted last year, in 2003, George Osborne said:

“We greatly support the principle that the (Child Trust Fund) Bill is designed to promote (…) We think that having savings gives people a stake in society, gives them independence, encourages self-reliance and bolsters the freedom of the individual against the overbearing state.”

It was the conservative appeal to a savings culture that surprised a lot of Tories when it was decided the Child Trust Fund and the Savings Gateway – which have been noted as progressive conservative ideals (pdf) – should be scrapped.

Unfortunately nothing has yet been put in its place. OECD figures revealed that in each year from 2005 to 2008 British households were running negative savings, but thankfully the consumer credit (regulation and advice) bill seeks to address the very concerns expressed by high-ranking Conservatives themselves. It seems obvious that Conservatives should support Stella Creasy’s motion on Thursday.