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Lord Newby: My Lords, I too thank the noble Earl, Lord Northesk, for bringing forward the debate at this time. As a number of noble Lords have pointed out, we either have passed or are about to pass the point at which household debt reaches £1 trillion. Although that is an unimaginable figure in many ways and has no particular practical consequence, it may be an appropriate time to give some thought to whether it matters. The debate has demonstrated that there is no common view at all about whether it matters. We have two groups—the worriers and the optimists.
The worriers, who include the chairman of the FSA, point to record levels of household debt in relation to post-tax income—now 120 per cent, as opposed to 40 per cent in 1980. As several noble Lords have pointed out, four-fifths of that is secured against depreciating house prices, which, in relation to income, are at levels comparable to those just before the house-price crashes between 1973 to 1975 and 1990 to 1992. There is also growing evidence of debt distress in the form of record personal bankruptcies. The Bank of England's own analysis suggests that 10 per cent of debtors regard debt as a heavy burden, and that 20 per cent of those with unsecured debt are borrowing to service the loans. On that side of the balance, recent FSA figures show that 6.9 million families are having difficulties with their borrowing commitments—an increase from 6.1 million families the same time the previous year.
The optimists, of whom the noble Lord, Lord Skidelsky, is in the van among your Lordships this evening, argue that there has been a shift in the sustainable levels of debt for a number of reasons, which he enumerated. They argue that the debt-to-income ratio of debt holders is not deteriorating, that the debt-servicing ratios of households are at historically low levels, and that the relationships between secured debt and assets and between unsecured debt and financial wealth cannot depart far from historic averages. For their part, the banks claim to have learnt the lessons of the late 1980s and early 1990s, and to be very careful to assess their customers' ability to pay before making loans.
In a number of respects, both sides of the argument are right. The difference is about not current facts, but expectations of the future. The worriers emphasise that consumers are taking on debt on the assumption that employment will remain at recent high levels, interest rates will remain relatively low, income growth will remain strong and house prices will remain high. The optimists argue that those fears are misplaced.
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There is also confusion in the debate, in that there are two distinct debt problems, both of which have been discussed. First, there are the minority of borrowers, mainly in low-income households, who are in severe difficulty with debt. Analysis shows that the most serious problems relate to unsecured debt and families in social housing. That is a very different problem from that of the home buyer borrowing over the odds to get a foothold on the home-ownership ladder. Debt as a manifestation of poverty is a real issue.
The other debt problem is potential rather than actual. Continuation of comfortable balance sheets of households with big mortgages depends on the absence of a serious crash in house prices, plunging substantial numbers of people into negative equity. The optimists believe that house prices are being driven up by real and enduring scarcity in the housing market, caused by more and more people and households chasing seriously constrained increases in the housing stock. That was one of the main conclusions of the Barker report. They also believe that, barring some major unforeseen shock, policies designed to ensure financial stability will ensure low interest rates, low inflation and steady growth without a destabilising housing boom and bust.
The worriers take a different view—that, although Gordon Brown's estimable commitments to financial stability may work in aggregate, there can still be boom and bust in asset markets, of which in Britain housing is by far the most important. Just as stock markets see irrational exuberance, so do property markets. On the lending side of the market, a few aggressive lenders are undoubtedly pushing loan-to-value ratios and income multiples into hitherto uncharted territory, leaving their more conservative competitors lagging behind and faced with the dilemma of either following suit or losing market share.
Whatever the larger banks say about their assessment of potential borrowers, anyone who gets the flood of direct mail that I do, from all kinds of banks of which one has never heard and about which it is difficult to discover very much, cannot believe that they are acting with the degree of responsibility that the British Bankers' Association might wish. With such lenders about, there are undoubtedly ingredients for a potentially unstable asset bubble. It will be clear only with hindsight whether the worriers or the optimists are right.
It seems to the Liberal Democrats that the fact that we do not have the benefit of hindsight should not mean that we sit on our hands. A problem with the current situation is that the Bank of England worries about a potential house price bubble, but claims that it cannot take action to deal with it because its single policy tool—interest rates—is quite rightly focused on a much broader set of variables than simply house prices. The FSA, the Treasury, the DTI and the OFT all have responsibilities in the area, but there is a danger that primary responsibility is often not desperately clear. In
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that is the danger that some measures that could be taken are left untaken, because everyone looks at everyone else to take it.
Therefore, I would like to make a number of suggestions that, whichever view one takes of the overall borrowing situation, could usefully be implemented. I have two suggestions regarding high and rising debt, as far as individuals, in particular those on relatively low incomes, are concerned.
The first relates to advice. A number of speakers have mentioned the increasing role that the citizens advice bureaux play in giving financial advice. But they are tightly constrained in what they can say and I believe that there is a need to establish a framework for providing independent, low-cost financial advice supported by the credit providers and the investment industry. The banks and the investment industry are already looking at that area and are doing something, but they are not doing very much and they are not doing it with any great urgency—and they could do more.
Secondly, it would be sensible to widen the remit of the social fund to permit an emergency short-term lending fund for low-income families in financial crisis. That would be a failsafe measure which, it is hoped, would not be needed in the vast majority of cases. However, as the case mentioned by one noble Lord about a man who committed suicide demonstrated, we are talking about issues that have fundamental impacts on the ability of households to live normal lives.
The second raft of changes that are needed relate to the way in which the banks operate. First, I agree with the suggestion of the noble Lord, Lord Selsdon, that there should be a credit health warning on the tidal wave of unsolicited credit promotion that we are all bombarded with. I am not sure what the research evidence is on the health warnings on cigarettes, but I cannot believe that it has no impact whatever. Secondly, regarding low-income households in particular, there needs to be a crackdown on exploitative loan sharks. It is an area that is very much within the remit and focus of the review of consumer credit, but as we have debated previously in your Lordships' House, the pace at which that review is being undertaken leaves much to be desired. It would be sensible if the often hidden penalties for the early redemption of debt were ended, because that would encourage people when they are in a position to reduce their debt to do so without incurring financial penalty.
There needs to be stronger enforcement of OFT rules to prevent abuse associated with misleading advertising by debt management and advice services and excessive interest rates on store and credit cards undoubtedly need to be more rigorously policed by the competition and trading authorities. There has been some debate about the proposals on simplifying APR and making that clearer. That is a sensible step, but I doubt whether it goes far enough. I hope that it would be possible one day to produce with every financial product sold the equivalent of the sheet that one receives when one obtains a medicine, to which the drug companies devote enormous effort. It describes what the drug is, what its ingredients are, what it might
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do to you and what the side effects are. One does not have the equivalent of 20 pages of minute print in a packet of aspirin, but something that describes the key features of that drug. That kind of document is almost entirely lacking in financial services products—not least, because, while the drug companies have to go though immensely rigorous procedures to make sure that the information on that piece of paper is correct, that piece of paper is sadly missing in many financial services products.
Finally, there is the question of, as it were, macro management of credit, where we have three suggestions. First, we believe the Government should publish and monitor, along with the Bank of England and the FSA, measures of sustainable household debt along the lines of the Government's fiscal rules. The Government have clear rules about what should be happening to taxes. They should have equally clear views on what are sensible measures of sustainable household debt.
Secondly, there should be guidance to banks on safe loan-to-value ratios and income multiples for mortgage borrowers based on independent assessments of asset values by a group operating in a similar manner to the Bank's Monetary Policy Committee.
Finally, there is scope for the active use of reserve deposits to reduce destabilising boom and bust in mortgage lending. I realise that this last point is extremely controversial within the banking fraternity—indeed the Bank of England claims that in the multinational world in which we operate and in global liberalised capital markets it is virtually impossible to do that. But frankly, given that there is a raft of regulations of which the rules about solvency ratios are but one, it is worth looking at the option of adjusting ratios to reflect the state of asset markets and, therefore, the risk of loans.
There are a raft of proposals that we believe make sense, whether one is an optimist or a pessimist about prospects for household debt. I hope that the Government might adopt them.
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