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Personal Debt (Advice and Regulation)

Volume 472: debated on Wednesday 27 February 2008

I beg to move,

That leave be given to bring in a Bill to require schools to provide education on personal money management; to make provision about advice centres on personal finance; to impose conditions on the activities of money-lending companies; and for connected purposes.

Debt has always been a problem for some, but we live in an increasingly materialistic society and that is fuelling a growing debt crisis. Yesterday we heard from the Children’s Society about the increasing materialism shown by children and the pressure that that can cause. Children are keen to conform, and that is a particular problem in the teenage years. A separate survey of 14 to 18-year-olds revealed that more than half of them are in some sort of debt by the age of 17 and a further 26 per cent. saw credit cards and overdrafts as a way of increasing their spending power.

Last year, 106,645 people were declared insolvent or bankrupt. That is 272 people every day. Many others are wondering whether they will be next, but the problems start building up early in life. Quite simply, many 18-year-olds today start their adult life in debt. A student loan, topped up by tempting deals on credit cards and store cards, causes the problem. Faced with the offer of 10 per cent. off if a person signs up for a store card today, many teenagers and young adults are ill equipped to consider fully the long-term cost of so much cheap credit. A survey by the Nationwide building society revealed that 75 per cent. of people in the UK do not understand the monetary value that a 1 per cent. difference in mortgage rates can make. It is probably safe to assume that that lack of knowledge can be extended to credit card repayments.

In the UK, personal debt as a proportion of income is the highest it has ever been and the highest in the developed world. We are, quite simply, the debtor of Europe. If the problem is not to deteriorate further, we need to take action at a number of levels. First, we need to get people while they are young. Currently, the teaching of personal financial management is not compulsory in schools, although there are opportunities for pupils to learn about managing their money through personal, social and health education, citizenship and maths lessons. However, the reality is that PSHE lessons are not always taken as seriously as they should be and there is no monitoring of what is taught. Some schools have found it difficult to teach financial literacy: some staff do not feel confident about teaching it, and that is combined with the difficulty of fitting the lessons into an already crowded timetable. Above all, however, education should equip people for life, so the subject deserves to be taught in its own right.

Financial education will be part of the national curriculum from 2008, but that will cover only the role of business and financial services. What children really need are lessons in budgeting and money management, as they will help them understand the implications of any simple financial decisions that they make and, hence, help them to avoid future debt.

Given the Government’s desire for individuals to take more personal responsibility for their long-term financial well-being, the only real surprise is that that education need has not been addressed already. For many adults, however, debt is a problem that already exists. People in debt simply do not know how to climb out of the debt trap, and in many cases some simple advice and support can help people to turn their lives around.

Yet the problem is growing. Since 1997, total British household debt has risen 170 per cent. The average interest paid on debt by each household per year has risen to approximately £3,800—an increase of £500 over the past year alone. According to Credit Action debt statistics, 80 per cent. of Britons regularly admit to overspending.

One tool for decreasing the problem is to ensure that people have access to free independent advice and assistance. The Thoreson review is currently looking into the matter, but Otto Thoreson has stated recently that providing a national, generic financial advice service would improve financial capability across the UK, and that the benefits would outweigh the costs by about three and a half to one. He has already identified the cohort of the population most in need of the advice, and calculated that there are 19 million or so people with significant needs. That represents nearly half the UK adult population.

Some advice is available already, but the organisations offering it face an increased burden. The National Association of Citizens Advice Bureaux received 434,592 requests for help in November last year. That is 30,000 more than in the whole of the 1996-97 accounting year, which shows how the problem has grown.

The Government should be working actively with the financial services industry to achieve a national roll-out of independent advice centres that would provide financial health checks. Currently, NACAB provides a valuable service but it usually offers help only once people have got themselves into considerable financial difficulty. It has recently trialled a new initiative called Moneyplan, whose aim is to find a way to meet the advice gap that has been identified in the provision of generic financial advice.

The main findings so far suggest a great deal of unmet demand. The project does not deal with crisis management, but it often has to deal with explaining financial documents that the individual simply does not understand. Also, the Resolution Foundation has investigated the feasibility of establishing a new national financial advice resource, funded by a public-private partnership, to provide financial advice targeted at people on low incomes. The foundation makes the point that a significant proportion of that group are currently making poor financial choices. I suggest that making poor financial choices is not restricted to people on low incomes.

The Resolution Foundation report also concludes that, by drawing on technology and harnessing learning from existing services, the financial advice needed could be provided at high volumes and at a reasonable cost. The time has come for Government to take a lead on the problem, rather than wait for some third-party organisation to try to get people together.

My Bill would provide a mechanism for achieving a national roll-out of independent advice centres that provide financial health checks. A network that provides genuinely independent advice would be in the best interests of the financial industry. It would be in the industry’s interests to finance the scheme collectively, as it would help to restore battered confidence by providing advice of a high professional standard that is not linked to any particular product.

However, it is no good having improved financial literacy if lending practices are confusing to the consumer. There is a need for greater transparency in a number of areas. Young people often collect store cards and, despite recent changes, some of the charging remains complex and fairly opaque. We need to have a simpler mechanism for explaining to people what their average monthly repayments will be for each £100 that they borrow—both in the initial phases of the loan, and once any offer period has expired. The current concept of APR—the annual percentage rate—is meaningless to most people.

There is also a need for tighter guidelines by the Financial Services Authority over non-income verified mortgages. We do not want to return to the days when the self-employed found it hard to obtain loans, but the recent growth in the number of unverified mortgages suggests an eagerness to promote competitive lending. Lenders should have more responsibility for ensuring that a mortgage is granted only if it is proven that the suggested repayments are feasible. The issue is hugely topical. Only this morning on the “Today” programme, Hector Sants, head of the Financial Services Authority, acknowledged the need to return to a rather more old-fashioned world in which banks lent money, kept risks themselves, and had to make rather fuller judgments about the people to whom they lent.

The aforementioned measures can only go so far, and there is a pressing need to find ways in which to put the brakes on irresponsible financial behaviour. One way of doing that would be to adopt greater debt-inflation pooling, in order to prevent irresponsible lending and borrowing. At present, about 60 per cent. of debt data are pooled; the 40 per cent. that are not includes student debt, and figures show that more than 59,000 graduates are in arrears of student loan payments by more than six months. Clearly that information needs to be part of the bigger picture, so that young adults are not allowed to get further into debt and lenders have the greatest possible amount of information on the people to whom they are lending.

This is very much a 21st-century problem. I pay particular tribute to my hon. Friend the Member for Twickenham (Dr. Cable), who has done much to highlight the issues in the past. The Bill is a modest contribution to tackling the problem, and I hope that the Government will support its aims.

Question put and agreed to.

Bill ordered to be brought in by Sandra Gidley, Rosie Cooper, John Bercow, Peter Luff, Mr. David Drew, Mr. Don Foster, Dr. Vincent Cable and Lorely Burt.

Personal Debt (advice and Regulation)

Sandra Gidley accordingly presented a Bill to require schools to provide education on personal money management; to make provision about advice centres on personal finance; to impose conditions on the activities of money-lending companies; and for connected purposes: And the same was read the First time; and ordered to be read a Second time on Friday 25 April, and to be printed [Bill 77].