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Loan Protection Gap

Volume 580: debated on Tuesday 6 May 2014

I belatedly welcome the hon. Member for South Northamptonshire (Andrea Leadsom) to her new position as Economic Secretary to the Treasury. She served with some distinction for four years on the Treasury Committee. As a continuing member of the Committee, I congratulate her on her appointment and welcome her to what I think is her first Adjournment debate.

More than 80% of borrowers have no form of protection to safeguard their loans, and the number of those in that position is on the increase. The disparity between the number of vulnerable consumers who need loan protection and those with an insurance policy is referred to as the loan protection gap. In this debate, I intend to raise five key issues involving loan protection insurance policies. First, I will draw attention to the significant minority of vulnerable consumers who continue to experience the damaging effects of excessive debt on their work, health and family life. Given that the squeeze on real incomes continues at a time of increasing consumer expenditure, the problem is likely to intensify, especially for those on the bottom half of the income scale.

There are any number of surveys confirming the squeeze on living standards. I will refer to just three. The first, a 2013 study carried out by the university of Birmingham on financial inclusion, showed that the real value of wages in 2012 had fallen back to 2003 levels. In this year’s “Green Budget”, the Institute for Fiscal Studies confirmed that living standards have declined over the past five years, and the Office for Budget Responsibility, the Government’s own independent forecaster, confirmed in its recent budget report that living standards will not recover to 2008 levels until 2018. Incidentally, in relation to loan protection, the OBR also forecast that the level of household debt will increase each year over the forecast period to 2018.

Secondly, I will show that the payment protection insurance mis-selling scandal has led to a collapse in trust and confidence in protection products and that, as a result, such policies have been withdrawn from the market by all but the very small, bespoke, specialist providers. PPI mis-selling is the biggest financial services scandal ever. It has affected every major bank, £13 billion has been paid in compensation and the bill is still rising. I asked the House of Commons Library to survey the market for protection policies. I would never call it a scientific study, but it gives a representative idea of what has happened in the marketplace. Unsurprisingly, the findings are somewhat depressing. PPI is seen as toxic, with little or no prospect of the main players re-entering the market. As a result, provision has declined significantly. Some policies are still provided, but mostly by small specialist providers.

One of those specialist providers is CUNA Mutual. CUNA is working with the largest credit union in my area, Plane Saver, which brings together British Airways staff and has been running for a number of years, and has developed what seems to be a way forward that provides at least an element of protection: the debt waiver system, at least for credit union services. Has my hon. Friend come across that? I would welcome discussions with the Minister, maybe involving a visit to my constituency to meet the Plane Saver group to examine this potential way forward.

I have indeed heard of the Plane Saver credit union, and I have been in touch with CUNA Mutual as well. I will talk later about the debt waiver system that they have introduced; it is one of a selection of protection products that should be available more widely in the market but are not. I will discuss some of the reasons why.

Payment protection insurance is currently provided only by small, specialist providers. As a consequence of that and of the lack of competition in the market, it has increased in cost. At a time when incomes are being squeezed, expensive income protection policies are an unwelcome additional cost for consumers.

Thirdly, surveys confirm that financial insecurity is on the rise. At the same time, protection products are totally absent from the market. The result has been the creation of a protection gap. Is the Minister aware of those developments? What steps are being taken to address this clear market failure?

In 2013, CUNA Mutual carried out a survey of financial insecurity in more than 2,000 households. Its findings were stark: two out of three were concerned about losing their job; six out of 10 were anxious about their financial affairs; 20% would find themselves in financial difficulties within a month of losing their job, rising to 30% in some regions of the country; 44% claimed that they were cutting back on heating and 59% on food, simply to make ends meet. Other surveys confirm that the number of borrowers safeguarding new loans or income has collapsed to less than 1%. Taking all those changes into account—I hope that the Minister will be sympathetic to my view—the Treasury, as a matter of urgency, should conduct a review of the state of consumer protection in credit markets to determine a plan of action to close the protection gap.

Fourthly, with traditional income protection policy tarnished, what new models of loan protection can fill the gap? Guidance was provided some time ago by the Financial Services Authority on a suite of transparent, fair and affordable lending policies, but it has had little impact on the market. The Government must show leadership by promoting the introduction of policies that will provide solutions to the protection gap. CUNA Mutual suggests that 95% of mortgages are currently sold to customers without any insurance.

This issue is not just about consumer protection. In a recent survey, 70% of respondents said that they do not trust the banking and financial services sector. Loan protection can act as a form of stimulus to get lending going again. The credit union mentioned by my hon. Friend the Member for Hayes and Harlington (John McDonnell) has experienced a boost in the number of mortgages due to the protection policy that it provides.

On the positive side, there have been some modest developments. In 2011, CUNA Mutual asked the FSA to test the debt waiver before CUNA took it up. It tested successfully and, as I will discuss, it has been introduced in a number of mutual organisations. In its 2013 report on loan protection, ResPublica, the well-known think tank, recommended that the Government should encourage the Royal Bank of Scotland and Lloyds, the two banks with major public involvement, to adopt the debt waiver. I concur with that recommendation, but little has been done to follow up on it.

Fifthly, the mutual sector is leading the way in tackling the protection gap through the use of the debt waiver in its lending. This shifts the emphasis on to the lender to indemnify the loan, rather than placing the emphasis on the customer to insure their ability to pay. What steps are being taken to encourage the financial services industry to follow the guidance of the FSA regarding the debt waiver and other similar products, so as to help to tackle the protection gap?

The debt waiver is relatively new to the UK, where it has been introduced in a number of organisations, but it has a long and successful track record since the 1930s in north America. Incidentally, it was introduced at the height of the great depression, to help try to restore confidence among the public in lending. In its 2013 report, ResPublica recommended that the regulator fast-track the debt waiver and other similar products, but nothing much seems to have happened. Three mutuals, including the one referred to by my hon. Friend, have introduced the debt waiver very successfully, in one case providing coverage for accident and sickness for up to one year, through the debt waiver, at no cost to the borrower. In my view, that is a very good deal for the consumer.

However, all these things are, of course, just the tip of the iceberg when set against the 95% of people who simply do not have any coverage at the moment. That is the argument; that is the need; and that is what I hope to get a response on from the Minister.

In conclusion, the challenge for the Government, the financial services industry and indeed all stakeholders is to recognise the dramatic impact that mis-selling PPI has had on the market for protection policies; to quantify the resulting loan protection gap; and, most importantly, to challenge the industry—all those lenders out there—to take the necessary action to tackle the gap. I hope that the Minister will concur and will take steps to address this problem.

Thank you for calling me to speak, Mrs Riordan. It is an honour to serve under your chairmanship, particularly as this is my first outing as a Minister in Westminster Hall.

I am very grateful to the hon. Member for Edmonton (Mr Love), a highly esteemed former colleague of mine on the Treasury Committee, for securing this debate on an incredibly important subject, which, as he well knows, the Treasury Committee has looked at. The Committee has been very concerned not only about the appalling scandal that has been PPI mis-selling, but about the implications for people who can no longer obtain PPI. This is very important not only for the hon. Gentleman’s constituents but for all our constituents right across the United Kingdom. I am very pleased to have the opportunity to set out the Government’s position.

The hon. Gentleman will recall that when we were together on the Treasury Committee one of my absolute pet projects was to try to increase competition in the UK banking system. One of my favourite lines was that people are more likely to divorce not once but twice than to change their bank account. There has been a fundamental lack of competition in the banking system, which has meant that we are in a position now where people are lucky if they are able to get access to certain products and services. He is therefore absolutely right to raise this issue today.

It is very important to me as a Treasury Minister to use my time in the role to ensure that consumers become more empowered and more capable of taking responsibility for their own financial future. I hope that the hon. Gentleman will also be reassured to hear that I wholeheartedly share his central concern that consumers need to build their own financial resilience—if you like, a financial fall-back—into their own financial affairs.

Of course, the hon. Gentleman is absolutely right that one such financial fall-back might be a loan protection product or another kind of income protection product, but it could also be savings, and some people will rely on responsible borrowing to help them to bridge the peaks and troughs in their finances. The key point is that consumers are vulnerable if they do not have any kind of financial fall-back. Financial difficulties can mount up and quickly turn into problem debts, as we have seen all too often. That situation is what the Government are taking comprehensive steps both to prevent and address.

I would like to use my comments this morning to set out, first, what the Government and the regulator are doing to support the development of appropriate protection products; secondly, how the Government are using flexibility and tax relief to promote savings and reward savers; thirdly, how we are reforming the regulation of consumer credit, to ensure that lenders both lend responsibly and treat those consumers who are in financial difficulties fairly and with understanding; and finally, a bit about how we are taking action on debt advice, to ensure that those who have problem debts get the help that they need.

To start with, I shall discuss the protection market. As the hon. Gentleman rightly said, consumer trust in protection products has been severely damaged by the PPI mis-selling scandal, and the market has contracted severely as a result of this lack of consumer trust. With a scandal on such a scale, robust regulatory action is key to restoring faith in the products and in the firms that provide them. I agree that that does not mean that consumers’ need for protection products, as one form of financial fall-back, has gone away. As long as the products are sold appropriately and responsibly, and as long as consumers can trust them, they continue to serve a real purpose. We need to promote them, and on that point the hon. Gentleman and I completely agree.

The Financial Conduct Authority also believes that there is a place in the market for income protection products. It has issued guidance that is designed to encourage a new generation of products that are fit for purpose. Although PPI is no longer allowed to be sold at the point that a loan or credit is given, a number of alternative protection products are available to consumers, some of which the hon. Gentleman has mentioned, such as income protection insurance, and innovations such as debt waivers, as the market adjusts to consumer demands.

The Government have been driving the industry, and will continue to drive it, to design and bring to market simple and transparent income protection products that are fit for purpose and that consumers can more easily understand and trust. In fact, that was one of our aims in commissioning Carol Sergeant to conduct a review of simple financial products. As the hon. Gentleman may know, her report recommended the development of a number of simple products, including savings products and a simple income protection product. The industry is making good progress against her recommendations. It has committed to getting a simple products accreditation model up and running by the end of the year. In parallel, the Association of British Insurers is leading on the development of a simple group income protection product, which can be sold throughout the workplace. We are confident that simplifying products in this way will make it easier for consumers to see the benefits of protection products, and will redevelop the income protection market in a way that works better for consumers.

I hear what the Minister is saying about all the developments and the work that both consultants and the regulator are doing in relation to protection policies, but unfortunately there has been very little impact on the market so far. That may be understandable in the context of the disaster that PPI has been in terms of providing income protection policies. However, the debt waiver is something different and something that everyone can have confidence in: it is truly tried and tested in other countries. Will she give the House a reassurance that firmer, more robust steps will be taken by the Government to influence the regulator to do more to get the industry to take these protection policies seriously?

Yes, I think I can give the hon. Gentleman some reassurance that the Government are committed to the proper development of alternative income protection products, which would certainly include the debt waiver. Obviously, as he has pointed out, there has been a real crisis in consumer trust in these products, but the Government are certainly committed to ensuring that that lack of provision is addressed, and his raising the issue today will certainly reinforce our endeavours to achieve faster progress.

There are other ways in which the Government are trying to ensure that consumers and customers have proper financial protection. Of course, one of those measures has been to promote saving. Having a savings “buffer” is many people’s financial fall-back, and as the Chancellor made clear in March, this year’s Budget was a Budget for savers. We announced a reduction in taxes for the lowest-income savers, so that from next April the starting rate of savings income tax will be lowered from 10% to zero, and the band to which it applies will be extended to £5,000. That should help the worse off—the smaller savers—and encourage them to save in order to create a financial fall-back for themselves.

We also announced increased flexibility in saving and investment choices through the ISA system and an increase in the overall ISA limit to £15,000. We have introduced new National Savings and Investment products in order to help retired savers to get a better return. The Government have taken action on the promotion of savings products and increased saving as a means to create a financial fall-back, and we are determined to do more to help people to provide for their own financial fall-back needs.

There have been some important changes on the regulation of consumer credit that I am sure the hon. Gentleman would welcome. Regulation of consumer credit is vital to this debate in two ways: first, it is vital that lenders lend responsibly and only to those who can afford to pay it back; and secondly, lenders should treat people in financial difficulty fairly and with the appropriate understanding. The Government are committed to curbing irresponsible lending and strengthening consumer protections, and we have a clear vision for the consumer credit market. We want to see firms meeting the standards expected of them, lending responsibly, and offering competitively designed and priced loans and credit products that will meet consumers’ needs.

The hon. Gentleman will be aware that responsibility for consumer credit regulation has now transferred from the Office of Fair Trading to the new Financial Conduct Authority, which has far stronger powers. In particular, the FCA has turned the OFT’s non-binding guidance into binding rules. We are confident that the FCA is better resourced to take a proactive approach to identifying risk and that it has a broader and more robust suite of enforcement powers to punish breaches of its rules. As such, we are confident that in future lenders will both lend more responsibly and treat customers more fairly.

This is a slight aside to the thrust of the Minister’s comments, but with regard to the mortgage market review, which sets the terms of the discussion between the customer and the lending institution, I am not aware that within the comprehensive discussion that is now required any room is given to insurance products to protect the loan. I would have thought that that was one way in which the regulator could ensure that at least it is brought to the customer’s attention that they should get a protection policy, so that if things go wrong, they can rest assured that their loan will be insured.

The hon. Gentleman make a very good point. Since I am extremely new in the job, I hope that he will forgive me because that is a point that I cannot answer. Nevertheless, it is an excellent idea and perhaps I can write to him on it. I would certainly take such a good suggestion forward.

The Minister may well gain inspiration on that while I am talking. I requested earlier that she come to meet the Plane Saver credit union in my constituency. That group meets the objectives she mentioned not just by providing protection; we have found that it is also encouraging more savers to join the credit union. It seems to tackle both issues at the same time, so perhaps that is a model she would like to explore in more detail.

I am grateful to the hon. Gentleman for his invitation. I am keen to become more closely involved in such an important issue and so will discuss with my team whether I can come to meet his constituents. I thank him again for the invitation.

Finally, I want to mention the provision of debt advice. Where people get into financial difficulty, the Government are committed to ensuring that they can access free help and advice on managing debts. That is why the Government have put funding for debt advice on to a sustainable footing.

In conclusion, I thank the hon. Member for Edmonton again for instigating this debate on such an incredibly important issue. We know that times have been extraordinarily tough and continue to be so for many people in the United Kingdom, and we are determined to do more to ensure that consumers get the advice and support, the responsible lending, and the suite of products that they need to enable them to manage their own financial affairs more effectively.

I thank the Minister for being so liberal in taking interventions. One conclusion that I have reached on this issue is that the relationship between the Treasury and the regulators is extremely important. Will the Minister discuss with the regulator what further action it can take to get the industry to live up to its responsibilities to give customers not just a responsibly delivered loan, but protection for that loan should things go wrong?

I can assure the hon. Gentleman that I will take up that issue with the FCA when I see it next.

I hope that the hon. Gentleman is reassured that the Government fully agree with his concerns and are already taking action to address them, and that I have undertaken to try to take further his specific recommendation that we look more closely at debt waivers. We are determined that financial services serve consumers in the way that they should, and that consumers understand the benefits of all the products, including income protection, that are on offer. I am very glad to have had my first Westminster Hall debate as a Minister with such a sensible and measured colleague, and I shall look forward very much to his holding me to account in the coming years.

Sitting suspended.