Soaring household debt should be an urgent wake-up call to the Government
The Government must take action now to help people stuck in a "vicious cycle" of debt, writes Labour MP Rachel Reeves.
Our household debt to GDP ratio is rapidly approaching levels seen just before the crisis, when household debt peaked at 157%. Since late 2015 it has grown from 133% to 140%.
The new report from debt charity StepChange on crippling and persistent debt problems should be an urgent wake-up call for the Government. Shockingly, nearly 50% of StepChange clients have overdraft debts. These clients have built up overdraft debts of £1,722 on average.
Over two million people in the UK have permanent overdrafts, with many stuck in a “vicious cycle” of borrowing, according to the charity. A total of 79% of StepChange clients had to use their overdraft to cover the costs of everyday essentials including paying for basics such as food, utility bills, housing costs and transport. It is appalling that so many people are forced to rely on overdrafts to cover the cost of basic needs.
Overdraft charges are often complicated. In the case of unarranged overdrafts, the charges are frequently unjustifiably exorbitant. Research published in February by Which? found that consumers needing to borrow as little as £100 through an unarranged overdraft could be charged up to seven and half times more, or £156, by some high street banks than the Financial Conduct Authority (FCA) allows payday loan companies to charge when lending the same amount over the same period.
The FCA found that almost 3.1 million people in the UK have gone into their unarranged overdraft in the last 12 months. StepChange clients have raised the hefty fees charged on unarranged overdrafts as a particular issue. Last year, the charity found that their clients would go into unarranged overdrafts in five months in a year on average – and were hit by charges of £45 each time.
These excessive charges are totally unacceptable and only serve to push already vulnerable people deeper into debt. In April I presented a bill in Parliament to cap unauthorised overdraft fees in line with payday loans. Since then, the FCA published its review of the high cost credit market which pointed out that there is a case to consider fundamental reform of unarranged overdrafts and that there appears to be no justifiable reasons for excessive charges.
Lloyds Banking Group recently simplified their charging system for arranged overdrafts and scrapped fees on unarranged overdrafts. While not all customers would be better off under the new system, it is an example of one of the big banks trying to reform. More needs to be done, but there are increasing levels of support for getting rid of the high charges on unplanned overdrafts - something that seemed unlikely before I introduced my bill in Parliament just eight months ago.
In its report, StepChange make the call for ending unarranged overdraft charges. A cap, as StepChange argue in their report, means that charges can still build up into an unmanageable debt. As the FCA highlight in their review, banning charges could end access to unarranged overdrafts, which could remove flexibility and a source of emergency borrowing for many. There is also the risk of vulnerable customers having to resort to less reputable and more risky sources of borrowing.
An FCA consultation on overdraft charges is due in the spring next year. This must look at how to get consumers a good deal and ensure that they are not ripped off. But it also needs to make sure that the parts of the market that function well are preserved. Whatever recommendations come from the FCA, there is a risk that they do not act for fear of legal challenge by the banks. That is why I have asked the Government get its act together and introduce legislation to tackle rip-off charges as a matter of urgency.
The Tories are far too complacent about the growth in unsecured debt, which has grown by nearly 10% in the past year. We need to end the reliance on consumer credit. People should not have to rely on debt to cover the cost of basic needs.
It is clear that something needs to be done. The Government’s austerity policies are manifestly failing people across the country and pushing them even deeper into debt. Whilst action on unarranged overdrafts will not fix the issues of problem debt or our dangerous reliance on consumer credit to fuel economic growth, it will at least be a very good start.
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