The Centre for Responsible Credit warmly welcomes the Labour Party’s commitment to tackling Britain’s personal debt crisis.
In his speech at the Party’s annual conference, Shadow Chancellor, John McDonnell today described “…a society steeped in debt and scarred by low pay and insecurity, with our public services in meltdown” and promised to establish a “thorough review of the scale, causes and responses to debt”. He also correctly identified over 3 million people who are trapped in persistent credit card debt and issued a clear call for Government, and the Financial Conduct Authority, to address this as a matter of urgency:
“I am calling upon the Government to act now and apply the same rules on payday loans to credit card debt. It means that no-one will ever pay more in interest than their original loan. If the Tories refuse to act, I can announce today that the next Labour Government will amend the law.”
We support this call, having set out the case for a total cost cap in the credit card market with the New Economics Foundation earlier this year. This highlighted how sub-prime credit cards, such as some of the Aqua range of cards provided by NewDay Limited and those provided by Vanquis Bank, can result in borrowers paying more than 100% of the amount they have borrowed in interest and other charges if they make only the minimum payments over a two to three year period.
Sub-prime cards of this nature have expanded dramatically in recent years. For example, NewDay increased the number of people borrowing with their Aqua cards by around 33% in 2016, and the number of Vanquis customers rose by 27% in the first half of this year.
According to figures from the Financial Conduct Authority nearly half a million people who took out their credit cards in 2010 have already now paid more in interest and other charges than the amount they borrowed, and there are over five million accounts which, under current repayment patterns, will take more than ten years to pay off.
This isn’t just bad news for the individuals concerned. With an average balance of around £3,500 on each card, and no current total cost cap in place, that means there is up to £17.5 billion of debt outstanding on which interest can currently continue to be charged virtually ad infinitem. That’s sucking demand out of our economy, and holding back growth.
The Financial Conduct Authority knows that something has to be done. It has recently consulted on proposals to require credit card lenders to look at how they can help people who are still struggling to pay down their debts three years after they initially borrowed. But its suggestion – that lenders consider reducing the interest rate at that point – is overly cautious and is unlikely to have any meaningful impact on a market which is rapidly getting out of control. As the Financial Conduct Authority is currently pondering the responses to its consultation, McDonnell’s intervention in calling for a more muscular approach is extremely well-timed. We can only hope it doesn’t make us wait until after the next General Election before it acts.