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28 November 2012
Like it or not, economic life runs on the supply of credit. UK consumers, like those in the US, are addicted to it. But you don’t expect those providing advice and treatment for the addicts to be criticised by those supplying the drug.
So it’s hard to know what to make of the recent comments from the new chief executive of HSBC to the effect that those firms offering debt consolidation and advising on Individual Voluntary Arrangements (IVAs) are somehow culpable.
It’s true that IVAs were originally intended to stimulate enterprise and risk-taking by removing the stigma from old-style bankruptcy. They may have done that. But even if one unintended consequence was to allow debt-laden consumers a way out of crippling interest payments on personal loans and credit cards, opting for an IVA is not a soft option.
The banks are as responsible as anyone for the explosion in personal credit to the problem levels of today. The remarks from HSBC’s Mr Geoghegan come hard on the heels of an announcement from Morgan Stanley. It is to launch a product aimed at allowing homeowners to borrow much more money than is currently feasible, in exchange for the bank taking a slice of the equity in their property. Then there’s the usual ‘silly season’ story in a weekend newspaper of someone’s wire haired fox terrier being given a credit card with a £15,000 limit.
The debt management industry is maturing. It is made up of several reputable public companies who offer a good service and whose activities are tacitly backed by government as a way of providing a way out for distressed and overextended borrowers. There may be a few rogue backstreet operators taking advantage of the vulnerable by offering unsuitable debt management packages – but that’s also reflected in the lending community too.
The banks have expanded their lending and credit card activities beyond all recognition since deregulation – and there is also plenty of evidence that those offering ‘sub-prime’ lending to less affluent borrowers have been expanding their activities too. Not surprisingly, loans like this carry higher rates and, if they work, are more profitable for the lenders.
Pressure groups, and of course banks and mortgage lenders, have complained that the debt management industry as a whole appears to offer consumers a simplistic proposition: an easy way to consolidate their debts into a single monthly payment. It may do so by taking a charge over their home’s equity and often manage the lower payment simply by spreading payments over a longer period. But that’s only one option. Most bona fide debt management firms offer a range of solutions tailored to individual circumstances.
It’s true, of course, that debt management companies are not subject to the same regulatory controls as credit card issuers, mortgage banks or other lenders. They pay only a modest fee to be licensed.
You could argue, however, that that is all that is needed. Insolvency practitioners, including those who have to be employed by debt management companies, are regulated and have to jump through a variety of compliance hoops to do their jobs.
Unsurprisingly, the banks and credit card companies are in the forefront of those calling for these companies to be regulated. In fact, some debt management and IVA companies claim to conduct their businesses according to the spirit of FSA regulation anyway, or else have ancillary activities that are formally regulated.
But for the banks to claim that the ‘IVA factories’ pose a threat to their recovery of debts is wide of the mark. Banks generally do markedly better in terms of debt recovery under an IVA than they do if they try and collect the debt themselves by more traditional means.
Debt management companies reckon that recovery rates for IVAs are 25-45% versus around a 10th of this level through traditional means. Not only that, but the banks save on costs. The debt management companies who promote IVAs represent an outsourcing of the recovery process for the banks.
Instead of calling for regulation of the debt management industry, many would argue that banks and credit card issuers need to reform themselves. They need to rein in the way they market their lending, to ensure that those they lend to understand fully what they are getting themselves into, the charges involved, and the alternatives and the risks involved.
The reasons for the explosion in credit provision are complex. In part it’s the instant gratification aspect of modern life, in part the relentless promotion of high margin branded products as though they were essentials, and in part the Thatcher-era deregulation of the credit markets, not to mention surging property prices, which have themselves been brought about by freely available credit.
Lord Griffiths, the former Bank of England director who 25 years ago recommended in an official report that bank credit be made more freely available to the man in the street, is on record more recently as saying that he could never have envisaged the proliferation of debt being offered to consumers, and that if he had done, he would have urged greater caution.
So if the banks are really sincere about seeing some improvement in their bad debt experience, then rather than criticising those providing debt consolidation advice and IVAs as a worst-case option – why not fund educational initiatives and curriculum development in schools, to teach new consumers about the realities of life in debt.
In the meantime you have only to look at the long-term relative share price performance of HSBC versus the likes of Albemarle & Bond, a pawnbroker, and the likes of Compass Finance, Debt Free Direct and Debtmatters to see which way the wind is blowing. Managing the consequences of debt is a big industry, and set to get bigger still.