501

3â Consumer debt, financial exclusion and over-indebtedness

Financial Services Authority (FSA) suggested that 40 per cent of the population

have no savings at all.31

However, it must be noted that there has been a constant increase in people’s

use of financial services products. For example, in 1975 only 45 per cent of

adults used a current account but that figure had increased to 85 per cent by

1998.32 A factor that has also contributed towards the increased use of sub-

prime lenders is the decline in the number of financial services outlets. This has

restricted people’s access to affordable credit and it has been suggested by some

commentators that up to 23 per cent of the population lack access to a current

account,33 although conversely, the Office of Fair Trading (OFT) estimated

that only 12 per cent of the country did not have access to a current account.34

These figures suggest that an increasing number of people are being forced to

gain credit from sub-prime providers. In practical terms this means that people

are compelled to enter into short-term credit agreements that attract higher

levels of interest payments from pawn brokers, catalogues, sale and buyback

shops and illegal money lenders.35 The next part of this chapter comments on

the problems associated with access to convenient credit and it illustrates how

they have influenced a change of policy by the government towards promoting

affordable credit.

Q1 How has the consumer credit market evolved over time?

502

The government’s policy towards consumer credit

Innovation and Skills (DBIS) stated that ‘consumers currently owe around £1.4

trillion to banks and other financial institutions. The vast majority of this bor-

rowing is for mortgages on houses. However, £230 billion is unsecured bor-

rowing, which includes personal loans, overdrafts, credit cards, store cards

and some other forms of specialist lending.’39 Credit Action reported that the

total level of personal debt in November 2010 was £1,454 billion; the average

level of household debt was £8,495 (excluding mortgages), £16,336 if based on

the number of households who actually have an unsecured loan and £57,706

(including mortgages). Therefore, the average owed by every United Kingdom

adult was £29,875.40

High levels of consumer debt have been exacerbated by the global finan-

cial crisis or ‘credit crunch’.41 The uncertainty in the global financial system has

led to a dramatic reduction in the availability of affordable credit. These prob-

lems have been partly fuelled by the sub-prime mortgage crisis in the United

States.42 Sub-prime mortgage loans are designed for persons with poor credit

histories and, as such, they carry a significantly higher interest rate than prime

loans.43 Baker described them as ‘being more expensive in respect of interest

and charges as a result of the credit and repayment histories of the borrower’.44

The growth in the level of sub-prime lending in the United States is staggering.45

The total amount of outstanding loans for the sub-prime mortgage market has

increased at an unprecedented rate and has resulted in a 75 per cent increase in

the number of repossessions in the United States.46 It is the global contraction

of credit that has caused turmoil in the United Kingdom credit market and has

resulted in the near collapse and part-nationalisation of several banks.47

39

DBIS, Review of the Regulation of Credit and Store Cards, a Consultation: Initial Equality Impact

Assessment (London, 2009) 7.

40

Credit Action, above n. 21, at 1.

41

For an excellent, albeit, brief comment on the impact of the credit crunch see R. Disney, S.

Bridges and J. Bathergood. Drivers of Over-indebtedness, Report to the Department for Business,

Enterprise and Regulatory Reform DBERR (London, 2008) 34–5.

42

For a detailed discussion of the sub-prime mortgage market see C. Foote,K. Gerardi,L. Goette

and P. Willen, ‘Just the facts: an initial analysis of subprime’s role in the housing crisis’ (2008)

17(4) Journal of Housing Economics 291.

43

A sub-prime mortgage loan is defined as ‘a mortgage loan to a borrower with sub-standard

credit’. See V. Henry, Lehman Commercial Paper, Inc., 471 F.3d 977, 984 (9th Cir. 2006) as cited

in K. Johnston, J. Greer, J. Biermacher, and J. Hummel, ‘The subprime mortgage crisis: past,

present, and future’ (2008) 5(12) North Carolina Banking Institute 125.

44

A. Baker, ‘Banks and the communities they serve: time to legislate’ (2008) 29(2) Liverpool Law

Review 165, 173.

45

A. Jacobson, ‘The burden of good intentions: intermediate-sized banks and thrifts and the

Community Reinvestment Act’ (2006) 6 UC Davis Business Law Journal 16. Also see G. Udell,

‘Wall Street, main street, and a credit crunch: thoughts on the current financial crisis’ (2009)

52(2) Business Horizons 117.

46

For a more detailed commentary on the predicted decline in the US mortgage sector, see

Mortgage Bankers Association, ‘Mortgage Finance Forecast’, 14 January 2008, 8 January 2007, 10

January 2006, available at www.mortgagebankers.org.

47

For a more detailed discussion of this see Part 6 Chapter 1.

503

3â Consumer debt, financial exclusion and over-indebtedness

The changes in the consumer credit market have also contributed towards

financial exclusion. Financial exclusion has been present in the United

Kingdom for some time, yet it has only received political attention since 1997.48

According to the European Commission, the term ‘was first coined in 1993

by geographers who were concerned about limited physical access to bank-

ing services as a result of bank branch closures’.49 Financial exclusion has been

defined as a person’s inability to access financial products, bank accounts and

money transmission facilities.50 The European Commission offered a broader

definition and described it as a ‘process whereby people encounter difficulties

accessing and/or using financial services and products in the mainstream mar-

ket that are appropriate for their needs and enable them to lead a normal social

life in the society to which they belong’.51 The extent of financial exclusion is

difficult to determine and it has led several commentators to argue that its full

extent and impact will never be fully known or understood.52 It is also said to

be geographically concentrated and it has been suggested that ‘68 per cent of

the financially excluded reside in 10 per cent of the most financially excluded

post codes districts’.53 There are several different types of financial exclusion:

access exclusion;54 condition exclusion;55 price exclusion; marketing exclusion;

and self-exclusion.56 HM Treasury identified other types of financial exclusion,

including ‘geographical exclusion, exclusion on the grounds that charges and

prices are prohibitively high, or exclusion from marketing efforts’.57 Financial

exclusion is not unique to the United Kingdom; it can also be found in many

countries in the European Union.58

Over indebtedness is another problem resulting from the diversity of the

consumer credit market. It can be defined as a ‘debt which has become a

48

N. Ryder, ‘Out with the old and in with the new? A critical analysis of contemporary policy

towards the development of credit unions in Great Britain’ (2005) Journal of Business Law

(September 617) 627.

49

European Commission, Financial Services Provision and Prevention of Financial Exclusion

(Brussels: 2008) 9.

50

For a more detailed discussion of the impact of financial exclusion see E. Kempson, and C.

Whyley, Kept Out or Opted Out? Understanding and Combating Financial Exclusion (Policy

Press, London, 1998) and E. Mayo,T. Fisher, T. Conaty, J. Doling and A. Mullineux, Small is

Bankable: Community Reinvestment in Great Britain (Joseph Rowntree Trust, York, 1998).

51

European Commission, above n. 49, at 9.

52

J. Ford and K. Rowlinson, ‘Low-income households and credit: exclusion, preference and

inclusion’ (1996) 28 Environment and Planning 1345.

53

D. McKillop, A. Ward and J. Wilson, ‘The development of credit unions and their role in tackling

financial exclusion’ (2007) 27(1) Public Money and Management 37.

54

This occurs where people are excluded through risk assessment procedures.

55

This occurs where conditions attached to financial products and services make them

inappropriate.

56

Marketing exclusion occurs as a consequence of targeted marketing and sales campaigns and

self-exclusion occurs when people do not apply for financial goods and services as they feel they

might be rejected.

57

HM Treasury, above n. 20 at 2. For a more detailed discussion of the different types of financial

exclusion see European Commission, above n. 49, at 11–14.

58

Ibid. 58–60.