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Credit for the poor or just poor credit? Emerging lessons from overseas Dr Chris Deeming, Senior Research Fellow Personal Finance Research Centre www.pfrc.bris.ac.uk 2 France • Consumer credit market €156b 8% GDP [UK 16% GDP] • Financial exclusion low - 2% population • Household debt relatively low - debt to income ratio at 102% of nominal disposable [171% UK] • Credit market major retail banks (e.g. BNP Paribas), and consumer credit providers (e.g. supermarkets, car dealers) • APR are tightly specified by the Banque de France • Sub-prime market underdeveloped • Social Cohesion Fund, government programme 2005, APR 4-8% • Regional schemes, pawnshops (Prêt sur gage), illegal? • Credit access problem for low income families (Policis) • Is this a problem? Question how do families manage? 3 Germany • Consumer credit market €224b 9% GDP [UK 16% GDP] • Financial exclusion low - 3% population • Household debt relatively low - debt to income ratio at 99 per cent [171% UK] • German IRR – 1990 Consumer Credit Act stops ‘extortionate’ lending • Comprehensive national credit reference database - ‘risk’ assessment • Mainstream and co-op banks provide credit for low income families (e.g. DZ Bank, Volksbank, Raiffeisenbank, Sparkassen) • Sub-prime lending sector limited • Pawnbroker, Illegal lending? • Credit access issue for low income families (OFT) • Is this an issue? What do low income families go without? 4 Australia • Consumer credit market like UK • Financial exclusion low - 3% population • Household debt relatively high like UK - 173% of disposable income • Sub-prime market developed • Payday lending worth $500m per annum • State not national regulation – IRR ‘patchwork’ • Growing social banking sector , ‘Big Society’ type initiatives • Debate about regulation like UK, government reforms – IRR? • Access to credit less an issue for low income families 5 Australia: State regulation of high-cost credit State or Territory Australian Capital Territory Approach 48 per cent APR comprehensive cap New South Wales 48 per cent APR comprehensive cap Northern Territory No regulation beyond UCCC Queensland 48 per cent APR comprehensive cap South Australia No regulation beyond UCCC Tasmania No regulation beyond UCCC Victoria 48 per cent APR interest rate cap Western Australia Licensing required but no cap 6 Australia: Current reforms • Comprehensive national licensing regime for all providers of consumer credit • Code of conduct responsible lending (unsuitable products) • Improved sanctions and enhanced enforcement powers for the regulator • Expanded consumer protection through court arrangements • Provisions to stop predatory lenders from exploitative practices such as using household items as security for cash loans • IRR??? 7 Australia: ‘Big Society’ affordable credit initiatives • NAB (National Australia Bank) No Interest Loan Scheme (NILS) • Good Shepherd (Christian charity) idea 30 years ago • Small, no interest loans for people on low incomes for the purchase of essential household goods • Loans are safe, and affordable – in the region of $800 to $1,000 – and are completely free of interest and fees • $15 million to expand NILS, $130 million capital boost to support lending to low-income groups 8 Australia: ‘Big Society’ affordable credit initiatives • ANZ (Australia and New Zealand Bank) Progress Loans as ‘safe and affordable credit’ • Partner organisation Brotherhood of St Laurence • $500-$3,000 for essential household items (<$5,000 for a car) • interest rate @ 12.7%, term is flexible 1-3 years • $3.5 million in loans so far 9 International evidence (summary) Australia France Germany UK M ainst ream •Term loans (e.g. banks) •Term loans (e.g. banks) •Term loans (e.g. banks) Term loans (e.g. banks) •Retailer credit cards •Retailer credit cards •Retailer credit cards •Retailer credit cards •Mail order •Mail order •Mail order •Mail order •’Big society’ (e.g. NILS) Sub- prime •Payday loans •Payday loans (e.g. Wonga, Uncle Buck) •Cash converters •Cash converters •Home Credit •Home credit (e.g. Provident) •Rent to own •Rent to own •Pawn-broking •Cash Store *State owned pawn-broking. •Crédits Municipaux* •Pawn-broking 10 Agency/Structure - extortionate lending as the problem! Human Agency Agency ‘problem’ Social Structure Structural ‘problem’ e.g. OFT - consumers need help to make informed decisions on highcost credit; industry working with others (including government) to provide better information to consumers on high-cost credit e.g. Better Banking campaign (500 organisations) interest rate caps to help prevent extortionate lending 11 European Commission IRR Consultation • Industry – little support for IRR • Consumer groups – importance of IRR • Member states – mixed +/- 12 Typology of welfare-capitalist societies Liberal Conservative Social Democratic Communist Countries •UK •US • Australia •Germany •Italy •France •Norway •Sweden •Denmark •former East Germany Governmentality Market (self reg) Decommodification Relatively low (welfare) State (high) Relatively high (welfare) 13 Affordable Credit, Way Forward UK Financial/Credit exclusion: new assessment needed Information asymmetry: rates and fees Regulation: industry could/should do more Banks: could do more to make affordable credit available (e.g. AUS) Government: could do more to make affordable credit available, IRR needed? Social/Third sector: uncertain at present, talk of ‘big society’; credit unions likely to need government support, sustainable? (e.g. Aus and UK under Labour) Choice: improved affordable credit choices for low income families Policy framework: living standards, broader issues of consumption, debt, sustainable society 14 Questions/issues for discussion •What can we learn from others? •Evidence-base, disputed, transferable to UK? •IRR? -Better Banking Campaign needed -OFT kill UK subprime sector -what level IRR? Australia debate behind closed doors •Big society? What chance for credit unions and social sector? •Public attitudes? Users and general public not just ‘experts’? •Important to understand the wider social policy context 15 Down side (household indebtedness % disposable income) UK France Germany Liabilities 1998 109 1999 114 2000 117 2001 121 2002 134 2003 145 2004 160 2005 162 2006 176 2007 184 2008 178 Mortgages 79 83 85 89 97 107 119 121 130 138 136 Liabilities 73 75 77 78 76 80 84 91 97 100 102 Mortgages 52 54 53 54 55 57 60 65 70 73 77 Liabilities 109 114 115 112 112 111 110 107 105 102 98 Mortgages 67 71 72 71 72 72 72 71 71 69 66 2009 171 133 107 .. 99 67 16 Consumer Credit (Regulation and Advice) Bill 2010-11 Stella Creasy MP “the rates charged do not reflect any economic rate. One of my frustrations in running this campaign has been that none of those companies will explain to me the rates of interest that they charge, yet they all vary markedly. For example, pay-day loans can go from 4,500% with Wonga to 2,500% with Uncle Buck, or 1,200% with Payday UK, or 1,700% with Kwik Cash. One might argue that they are just making the numbers up because they can. Above and beyond their fixed costs, they can charge what they like. That lack of any pressure to address the way they are lending is very negative.” Type of Bill: Private Members' Bill (under the Ten Minute Rule, SO No 23) Sponsor: Stella Creasy