Consumer Debt

HL Deb 07 December 1988 vol 502 cc575-612

3.9 p.m.

Baroness Ewart-Biggs rose to call attention to the high level of consumer debt; and to move for Papers.

The noble Baroness said: My Lords, while I am grateful to see so many distinguished names on the list of speakers today, nevertheless, without meaning any disrespect to the noble Lord who will reply to this Motion, I much regret that the Secretary of State for Trade and Industry has not found it possible to be here this afternoon in order to reply to a Labour Party debate. I believe that this subject before the House this afternoon is an important one. It is considered important both within the House and by many outside it.

For my part I should like to present the background to the debate by producing some facts and figures, first about sources of credit and, secondly, about the variety of ways in which individuals and families incur debt. Lastly, I should like to say something about the distressing social consequences of such indebtedness.

First, it is important to underline the distinction between credit use on the one hand and indebtedness on the other. Indeed, on looking at the consumer credit market in 1971, the Crowther Report said: Consumer credit is beneficial—it makes a useful contribution to the living standards and the economic and social well-being of the majority of the British people".

How right this was when one thinks of the many examples of people being assisted, such as children who will receive their winter coats at the beginning of the winter rather than halfway through because their parents are able to spread the payment over several months on a mail order. Alternatively, a working mother can buy a washing machine on hire purchase to help her in her dual role of paid worker and housewife. Consumer credit of this kind can be regarded only as a social good.

Since the late 1970s the level and very nature of consumer credit and debt has entirely changed. People find it quite natural to borrow but, unfortunately, often do not understand the full consequences of doing so. There is little doubt that they are increasingly encouraged to do so. By an extraordinary coincidence this morning when I was considering this debate, I opened my mail and one envelope contained a letter from Barclaycard introducing a new scheme called "Profiles". The heading stated, "Another chance to get something for nothing". This is rather the refrain that is coming from many quarters. It is attacking vulnerable people who believe that they will be able to get something for nothing.

The number of lending institutions and sources of credit have multiplied out of all recognition. An increasing proportion of aggregate household income is now accounted for by debt service payments. Establishing credit-worthiness by lenders has gone by the board as granting credit is so lucrative that a few bad risks can easily be absorbed. This has brought about a dramatic rise in the growth of personal credit. According to the president of the Chartered Institute of Bankers in a speech as recently as 7th October this year, it stood at over £39 billion. That is an average of about £1,800 per household. This means that since 1983 the amount of credit outstanding has doubled. It must be remembered that this does not include borrowing for house purchase. The amount of mortgage lending outstanding at the end of June 1988 was over £203 billion. Thus consumer debt as a proportion of consumer spending has risen from 7.4 per cent. in 1977 to 13.3 per cent. in 1986. It has just about doubled.

Unfortunately, figures on the other side of the balance sheet show that between 1977 and 1987 the saving ratio halved from 10 per cent. to 5.5 per cent., and the personal sector surplus of £5 billion 10 years earlier was transformed into a deficit of £7 billion. Those are some of the very bald statistics.

Let us now consider the lending institutions and the many different sources of credit that exist. There are the building societies and banks who offer mortgages on house purchases. These loans represent as much as 80 per cent. of credit use. This explosion has occurred for a variety of reasons. First, housing now represents very important investment. Secondly, the Government's accelerated programme of council house sales has increased the demand for mortgages, and as the housing stock diminishes then many more people who otherwise would have taken rented accommodation have no alternative but to buy their home. How difficult the situation must be for first-time buyers when one considers that they now face an interest rate of 12.75 per cent. from building societies and 13 per cent. to 13.2 per cent. from banks. Figures from the National Association of Citizens' Advice Bureaux show that these owner-occupiers are in many cases facing serious problems. For instance, 59 per cent. of owner-occupiers are in arrears with mortgages, and 31 per cent. are behind with a second mortgage or secured loan. Building society repossessions show a steady upward trend with 2,530 repossessions in 1979, but in 1987 this has increased to 23,244. That is a staggering increase.

Let us look at credit cards—another source of credit. Interest rates vary. Save and Prosper charges 19.19 per cent., and Barclaycard's increased rate is 26.8 per cent. The citizens' advice bureaux report that only between 3 per cent. and 7 per cent. of debt problems coming to them were accounted for by bank credit cards. But despite this very low figure, coupled with the positive fact that banks show responsibility in the inquiries they make about applicants, credit cards are a source for incurring heavy debt because the possession of a bank credit card is taken by other lenders as a justification for extending additional credit without proper evaluation. This can certainly apply to the acquisition of a store card, of which the number in circulation has increased to 10.6 million now compared with 5 million in 1982.

On these, the interest rates are very high. Littlewoods charge 34.9 per cent. We know that the Retail Credit Group has published guidelines on the issuing of credit to stores. However, those of us who read the Sunday Times last Sunday may have wondered whether these guidelines have been accepted. Other noble Lords may have read the very scary-sounding story about a 19-year-old secretary who went to 10 high street multiple stores asking for credit for Christmas. To her surprise she was offered as much as £4,700 to spend immediately, with a promise of even more after her applications had been processed. Her only identification was a cheque guarantee card. When replying, I hope that the Minister will comment on this press report. It must have worried a great number of people.

The last source of credit that I have time to mention is the moneylenders and loan sharks who operate in the big cities. The August edition of Which? gave a staggering picture of the APRs they charge and of the very aggressive methods of harassment that they employ. For example, the magazine cites a case of one firm trading with a credit licence who offered a loan with an APR of 4,822 per cent. This surely points to the need to strengthen the consumer credit measure of 1984 which states that credit bargains should not be extortionate. Unfortunately, it does not put a figure on what counts as extortionate. My noble friend Lord Bruce of Donington has on many occasions asked the Government to look at this with a view to strengthening the position of the borrower, who after all was very much better protected under the 1927 Moneylenders Act.

Will the Minister also say whether he agrees that one way of weeding out unscrupulous applicants for licences would be for a better liaison between the OFT and the local trading standards officers, whereby the OFT could refer applicants to officers before granting licences? In view of the fact that some moneylenders operate illegally without licences, perhaps the Minister may tell the House how successful the police are in dealing with them and how often criminal proceedings have been brought against the utterly despicable loan sharks.

One knows full well that it is always the poorest families, already up to their ears in debt, which fall back on local moneylenders. Families such as these need all the protection that they can get. It would be hard to describe the suffering and family disruption caused by the harassment and anxiety which result from falling into the hands of moneylenders.

Lastly, I should like to comment on what the citizens' advice bureaux report about the debts which they handle. They handled 500,000 debt inquiries this year, and it would seem that they can not continue to increase their staff in sufficient numbers in order to carry on. They say that 70 per cent. of those who went to them had incomes of below £100 per week. In many cases they were in debt simply because they did not have enough money to pay the bills. But the causes of severe indebtedness, they say, come when a family, with a budget which is already very stretched, suffers a crisis such as redundancy of the breadwinner, sickness of a member of the family or marital breakdown. The fragile structure then comes tumbling down and multiple debt occurs, mainly as a result of their effort to extricate themselves from the original debt.

An increasing number of CAB applicants have problems with their fuel and water bills. Gas disconnections showed an alarming upturn in 1986, the privatisation year. They jumped from 2.9 per cent. in 1975 to 23.2 per cent. in 1986. They continued to rise in 1987 when the increase in disconnections rose to 30.3 per cent. The National Association of Citizens' Advice Bureaux is particularly worried about the figures for water supply disconnections. They have gradually risen since 1982 and showed a sharper upturn of 24 per cent. last year. The association believes that the rise is due to the increases in water charges which have been imposed on water companies prior to privatisation. It is also due to the fact that claimants must meet water rates from benefits rather than as they did prior to the April social security changes when they received separate allowance for those rates. The CABs are worried that there may be a repeat of the gas industry's soaring rate of disconnections following water privatisation.

That is a superficial picture of the scenario surrounding the rising level of debt in Britain. I have tried to show how the original advantages of consumer credit are, in many ways, being eroded through the emergence of indebtedness and the social consequences. The CABs have some heartrending case studies of individuals and families who have been drawn inexorably further and further into the quagmire of debt from which they have become powerless to extricate themselves.

A typical example of the spiral effect of debt is of a man in his mid-thirties who went to his CAB. He had had an accident at work and the resulting drop in his income put him into debt. His marriage broke under the strain and he became homeless, which he still is. He now suffers from extreme depression which will probably bar him from work or a home for ever.

This year the Jubilee Centre published a thoroughly-researched paper entitled Families in Debt. It shows how debt puts intolerable strains on the family structure and how those affected suffer from all kinds of problems. They range from mental problems, social withdrawal, physical ailments, marital and family problems. The paper also describes the consequences for the children who grow up under the dark cloud created by debt. It makes their parents fight, brings disruption to the home and deprives them of the things which other children have by way of Christmas and birthday presents and so forth. An American research paper suggests that there is a correlation between child abuse and the financial status of the family.

The Chancellor of the Exchequer has expressed his concern about the effect that increased interest rates will have on families during the coming year. However, that has not manifested itself in policy. He has rejected credit controls on hire purchase and credit sale agreements saying that they would be evaded. However, I cannot understand how banks and finance houses would evade them. Perhaps the Minister can explain that statement. It appears that the Chancellor would be supported by many people if he introduced some controls. The Jublilee Centre research shows that people believe that it should be harder to obtain credit and they accept the fact that restrictions should be imposed.

One can be left only with the impression that the Government disclaim social responsibility and that they are content to stand back and allow the continuing pursuit of profit from credit to continue because that is what best pleases their supporters in City circles and elsewhere

Besides bringing some order to the field of consumer credit, surely the Government should be moving away from placing their whole focus on consumerism and instead promote a philosophy which includes other values. After all, no one is asking the Government to establish a "nanny state". However, in the same way as government action reduces risks to members of society in so many fields, they have a responsibility to reduce the risks which so many poorer families and young people run of becoming enveloped and smothered by debt. Let us remember that letting the credit market rip may have been effective in creating competition but it has also led to the unattractive spectacle of a growth in human misery and exploitation.

I should like to end by repeating what was said by Sir Gordon Borrie, the Director General of Fair Trading, in his annual report published last month. He quoted a sixteenth-century sage who said: Who goeth a-borrowing, goeth a-sorrowing".

I end on that rather sombre note. My Lords, I beg to move for Papers.

3.27 p.m.

Lord Jenkin of Roding

My Lords, the House will be grateful to the noble Baroness, Lady Ewart-Biggs, for giving it the opportunity to debate a subject which has attracted a great deal of attention among commentators and the press. It gives noble Lords the opportunity not only to share the concerns which she has rightly mentioned but also to dispose of a few of the myths which appear to have grown up about the subject and which should be put right.

Many of us were brought up years ago in an atmosphere in which it was considered disreputable to accumulate debts and it is tempting to become alarmed by the increase in personal debt. I did not disagree with any of the figures which the noble Baroness quoted. I was brought up with the stern warnings about my Uncle Charlie. He had been a prominent juvenile lead on the West End stage. He had enjoyed lavish parties at Claridges and ended up being supported by his family. That spectre was hung over me throughout my youth.

When one is told that personal credit has doubled since 1983—the latest figures that I have show that it was £41 billion by the end of September and that it has risen from the June figure which the noble Baroness mentioned—it is not at all surprising that we in the older generation shake our heads, purse our lips and mutter that it will all end in tears. The noble Baroness is right because for a few people it does end in tears and I shall come on to that in a moment. However, it is important to get the facts into perspective.

I was a Minister in the Treasury when we introduced the historic document Competition and Credit Control. It was the start of a process which has blown the fresh winds of competition and innovation through our whole financial system. When one bears in mind that during the past nine years there has been added the abolition of the corset on bank lending, the ending of hire purchase controls, the ending of exchange controls, new banking legislation and building societies' legislation and the new consumer credit legislation which the noble Baroness mentioned, not to speak of the huge changes brought about by "big bang" it is hardly surprising that the older relationships between income, assets and indebtedness should have changed and should still be changing quite dramatically. Therefore, attitudes have also changed. The noble Baroness mentioned the huge expansion of mortgage lending. That has actually made borrowing more respectable and given it a much more favourable image. I believe that she would recognise that the high rates of inflation in the 1960s and 1970s made waiting before buying very unattractive. She quoted Sir Gordon Borrie. I shall also do so from his 1987 report. He said: two-figure inflation made debt both economically sensible and respectable since more and more people adopted it as a means of buying not only their homes but the increasing range of consumer products which filled them". That process has continued. But should we be alarmed? I believe that we should not be alarmed. If one looks at the figures, particularly of the latest trends, it seems that some cries of disaster may appear to be exaggerated. In the few moments I have I shall just make five short points.

As the noble Baroness said, mortgage lending is by far the biggest element in total personal indebtedness; namely, £202 billion, which is about 83 per cent. of the total of personal debt. As the vast majority of mortgages are either repayment or endowment mortgages, that indebtedness is matched by saving on a very big scale. Obviously there are problems for some people who fail to keep up their mortgage payments, but without doubt that has been a hugely beneficial social trend. It is accompanied by some dissaving which was pointed out by the noble Lord, Lord Williams of Elvel, in his speech in the debate on the Address on 29th November. However, as he rightly recognised, higher interest rates will do a good deal to discourage that process. I entirely endorse his verdict when he said: I do not think that I would be especially worried".—[Official Report, 29/11/88; col. 173.] The second point is that bank lending via credit cards has been blamed, quite wrongly, for all the problems of the consumer boom and growing indebtedness. In fact, that only accounts for some 2⅛ per cent. of all consumer borrowing. Around half of all credit card holders pay off the debt during the free credit period so that they are not borrowers at all. The banks' latest figure is that probably about 1 per cent. of borrowers have difficulty in repaying their debt. In the last 12 months the growth of bank card debt outstanding has done little more than keep pace with the growth in the number of cardholders and the rise in retail prices. In any event, they are now the subject of a Monopolies and Mergers Commission investigation, so perhaps we should await the result of that. However, I ask the question: why only bank cards and not other forms of plastic credit like store cards?

That brings me to the question of retailers' credit. That too is an even smaller part of total consumer credit—around 1 per cent. of consumer borrowing if mortgages are included, or 5 per cent. if they are excluded. That is also slackening off. Figures announced last week by the Retail Credit Group show a slowdown in the rate of growth of retail credit during the summer. Although the number of credit accounts continues to grow strongly, the average amount outstanding per account, which is now about £157, is down from a figure of £166; namely, a 5½ per cent. reduction. That tallies with the CBI's recent Distributive Trades Survey of 14th November which shows that the earlier strong growth in retail sales is starting to fade. That is entirely in line with my right honourable friend the Chancellor's policy of using interest rates to curb the rate of inflation.

This debate is about consumer debt. Do the banks and stores encourage irresponsible borrowing? That has certainly worried some people. Of course, that matter needs to be watched carefully. However, it is right to point out that the banks refuse some 30 per cent. of the applications made to them or their credit card companies, while the Retail Credit Group tells me that their members' rate of rejection is about 25 per cent. Clearly a good deal of care is exercised there.

The noble Baroness mentioned a report in the Sunday Times. I am sure that many noble Lords in all parts of the House will have read that. It certainly caused me some concern. Therefore, I took the opportunity to check the facts with the Retail Credit Group. The House will remember that that was a case of a young lady of 19 with an income 01111,000 who, the paper said, was allowed to run up £4,700 worth of credit in a couple of hours in a number of West End stores.

The House may take some comfort from the fact that happily, the story turns out to be wildly inaccurate. Time forbids me from giving all the details, but the simple fact is that she was offered credit facilities rather than credit, and not of £4,700 but £1,200, and even then how much use she made of those facilities was up to her. Of course, had she asked for actual credit there would have been the usual references to the credit reference agencies. None of the counter staff in any of the stores with which the young lady dealt had any authority to give her credit and nor did they. They indicated what the sort of limits might be. In fact, references are made to the credit reference agencies only when there is a substantive credit inquiry.

In the light of the facts—and there are a great many more facts—perhaps the Sunday Times owes those retailers, all of which were mentioned by name, some apology and correction.

What about the few people who become overstretched? As the noble Baroness said, it is clear that the vast majority of cases are those where family misfortune overtakes what would otherwise have been perfectly sensible borrowing—illness, unemployment, divorce, separation and events of that sort which overwhelmingly trigger the serious social problems which she described.

Perhaps I may mention to the House that there is a solution which is not widely used; namely, credit insurance. That was suggested by the president of the Chartered Institute of Bankers in the speech mentioned by the noble Baroness. It would be wrong to put limitations on credit. There needs to be a much wider use of credit insurance, and his suggestion was that this is a case where some of the attitudes to inertia selling might be a way of overcoming that. It would be totally wrong, despite all the points made by the noble Baroness, to start putting restrictions on credit. Sir Gordon Borrie has made it clear that he would be totally opposed to anything of the sort.

3.38 p.m.

Lord Ezra

My Lords, I agree with the noble Lord, Lord Jenkin of Roding, that we owe a positive debt to the noble Baroness, Lady Ewart-Biggs, for introducing this debate on the high level of consumer debt. This is an extremely timely debate. As the noble Lord, Lord Jenkin, reminded us, on 29th November we had a debate on the Government's general economic policy, but in some respects this is the social aspect of that economic policy.

There is little doubt that the level of consumer debt is now becoming a pressing social problem. Yesterday I spoke to my noble friend Lord Winstanley, who for many years presented a series of broadcasts on personal problems on Granada television. He told me that in the early years of this decade the most pressing problems were those of unemployment and housing but in the most recent months the question of indebtedness has come to the forefront. From his personal anecdotal view, this is now a very serious problem.

I am glad to note that this matter is being taken much more seriously. The Office of Fair Trading, to whose report reference has already been made, has produced a guide on debt called Debt: A Survival Guide. That is a rather awe-inspiring title. When one sees what that guide regards as the priorities for indebted families it is a bit horrifying. It mentions four priorities: rent and mortgage arrears—you could lose your home; rate arrears—you could land up in court; fuel debts, to which I could add water debts—you could be cut off; hire purchase debts—if you have paid less than one-third, the goods could be repossessed. Imagine the position of people in that situation with those problems standing over their heads.

I am glad to say that this has not only been identified as a problem but that action is being taken in an endeavour to deal with it. Since the middle of this decade there have been many money advice services operating through the citizens' advice bureaux and in other ways. The Policy Studies Institute has recently published a report on the activities of these services and the ways in which they operate. Indeed, a money advice association was founded in 1984 to co-ordinate their work.

However, what slightly alarms me is that we do not seem to know the size of the problem. We know from experience that it is an important problem, but that same institute, the Policy Studies Institute, is launching a study into the whole question of who is borrowing, how many people are in debt and what happens to them. That will take two years to find out, which worries me. Here we have an important social problem, and an independent institute, independently financed, is going to spend up to two years ascertaining the size of it.

There is not the slightest doubt that this is a serious problem. As has been pointed out, the amount of money borrowed for domestic purposes since 1980 has doubled in real terms. The reasons for that have been mentioned—the massive expansion of credit facilities and the consumer boom during the latter part of this decade which has swept many along in its slipstream who have been unable to cope for themselves. Without any question, the position has been made worse by the dramatic increase in interest rates.

The noble Lord, Lord Jenkin, pointed out all sorts of reasons why the increase in interest rates is a desirable remedy for the problems that we face, and that was debated by this House on 29th November, but for people who are in debt it has added enormously to their problems. We have had interest rate increases from 7½ per cent. to 13 per cent. since June of this year and that is a massive increase for people who obviously did not expect it to happen.

Therefore, I conclude—and I keep my remarks within a limited time to allow plenty of time for others—by making the following three proposals to deal with the problem. First, I urgently recommend that the Government endeavour to find out the size of the problem. It is all very well to have an independent survey over two years, but we need to find out much more quickly what is the size of the problem. Secondly, we should review the measures already taken to deal with the problem. Are they or are they not adequate? Should we be doing more? How can we identify those case which are really deserving and those cases of indebtedness which simply arise through improvidence? There must be a number of those.

Thirdly—and this comes on to economic policy—I have to say that from the point of view of those in debt, from the point of view of those in manufacturing and from the point of view of those who are trying to export, one of the most urgent priorities is to bring interest rates down. Having brought down interest rates we ought to seek to deal with the credit expansion boom in other ways, as was mentioned in our debate on 29th November. We must give positive encouragement to personal savings and build up the ratio which has fallen to such a low level.

I believe that if those three measures are taken this important and growing social problem can be effectively dealt with.

3.45 p.m.

The Lord Bishop of Guildford

My Lords, like other speakers I am grateful to the noble Baroness, Lady Ewart-Biggs, for introducing this debate because it is recognised by all that this is a matter of growing concern. As I represent an organisation which has many people working at ground level, so to speak, perhaps I may report that it is clearly becoming a widespread concern of the clergy, who are in contact with all sorts of people, that debt is an increasing social problem.

However, as the noble Lord, Lord Jenkin, said, we need to keep a sense of proportion and there is, as I see it, a sort of balance of payments in this matter of consumer credit. On the one hand, we have to acknowledge that credit facilities are of high value to those with the strength of mind and the experience in managing money; but, on the other hand, we must recognise that for those readily attracted by the glitter of advertisements and bamboozled by mysteries like the APR, credit can be a highly priced trap.

We have lost the Victorian value of thrift. What was left of it was eaten away by the high inflation of the 1970s. It then became economically imprudent to save. Since then, although inflation has been brought under control (for which we are extremely grateful) thrift has now been replaced by credit. The trouble with credit is that interest charges can take on a life of their own. When they are small they can be comfortably suckled, but when they grow they get hungrier and hungrier. The danger point for many individuals and families is that appalling moment when they recognise that their debt charges are increasing faster than income. That is the moment of human despair.

In spite of what the noble Lord, Lord Jenkin, said, I think that it is generally recognised that instant credit is too easily obtainable. I remain to be convinced that the article in The Sunday Times can be so easily and readily dismissed as it was by the noble Lord, Lord Jenkin. Surely the fact is that many people, including young people, can walk into high street stores and obtain credit with hardly a question being asked. Certainly they are given that impression. I believe that they need to recognise that what they are obtaining is not instant credit but instant debt. If we could change the words, that might even indicate to people the direction in which they are heading.

Greatly daring, I raise the question of whether the banks are being as helpful as they should be. I understand that a number of banks are moving over to performance-related pay for their staffs. There is no doubt good and sound reason for doing that, but it seems to be the cause of a significant shift in the approach of the banks to their customers and the basis on which they offer loans. Loans were offered essentially when there was a reasonable assurance that they could be repaid. Customers were advised about the wisdom of taking out loans. However, I am told that some banks are now gratutitously offering overdraft facilities to customers who have not even asked for them. The emphasis, therefore, is shifting from not so much what is wise for the customer but more to what will get business for the banks.

I draw attention to that aspect because the Judaeo-Christian tradition has always been cautious about interest charges. It was called usury in the early centuries and it was forbidden until the 13th century. With the rise of capitalism a shift took place in moral thinking and it then became appropriate to lend money for wealth creation. But there was still great caution as regards the morality of lending money for consumption. That is not an easy distinction to maintain today but nonetheless there seems to be residual wisdom in it.

I wish to draw attention in particular to the human tragedy which results when debt begins to take its effect. It is almost an inevitable constituent part of marriage breakdown and of the other social problems that we have. One essential weapon in the battle against consumer debt is keeping inflation under control. I believe that we need to recognise our gratitude to the present Administration for achieving that. I have no doubt that we should also recognise the importance of people being encouraged to take responsibility for their own decisions. If they make unwise credit arrangements, in one sense they have only themselves to blame.

In my view it is not satisfactory to leave the matter there because we have a responsibility for those in the most exposed positions in our society. I hope that there are other actions which can be taken to protect the unwise from falling victim to the advances of the moneylenders and the credit companies.

3.52 p.m.

Lord Diamond

My Lords, I express my gratitude to the noble Baroness. I start by reminding your Lordships that the British people are to be distinguished from all others on this one count. Since the beginning of this century they have displayed a propensity to borrow more and to eat more of their seedcorn than any other competitive nation. That is a deeply ingrained pattern of which we should be aware. If the strength of the nation is based on investment to secure increased living standards in the future and investment supported by saving and not spending and borrowing, then what this nation needs is to be aware the whole time of its propensity to eat its seedcorn and its need to save more and more.

Ever since this Government came into office what has been happening is the encouragement of borrowing and spending. I cannot do better than quote what the Prime Minister said very recently—that too much buying is paid for by too much borrowing. This matters to the nation as well as to the individual. I am very grateful to all those who have taken part in the debate for underlining the difficulties with which certain individuals are faced. That leaves the ground clear for me—if I may put it in those terms—to concentrate rather more upon the impact on the nation. What is good for the individual in total is also good for the nation; that is, to save and not to borrow unless there is an absolute necessity.

I do not share the view that the old lady who needs a coat for the winter and cannot afford it should borrow the money at twice the rate of interest at which I can borrow. I see no reason why that old lady should borrow money at those rates in order to buy what she is entitled to. It is a matter for social security and the conscience of the nation. It is not a matter for encouraging financial institutions to spread their lending net ever wider. As we know from the figures, fortunately the amount of borrowing that is done at that level is almost minimal. It is very small indeed. The reason for the enormous increase in our consumer debt is the amount that has been borrowed by the categories that we call A1, B2, and so on. They are well above category D, which was no doubt in the mind of the noble Baroness when she referred to the difficulty of buying a warm coat.

It is very important that we should have regard to what the Prime Minister said about too much buying being paid for by too much borrowing. It has its economic impact. Excessive borrowing fuels inflation at home and produces balance of payments deficits abroad. I am absolutely clear in my own mind—I see no reason why I should not express this opinion in your Lordships' House—that it destroys moral fibre. To me, financial integrity means earning first and paying second; earning first and spending later. There has to be a good reason to depart from that other than in terms of buying a house, where the issue is different because one is really converting spending into rent which is the alternative available to people who want either to buy or to rent.

I take a clear view on that matter. I recognise that it is difficult, when the Joneses are setting the pace on easily borrowed money, for the Browns not to follow them although it will be against their normal instincts to do so. Therefore there is the whole time reason for discouraging credit and not encouraging it. There should be a discouraging of consumer credit which is not based on anything other than desire to spend first and earn later. That is my message.

This situation has arisen, as the noble Lord, Lord Jenkin, made clear, through the Government giving the message from the moment they came into power that the restrictions on borrowing should be removed and that full and free rein should be given to the propensity of this nation to continue to eat more and more of its seedcorn. Every instrument that came to the hand of the Government to control that propensity has been removed. I exclude foreign exchange controls because they were the subject of wise and confidence-making decisions.

I ask whether the present policy of the Government will suffice; but clearly it will not. In the past year there have been 11 variations in interest rates and that is the only policy that the Government are prepared to have regard to. Seven or eight of those variations have been upwards. Inflation has continued at exactly the same pace throughout the year, paying no regard whatever to the interest variations. It is not surprising. We are talking about the hundreds of thousands of ordinary individuals who buy things in shops. The ordinary consumer is not an economist and he does not read the details in the Financial Times leaders. The ordinary consumer gets a general message from the Government. That general message in the Budget was "Everything is fine; taxes are reduced and that means you can spend more".

The general message from these interest rate variations is nil as regards the consumer. How could it be otherwise? The variations have not been made in order to shock the consumer into a realisation of overborrowing and overspending; they have been hidden and muffled. The variations have been 0.5 per cent. most of the time, or 1 per cent. Imagine the aforesaid Mrs. Jones saying to her husband when he comes back from his office in the City, "What does this mean about the Chancellor increasing interest rates?" He explains, "Well, dear, instead of having to pay 25 per cent. on your borrowing for the costume you have just bought at the store you will now have to pay 25½ per cent." She replies, "Oh, isn't that terrible". I am bound to tell your Lordships that Mrs. Jones does not immediately commit suicide. She goes back to the store and buys the pair of Italian shoes that goes with the costume in order to make up the complete wardrobe.

That is how the public have been misled by these tiny and regular interest rate variations into believing that it just does not matter. It does matter, and there are various suggestions which, on another occasion I regret to say, I shall hope to put before your Lordships.

4 p.m.

Baroness Phillips

My Lords, first, I should like to say that the Government can rest content. I shall not blame them for everything. We are in danger of blaming the wrong people. I work with retailers and I am constantly amazed that they are blamed if people steal from them. They display the goods and people are tempted and they steal. It is the same with credit. We have always had credit and there is nothing wrong with it. What is wrong is when people do not pay for it.

I grew up in an age when the only way in which one could buy certain things was by credit. However, it was not called credit; it was called hire purchase and co-operative mutuality. But one borrowed before one actually paid for the goods. Nowadays people seem to have the idea that they do not have to pay. I am sorry for the people mentioned by my noble friend on the Front Bench. They get into trouble when they become unemployed. But let us face it, many people know exactly what they are doing when they obtain credit. We have to be careful that we do not support the wrong philosophy. I repeat that there is nothing wrong with credit.

I grew up in a working class street where we had simple values. First, one paid the rent and then one paid for food. If anything else was left one paid for the other things. But one never feared being turned out of one's house or flat because one had not paid the rent.

Where has the idea grown up that when one does not pay for things one can still be supported? The right reverend Prelate is right. I try to carry out my own Christian belief but we have somehow to reassert the whole Christian philosophy in our society. We have allowed it to slide.

The noble Lord, Lord Jenkin, mentioned the Retail Credit Group. It is quite true that its spending, borrowing and credit accounts for a small percentage—about 1 per cent.—of the total. I am fascinated by the ease with which people can obtain credit. I was in a House of Fraser shop one day. The little assistant said to me, "Do you have a credit card?'. I said that I did not. She asked if I would like one. I said, "Will it do you good?" She said, "Yes, I shall get a percentage if I sell it to you'. I said, "Okay, I shall have a credit card". I filled in three pages of detailed information. I had to wait six weeks before it was decided that I could have credit. It may be that the store was suspicious of Baronesses. I do not know. Perhaps I do not look the part.

I am astonished by the stories of how easily people can obtain credit, but that is not my experience. I was suspicious of the story in the Daily Mirror. I have followed it up. The shops did not offer the young lady credit in the way that she described. Why do we quote the press? For heaven's sake, every time the press have quoted me they have been wrong. Why should I believe what they say about anything else? I am astonished that noble Lords should stand up and quote something from the press.

Credit is with us. Let us train people how to use it sensibly. I am president of the Money Advice Centre. I also helped to write a book on women and money. It may be sexist but women are really much better with money than men. We wrote the book with the support of a bank. I come back to this point. Let the banks and the retailers give more instruction and more attractive leaflets on how to use credit. Credit is with us and therefore I do not take a negative view. We need more training.

I listened to the chairman of the Consumer Council recently. She gave a good speech in which she gave examples of the kind of promotions we do not want. She said that an advertisement for a certain store said, "Up to £2,000 no fuss instant credit. Spend it today". She did not say which store it was so I cannot mention the name. She said that the sales staff could not explain it anyway, so perhaps people will not be stupid enough to take out this credit. Obviously the borrowers must understand the credit agreement and what it will cost in cash. Why is it indecent to mention cash now? Credit is the thing. If people understood the agreement when they obtained credit there would be no danger. Surely they should know exactly what they are doing.

The Money Management Council has simple aims and objects—to exercise a responsible influence on the development policies affecting the financial interests of consumers both locally and nationally. The banks and the credit card companies—we must give them due credit, if that is not a terrible faux pas—are trying to tell people what they are doing when they take out credit. That is what we want. We want information and education on how to use the system.

There is nothing wrong with credit. It is only wrong if one does not pay. Loan sharks are a different matter but the debate today refers specifically to consumer credit. The retailers, banks and credit card companies could start with the women's organisations which are always the leaders of thought. They do not get credit for it but they are always the leaders of thought and information. Let us make sure that our citizens understand how to use something that is with us. Those who get into trouble are a different kettle of fish and the noble Baroness has rightly drawn attention to the matter. However, many people know exactly what they are doing. Let us underline that and make sure that they get the best advice.

4.8 p.m.

Lord Rippon of Hexham

My Lords, we are rightly grateful to the noble Baroness, Lady Ewart-Biggs, for having raised an important topic which has social and economic consequences. On 15th July this year my noble friend Lord Beaverbrook rejected out of hand my plea that the Government should take some action to control the credit boom as part of the battle against inflation. I hope that tonight we shall see that the Government are more aware of the dangers. High interest rates cannot be the only weapon in the Government's armoury. Indeed it can be said that, at least in the short term and until they bring about some kind of recession, they actually fuel inflation. The Government should now take some action to stop the banks and others generally encouraging borrowing at excessive rates of interest.

It is worth noting that those countries which have the lowest rates of inflation and the lowest interest rates are countries like Germany and Japan where the people are accustomed to paying as they go. It is the failure to control credit which underlines the Chancellor's present predicament. The problem is not just house mortgage advances. Indeed it can be argued that those are wise in the sense that the borrower is making a long-term investment for himself and his family. What I believe is having such a devastating effect is the rapid rise in personal debt—day-to-day consumption—urged on by every means in their power by the banks and every other supplier of credit.

My wife, who fortunately for me is not a plastic money addict, was not impressed by a letter she received a week or so ago from the Midland Bank offering, presumably in addition to the Access card, a Midland Flexiloan. The letter, which is addressed to "Dear Customer", says: Imagine, the benefit of having a cash reserve available for your Christmas shopping, or the joy of taking a winter break at short notice. Flexiloan can help you with necessities or luxuries alike and even the odd emergency… You decide your limit from £500 to £3,000". It is only fair to add that the supporting documents make it clear that the current APR is 20.9 per cent.—although they add that the figure may vary. That is a relatively modest percentage compared to some of the examples given by the noble Baroness. Is this the sort of action that the banks should be taking at present? Is it desirable that people should be urged to do their Christmas shopping by borrowing at 21 per cent. per annum?

According to this month's issue of Lloyds Bank Economic Bulletin, lending to persons has grown at almost the same pace as sterling bank lending to the economy as a whole, but that of the banks has grown faster—namely, 31 per cent. in 1981–87—and that of the building societies more slowly, at 17 per cent. Even so, the banks themselves account for no more than half of the total of consumer credit; retailers, and others, are in the business as well.

As Mr. Alistair Graham, the director of the Industrial Society, said at the annual conference last month of the Consumer Credit Trade Association: It has become like a bizarre religious ritual for some to collect as many cards as possible and then these are produced in the office or pub like a war veteran parading battle medals". In the process, of course, the young are being trapped in a spiral of debt. I believe, as other noble Lords have suggested, that at the very least, much more needs to be done to explain the basic ground rules regarding the use of credit cards. As the former government Minister for consumer affairs, Mrs. Sally Oppenheim-Barnes, has said: Credit firms give many customers no idea at the outset what the final cost of their borrowings will be". I commend to the Government her suggestion that there should be a full explanation of the cost added to all credit agreements.

Credit cards are all very well for those who use their cards for payment on demand. They in effect get an interest-free loan at the expense of the poor and the young. The damage is done to those who, when they receive their account, meet only the minimum that is asked for. This is a very clever situation. You get your credit, then in comes the bill and you need only pay £5—and then you are hooked. I think that there should be a higher minimum initial payment.

The Lloyds Bank Economic Bulletin goes on to give some of the reasons for this revolution in bank loans to persons. The first reason is that personal lending is more profitable to the banks than lending to large companies. I suppose that the banks, having done their best to ruin the third world, are now starting on our children. I find it horrifying that it is estimated that one in five younger credit users are now having repayment problems.

Another reason given for the rise in personal debt is that qualitative guidance to the banks by the Bank of England was first relaxed and then finally abolished. I think that that was a mistake; I think that it should be restored. In my view a great deal could be done without legislation, or credit control; for example, by the Bank of England telling the clearing banks that they must stop lending so much money and that they must behave responsibly in the national interest and restrict credit to necessary purposes. That is the key: credit to necessary purposes.

There may be something to be said for a loan to buy a winter coat or, much more sensibly, to buy a consumer durable like a washing machine. But there is no justification, in my view, for banks at a time like this to urge people to borrow money for a winter holiday break in the sun—hopefully in the sun.

In the present circumstances I think that we must also have regard to the way in which some people are being literally conned into rates of interest well beyond those imposed upon bank credit card holders or by retail shops. I think that there are strong grounds for urging the Government to introduce a new moneylenders Bill. Indeed, it might be called a usury Bill. It is interesting to note that in Texas, in the United States, the maximum rate of interest is still 15 per cent. and anything above that figure is usury. Indeed, I think that it is still usury today.

The combination of high interest rates and the credit boom is doing great damage at present both to our economic and to our social structure. I think that the young have a right to be protected from the worst excesses of quite dreadful loan sharks. I compare them to Mafia loan sharks. Indeed, the Mafia loan sharks look like charitable institutions compared to some of the people who are acting in this field today. I do not think that it is good enough just to say that people have a choice and ought to know what they are paying for the credit which they are being induced to seek. I hope that the Minister replying to the debate will have something constructive to say about the way the Government intend to tackle this increasingly serious economic and social problem.

4.16 p.m.

Baroness Lockwood

My Lords, I share the concern of my noble friend. Her Motion refers to the high level of consumer debt. The problem is both a personal and a national one. It is a strange irony that the nation facing, as it does, a severe balance of payments problem can probably find the cause in the increasing credit boom which we are now experiencing.

Some distinguished economists claim that the imbalance in our trading accounts stems not from overseas investments—as others would claim—nor from a growth in the import of capital goods to re-equip our industries, but from the City borrowing from abroad in order to fund loans to British consumers to purchase consumables imported from our overseas competitors. What a world turned upside down this is!

It is a real national problem, but for many it is also a very severe personal problem. Plastic cards are a new method of exchange, but because we are not handling hard cash this method of exchange is more difficult to manage. Some of us, as the noble Lord, Lord Rippon, has indicated, take advantage of the free loan on our credit cards. But others, less fortunately placed, become burdened by high rates of interest over a long period of time. Therefore help in the form of education in money management is very seriously needed.

I should like to say at this point that I welcome the announcement I saw from the DTI a couple of days ago that it is issuing a video for the young on how to manage loans and lending. I think that such a video can play a most important role. However, the problem is wider than that: adults also need help, education and information about the whole problem.

One method of education and information could be through advertising if, as my noble friend Lady Phillips indicated, all the conditions of the loans were made known. It is this area of the problem upon which I should like to concentrate. I must declare an interest as a member of the Advertising Standards Authority. Advertising for credit is governed by the advertisements and quotations regulations under the Consumer Credit Act 1974. Enforcement of the regulations lies with the local trading standards departments and the Office of Fair Trading. Advice on the interpretation of the regulations can also be obtained from these bodies. The Advertising Standards Authority is a self-regulatory watchdog of advertising standards. It has no statutory powers; it is concerned with the content of advertisements. However, through its complaints and monitoring procedures it has been involved in credit advertising. Its experience—widely shared by those involved, I believe—is that the present regulations are exceedingly complex and difficult to police.

The ASA has been particularly concerned about advertisements for credit based on secured loans. This is especially important in view of the figures that my noble friend Lady Ewart-Biggs gave in relation to repossession of houses currently mortgaged. In a recent exercise in which the ASA monitored a selection of print credit advertisements—I must underline that print credit advertisements are not television advertisements because that is a responsibility of the IBA—the ASA found it necessary to give advice to more than half the advertisers. The problems encountered in the advertisements revealed that a large number of those offering secured loans used words such as "secured loan" in very small print, "sorry, no tenants", or "home owners and mortgage payers only". In the view of the ASA, these advertisements, although technically correct were not sufficiently clear. The ASA feels that, because advertisements for secured loans are concerned with such an important issue for would-be borrowers, the advertisement should state without any ambiguity that the loan is based on the property.

I understand that some steps are being taken to try to deal with this problem. Indeed, in 1987 the Department of Trade and Industry issued a consultation paper on the current regulations. In March this year it issued draft regulations and invited interested parties to comment by 20th May last. The draft regulations seemed to be a vast improvement. The explanatory memorandum states: The main aim … has been to simplify the Advertisements Regulations, while at the same time providing additional safeguards for consumers". Some of the problems raised by many noble Lords are covered in the draft recommendations. I welcome them. In particular, I welcome the statement that: In the case of a loan to be secured on a borrower's home, a statement in the following form must be included in both intermediate and full advertisements:—

'Your home is at risk if you do not make repayments on a secured loan' ". No one could misunderstand a statement like that if it were clearly stated in the advertisement.

Can the Minister say what has happened to the draft regulations? A recent telephone call to the DTI confirmed that the department is still examining the responses. Surely there is much urgency about the matter. I would welcome a reply from the noble Lord. Advertising is only one aspect of the problem that we are discussing this afternoon, but a firm lead from the DTI on the advertising regulations would contribute to a better informed public both on the advantages and the disadvantages of credit.

4.26 p.m.

Lord Brocket

My Lords, I am grateful to the noble Baroness, Lady Ewart-Biggs, for bringing this subject to the attention of the House. With Christmas round the corner and inflation being the prime concern at present, I think that the debate could not have been called at a more opportune moment.

The problem of consumer credit and the trail of problems that it leaves in its wake are social and economic issues that I think are not being given the attention that they deserve. The Government, quite correctly I believe, have changed the country's thinking in that it is admirable to be successful, and one's natural inclination to accumulate wealth is neither perverted nor in any way wrong; in fact, it is to be encouraged. If this success is to be reflected by purchases that would otherwise previously not have been possible, then more power to your elbow.

The down side of all this of course is that those who have not yet reached that degree of affluence, who are too young or quite simply less able see these outward signs of affluence, want them and are delighted to find that banks, credit card companies and stores fling money literally at them and offer them credit facilities to assist them to obtain what otherwise they would not be able to obtain. Who can blame them for accepting this? It is not a case of, You can lead a horse to water but you cannot make it drink"; it is more a case of, "You can lead a horse to water but you cannot blame the poor animal if it does drink".

Among my staff I have pathetic examples of people who have been given credit that they have no hope of financing and who are now reduced to nervous wrecks in their inability to face literally an insurmountable problem. In some cases this has led to excessive drinking and extreme resentment against the system that they see at fault for landing them in this mess in the first place. I think that we are being extremely irresponsible in allowing this state of affairs to continue unabated.

High street stores are giving credit sometimes up to £1,000. I note what was said about the article in the Sunday Times, and I know that this is a fact certainly here in London—with few or no questions being asked. The ability to pay seems of little or no interest to them. The applicant's name and proof of identity are often the only questions asked. Credit card companies give out plastic cards like Christmas cards. There is no proper check on the facts that are given on the application forms. Shops display misleading and confusing signs about credit arrangements. Such signs as "free credit" should read "absurdly ridiculously high credit". There is currently a major high street electrical chain that is offering credit advertised as "free credit" which is in fact 40 per cent. per annum. If the small print is noticed on that sign, most people would not understand it anyway.

Lastly, banks far too readily give loans in the form of mortgages to the absolute maximum that their clients can afford, so that a slight change in circumstances tips the balance and puts well-meaning but naive people and their families into appalling straits. Quite simply, we owe it to these people, especially the disadvantaged, whether from skills or living in a depressed area, to take simple measures which are well within the Government's power to lessen the consequential economic and social problems, particularly that of inflation.

It is in the area of inflation that I have to admit I have a total and utter mental block. The Chancellor tells us that it is consumer spending that is rising too fast and that is causing the dreaded curse of inflation. Bearing in mind the problems regarding credit that I have illustrated, it would appear to me that we have an even stronger reason for taking measures to curb easy credit. However, the Chancellor has elected to use the blunt weapon of general interest rates to curb spending. This means that entrepreneurial businesses, small and large, that always have large borrowing and are the lifeblood of the economy and the power behind Britain's recovery, are hit extremely hard. But it is not the businesses that are buying new machinery that are causing the inflation. It is common or garden consumer spending.

This interest rate measure appears to me to be like going to the noble Lord, Lord Colwyn, complaining of toothache and the noble Lord hitting the patient over the head with a truncheon and knocking him unconscious. While I admit that that measure would cure the toothache for a while, as the patient would not feel a damn thing, it does not go to the source of the problem. There is no disrespect intended to the noble Lord, Lord Colwyn, as I am sure he does not advocate the use of truncheons in his surgery. Furthermore, we are repeatedly told that a strong pound will reduce inflation. This one has me competely stumped.

I have to declare an interest in that I manufacture in America and export to the United Kingdom, and a further interest in that I manufacture in the UK and export to Europe and America. It will come as no surprise to anyone in this House that it is the American company that is doing well and the UK company that has its costs rising and its exports falling. Lower corporate tax rates are of little consolation because we, like most companies, gear up as much as we can anyway.

It is possible that I am being extremely thick, but I have bluntly to admit that the logic of the Chancellor's measure seems totally to have escaped me and many others as well, including my professional advisers. I am sure that there is a good reason for his solution, but I wish that he would let me in on the secret. I am told that the Government are against controls involving consumer spending and I hear mutterings about individual freedom being infringed. Freedom of choice of goods will not be affected. The price of the goods will remain the same and all controls will achieve is the prevention of many people's misery and a great benefit to the economy.

In particular, first, I should like to see the minimum age for credit raised to 18 years and rigidly enforced by law, with stiff penalties for breaches. Secondly, credit notices in retail outlets should have the actual interest rate clearly displayed in the same size writing and not in the jargonised small print that the average buyer quite plainly does not understand because he is not a trained accountant or lawyer. Thirdly, credit facilities should be granted only when confirmation of bank liquidity, present commitments and the applicant's earnings are received. Lastly, and most important, there should be a legal minimum deposit on goods of not less than say, 30 per cent. That could be altered at the Chancellor's discretion.

I believe that this treatment, rather than the Chancellor's present treatment, would attend not only to the right area of the patient but to the right tooth. The truncheon would therefore not feature in the inventory of any dentist's surgery.

4.35 p.m.

Lord Cocks of Hartcliffe

My Lords, I, too, should like to thank my noble friend for introducing this debate and I should also like to reinforce the remark she made about how easy it is for young people, particularly when they move away from home, to sink swiftly into a morass of debt through the enticements which are offered. But we live in a borrowing society. The noble Lord, Lord Diamond, said that people do not relate their borrowing behaviour to such matters as interest charges. I believe they also do not relate their spending behaviour to matters like interest charges because our balance of payments problem, which has led to the recent increases in interest charges, has been largely fuelled by the purchase of imported goods.

On the radio this morning I heard that the latest figure for imported cars will be some 58 per cent. of the total purchased. If that is so, I believe that people are making a conscious decision which contributes to the economic problems facing this country.

The noble Lord, Lord Jenkin, said that happily few people became overstretched when borrowing. Would, that that were really true. The old ethos has faded where one saved before one spent and one did not fall into debt. In many working class homes it was a matter of honour that the family owed no debts and that there was always money to pay for the inevitable funerals. That ethos has unfortunately faded. I was interested in the remarks of the right reverend Prelate because, on the one hand, he said that those who take unwise decisions have only themselves to blame and, on the other hand, a little later in his remarks he said that we have a duty to protect the unwise.

One has to balance those two remarks because there are many in society who do not understand the ways of finance. I was very much at one with the noble Lord, Lord Rippon, when he spoke about the people who were preyed on by loan sharks who charge exorbitant interest rates which are quite astronomical and who use unscrupulous methods of collection. They even go so far as to impound people's benefit books so that they can go with them to the post office and collect the money which is owing as they emerge. It is a great social evil and a scandal. Much of this borrowing behaviour stems not simply from the fact that people are needy and deprived; it stems also from the fact that there is this borrowing ethos in society.

In the Bristol area much concern has been expressed about this matter. In the last two years the local Evening Post paper has taken a great interest in it. My attention was drawn to it by a former colleague of mine on the city council, Councillor Hicks, who drew my attention to inordinate pressure on council house tenants to purchase their properties. Noble Lords will be aware of the opportunities that have been opened by recent legislation, but that is being taken advantage of by the kind of people to whom the noble Lord, Lord Rippon, referred. Leaflets have been pushed through people's doors on the big council estates inviting them to purchase their homes and suggesting the following. It is easier if I were to quote words which I mentioned in another place: You can afford it with no cash outlay whatsoever and no obligation". If one is foolish enough to fill in one of those leaflets and return it or to contact the telephone number, somebody will come to the door to press the matter further. Although rebuffed, he may well return later for a second and even a third call.

People in robust health can deal with such a situation without difficulty, but for the elderly living alone that kind of pressure is extremely worrying. Their main concern is to have a roof over their head and anything which disturbs the normal tenor of their lives is of great concern. That sort of abuse is going on. I echo what the noble Lord, Lord Brocket, said about the problems of people reading the small print and understanding fully their obligations. I should like to hear from the Minister that the Government are prepared to put much more effort into providing credit advice and debt counselling services which some progressive authorities are already getting off the ground. Those services are extremely important. Busy councillors cannot cope with the flood of queries they receive; with the best will in the world they often do not have the necessary specialised knowledge. A small amount of funding into the debt counselling services would pay very good dividends in terms of benefit to society.

In addition, since the Secretary of State for Education and Science is producing his national curriculum, surely these matters should be explained in the schools. If it can be explained in the schools just what is implied by borrowing at certain rates of interest, if the rackets going on can be exposed then the children will go home and talk about it so that there will be a fertilisation upwards. The information will spread very quickly. I urge the Government to look into these matters because the current climate of borrowing in society is having these unfortunate effects, particularly on those least able to look after themselves.

4.41 p.m.

Lord Meston

My Lords, I intend to speak only about the operation of the Consumer Credit Act 1974 and how it affects the most hard-pressed debtors. The forerunner of that Act was of course the Crowther report, which looked at the whole matter of modern consumer credit in its widest context. It echoed J. K. Galbraith when he stated what we now realise to be the obvious. He wrote that consumer demand comes to depend more and more upon the ability and willingness of consumers to incur debt. He pointed out that advertising and emulation which create demand operate both on those who can afford to incur debt and on those who cannot. That is the price we pay for a higher standard of living. However, there is also a price to be paid, for example, as a result of increasing house values. Houses cease to be seen as homes but are portrayed as a source of cash. That is a very dangerous trend.

It is not just a problem for the affluent; research shows that those on the breadline get into debt not just because of fecklessness or extravagance but as part of the struggle to meet the necessities. Health and marriages suffer and matrimonial financial litigation—with which I am familiar—can be little more than a debt clearing exercise. When a family is together, there is just enough to provide one home and provide for one household. But there is rarely, if ever, enough to provide for two homes, two households, if the family splits up. The burden falls upon the diminishing public housing sector.

The most hard-pressed are the most vulnerable to the so-called loan sharks; the people who have to borrow from Peter to try to repay Paul. Short-term unsecured loans become all too easily long-term secured loans. To take up a point made by the noble Lord, Lord Jenkin, it may well be right that banks and the more respectable lenders are increasingly careful about those to whom they are lending. The more careful they are, the more people will have to be attracted to the less scrupulous lenders.

The expression "loan shark" is colourful but somewhat imprecise: the range is from the backstreet lender to the high street bank, particularly if we have a sufficiently unfavourable view of our bank manager. Mine, I hasten to say, is a saint. The unlicensed lenders are outside the law. They are the people who take the social security book away to use as a form of security. In looking a t the Consumer Credit Act and how it works, one is concentrating on licensed lenders and the protection that is meant to be given by the modern legislation. However we must not overlook the point made in the article appearing in Which? in August this year, to which the noble Baroness, Lady Ewart-Biggs, referred. The point made in that article was that the present licensing system for lenders needs a careful overhaul.

I wish to take up a matter which has been mentioned on previous occasions by the noble Lord, Lord Bruce of Donington, as to the effectiveness of the Consumer Credit Act 1974. In theory the Act gives those who would otherwise be easily led into debt an opportunity for a second thought. It gives them advance information about the terms on which they are to borrow, assuming that they understand the terms "APR", "total charge for credit" and "secured debt". In fact few people really understand those concepts. Lawyers and accountants themselves have to fight through a mass of regulations and interest tables to try to discern the reality of the transaction.

Having got into debt in this way, it is not particularly easy under the scheme of the Act to get out of debt. If one wants to repay early one must grapple with the early redemption regulations, which could not be accused of simplicity. However it is the workings of Sections 137 to 140 of the Act which seem to me to be a cause of the greatest concern. This is not a particularly technical matter; those provisions enable the courts to reopen extortionate credit bargains. The old Moneylenders Act used the expressions "excessive interest" and "harsh transactions" which were quite easily understood. It provided a presumption that 48 per cent. interest was excessive. The Crowther report recommended retention of the 48 per cent. presumption, but the 1974 Act did not follow that recommendation. We have the new terminology in the 19'74 Act. Its main phrase is "extortionate credit bargain" and it does not take a great deal of thought to realise that something which might have been excessive under the old law will not necessarily be found extortionate under modern law.

However it is worse still, because there is a definition of "extortionate" in the 1974 Act. It is defined as meaning "grossly exorbitant" or "grossly contrary to the principles of fair dealing". In other words, it is not enough for the court to say that a loan is exorbitant; it must be found to be grossly exorbitant before the law can begin to intervene. It is not easy to persuade a judge that something which is or might be exorbitant is grossly exorbitant. Even then the court is allowed a discretion as to whether and to what extent it will intervene. Of course the high risk lender is entitled to reasonable protection, but I suggest that the law in this area is weighted too heavily in favour of the lender.

Time is not available to mention all the other abuses which are prevalent. I wish to mention some of them, such as the abuses used by the secondary lenders. These are abuses which ensure that such lenders make their money early and make that money, come what may. A borrower goes along; he wants £2,000. Before he knows where he is he has been landed with a bogus arrangement fee charged by the lender, another bogus fee charged by the broker, who is very often the lender under a different corporate hat, and he is being lent £3,000. He is too hard-pressed to resist and signs the agreement.

Another abuse is for the secondary lenders to pretend to be doing the borrower a favour by taking over his mortgage arrears or his existing mortgage itself, whether or not the mortgagee wants that to be done. When the borrower gets into trouble—as he very often does—the benevolent lender offers to reschedule the loan, recycling the whole transaction and effectively charging interest on interest. As the right reverend Prelate said, the indebtedness feeds upon itself.

Of course there is a limit to which the law can go to protect people from themselves, but I suggest that we have not reached that limit. As the noble Baroness went back to the 16th century and reference has been made to the Usury Act, I venture to give the Government a suggested precedent. In 1545 Henry VIII repealed his father's Usury Acts. The preamble to the 1545 Act had an amazing level of candour. It said that the existing laws were so: obscure and dark in sentences words and terms", that the law was of little effect, and that offenders had actually been encouraged to use the law. I suggest that the Government would do well to take a leaf out of Henry VIII's statute book.

4.50 p.m.

Lord Graham of Edmonton

My Lords, I am very pleased indeed to have the opportunity of speaking in this debate, which was so ably opened by my noble friend Lady Ewart-Biggs. On reflection, I think we have had a very well balanced and well informed debate. I wish to declare an interest in the form of my association with the co-operative movement. When that movement was established about 150 years ago, one of its cardinal principles was that no credit should be given. The success of the co-operative movement in those early years was partly due to the experience of those who were pioneers of the movement who recognised that working people, poor people, unemployed people and defenceless people were the greatest victims of the use of credit.

The Truck Acts, which gave to employers the right to pay wages in the form of food, bound workers forever in the grip of landlords and shopowners in a terrible way. The co-operative movement recognized that credit was an evil in those times. But in 1988 the co-operative movement, like many others, has recognised the important part that credit plays in its affairs. In 1988 the co-operative movement took more than £5 billion over its counters. I imagine that a sizable proportion of that money was taken in the form of credit trading.

I liked very much the contribution of the noble Lord, Lord Rippon of Hexham, who I thought not only spoke good sense, as he always does, but who put before the Minister who is to reply some very important questions. He suggested that it was no good the Government wringing their hands about the problem of debt or credit unless they were prepared to do something about it. One of the themes that has emerged during this debate from all around the House, but especially from this side, is that there is an overwhelming demand for consumer advice and advice upon the management of money. One of the things I want to hear the Minister say is that he is prepared to help to reverse the Government's trend over the past 10 years, which has been in effect to downgrade consumer advice centres.

Ten years ago, when I was happy to serve at the Department of Prices and Consumer Protection, one of the great things that the then Labour Government did was to encourage the establishment of consumer advice centres. Many councils in the 1980s have not only had to abandon them, but through Government action, they have been given very little financial support to maintain them. I want to hear the Minister say something about the provision of centres which are non-political, which are dependent upon resources from the Government, and which, give the kind of advice to which, I believe, consumers are entitled.

Reference has been made to those individuals who by fecklessness, if not recklessness, get themselves into difficulties. The tag which comes to my mind is caveat emptor—let the buyer beware. I do not think it is an unreasonable proposition to assume that people who seek credit should at least have some idea of what they are letting themselves in for. Certainly legislation has been provided over the years which lays down responsibilities and duties upon retailers, the providers or the givers of credit, to make certain that there is an understanding about the terms and conditions and other matters involved in the giving of credit.

One of the interesting things that has emerged from this debate is that while we are looking at consumer credit, what we are really talking about is credit that is given by retailers in shops. What emerges is the stark fact that 3 per cent. of consumer credit is in the form of mortgages for housing. I want to hear the Minister address himself to how he intends to reduce the burden of consumer debt in the form of the cost of housing, which represents 83 per cent. of total consumer debt. The Government have a great responsibility, not only as regards interest rates in general, but especially as regards the high cost of borrowing in respect of housing.

I was also interested to hear of the very small amount of debt which is accounted for by retail credit accounts. I understand from the figures that it amounts to £157 per account. That sum is not, in the context of the current debate, chicken feed, but we must recognise that that amount is coming down. I was interested in the references that the noble Lord, Lord Jenkin of Roding, made in rebuttal of a general premise that was allowed to be given in an article in the Sunday Times last week. I shall be interested to read what the Sunday Times writes next week in the light of the information which it now has. I understand that the newspaper could quite easily have obtained that information, if it had done its homework well in advance at the time.

The young lady referred to in the article was called Helen Davis. The article stated that in Dixons: Davis was granted £1,500 of instant credit when she opened her Dixoncard account. Like many people I considered that to be an irresponsible action. Yet a retail finance organisation has informed me and other people that Helen Davis: Filled in a postal application—not instant credit—for a credit limit of £240. The monthly sum payable was £10. Identification was provided with a cheque guarantee/debit card. In the light of the conflict as regards, first, what happened and, secondly, what the facts are according to Dixons, we are not being very well served by some people who have a boat to push out on this issue. One must recognise that the incidence of credit is real and important, that it will not go away and that there are organisations which undoubtedly make it far too easy for the consumer to take advantage of what they have to offer.

I wonder whether the Minister will say something about the increase in the debt which is now hanging around the neck of owner occupiers who, of all classes of people, have been encouraged by the Government to trade up in respect of the houses they occupy. I hope that the Minister will say something about council tenants who are being encouraged to buy their houses. When one sees the great increase in debt that has occurred over recent years, which has, in effect, been generated by Government policies, I think the Government have a great deal to answer for.

I have an illustration from the citizen's advice bureau at Stoke-on-Trent. When it analysed the queries of 200 of its clients, 59 per cent. of the owner occupiers among them had problems as regards arrears with their mortgages. Of the council tenants who came to them, 44 per cent. had problems with rent arrears. When the figures were analysed further, 31 per cent. of the owner-occupiers were in arrears with a second mortgage or secured loan.

I know that my speaking time is almost up. I think that the Government must not be glib; they must not say that we are in a marketplace in which people are entitled to choose—although choice is the flavour of the month for this Government. I say that the Government have some responsibility to people who need protection not only from themselves but from some elements in our commercial community who are making it very easy indeed for ordinary people, who are desperate to maintain some standard of living, to get into trouble.

5 p.m.

Lord Peston

My Lords, we are indebted to my noble friend Lady Ewart-Biggs for introducing this debate. I am impressed not only by the debate in general but also by its non-partisan character. There have been a great many contributions from all parts of your Lordships' House with some or all of which I am able to agree. I expect that that is also true for other noble Lords. But that is not surprising. As noble Lords will recall, in the debate on the humble Address last week the noble Lord, Lord Vinson, said that many of your Lordships would share the universal anxiety that much money being spent is not consumers' own money but money which they have borrowed. Last week he went on to ask the Government—who after all are his friends—to examine and not to dismiss other forms of sensible control of personal credit. Similar points have been made by noble Lords this afternoon.

I am not opposed to credit or debt per se. I shall not moralise on that matter. It happens that personally I find being in debt quite horrible. I cannot cope with it, and on the whole I am not in debt. However, many of my friends seem to be perfectly happy being perpetually in debt and living on an overdraft without any other visible means of support. So I do not moralise. Credit is part of an advanced industrial society. It is a matter of degree, of control, and of its effect in terms of the behaviour of the economy.

We must not be naive about what is going on. The banks and the financial institutions find the provision of personal credit enormously profitable. They are in the business of offering personal credit. The retail firms are in the business of selling goods and services and they do it to make money. In so far as they offer credit, that is the reason why they do so. We should not be naive about that. It is perfectly clear what the forces at work are.

To be set against that we have heard suggestions that it would be better if consumers understood these things rather more; it would be better if the advertisements were clearer; it would be better if more advice were on offer. My noble friend Lady Lockwood referred to the DTI video. Of course we are in agreement with such measures; but in view of the force of sheer profitability on the other side, much as I support the suggestions, I do not believe that such measures will be other than quite minor in their effects on the problems—both economic and social—which have been mentioned.

That takes me on to the question of whether criteria or standards for the provision of credit have fallen. That is difficult to measure but we must use our common sense. I can only say that in my lifetime—in terms of the ease of obtaining a personal loan 20 years ago, 10 years ago and now—standards have certainly fallen. It was almost impossible for most people to get a personal loan 20 years ago, and for young people it was totally impossible. Again I do not moralise and I am not saying that it is altogether a change for the worse; but to suggest that there has been no change and that it is not easier is ridiculous: of course it is infinitely easier to borrow now.

It is also preposterous to suggest that the Government's financial deregulation, which has had many good sides to it, is not one of the underlying causes of what is going on. It is preposterous to suggest that at least some of the consumer boom that we have experienced is not credit-based. Of course it is credit-based. To the extent that financial policy is out of control—and it is—and to the extent that monetary policy is out of control with every single measure of money supply currently well beyond any targeted or desirable range, of course problems have arisen in this area for the economy. It is therefore not in the least surprising, and one does not have to be a monetarist, to note that the effect is both overheating, too high an inflation rate, and a major balance of payments deficit on current account.

None of us need doubt as the noble Lord, Lord Diamond pointed out, that because of the credit boom the structure of the system has gone wrong. I speak as someone who is not opposed to consumption per se; but there is excessive consumption and too little investment. For the Government to point to one year of investment boom as if that somehow makes up for all the earlier years of lack of investment is quite absurd. On that subject, I entirely agree with the remarks of noble Lords and in particular the noble Lord, Lord Ezra, that much more needs to be done to promote saving at this stage rather than consumption.

So the Government have created not merely the social and personal problems to which excessive credit expansion gives rise, but it has created overall a major economic problem. It has created it needlessly. We did not need to move at this pace. It was not necessary for the Government to give up all the means of intervention in financial markets which they gave up. Speaking as an economist, it was absurd of the Government to end up with just one weapon—namely, the interest rate—to deal with every economic problem confronting it. That has been referred to by noble Lords as a blunt weapon. I assume that it is the equivalent to the truncheon which was referred to.

It is a ridiculous state of affairs when there are other means, and obviously the old moral suasion of the Bank of England ought not to be forgotten. One hopes that that is being applied now. The suggestions that there might be a higher repayment fraction and—although it had not occurred to me until it was mentioned by the noble Lord, Lord Brocket—the minimum age at which one might borrow are relevant. There are a number of things that can be done.

Another point which I mention en passant, and which I often ask about, is the ease with which the use of credit cards has expanded compared with cheque guarantee cards. A cheque guarantee card, after all, is cash. One is paying with what one has. In real terms the £50 cheque card has declined enormously in the period since it was introduced. Therefore most of us are encouraged not to use cheques—cash that is guaranteed—but to use credit cards. I should have thought that the minimum intervention which might be required would be to restore the cheque guarantee card to its original real level.

I say that mischievously because I know exactly why the banks have no desire to do so. Cheque cards are not very profitable for them and they have no desire to do something that might help those of us who think that paying cash is better. However, the fact that the banks do not believe it is profitable should not hinder the Bank of England from saying that that is what they have to do. That is what governments are for, and that is what the Bank of England is for.

Baroness Phillips

My Lords, I hope my noble friend will forgive me. The banks do not want to increase the limit because if a cheque guarantee card is stolen they would have to honour £100 instead of £50.

Lord Peston

My Lords, that is what the banks say; but the banks are in the business of making money and not of worrying about social security. I might add that if it was right 20 years ago to have the higher real level, why is it not right now? Incidentally, one can also buy insurance against the theft of cards. I do not accept that argument at all. The answer is quite different, and it is the one that I gave.

I should like to say something about loan sharks, and add my support to those who have spoken on that subject. That criminal and evil activity is quite sickening. I simply do not understand this Government, which frequently intervenes in other areas of criminal activity, not intervening in this one. Why not this one? Why not give priority to this one? I should certainly like to see something much more reassuring on that point. However, I do not wish excessively to prolong this debate. As your Lordships will be aware from my interventions and indeed from the notes that they see in my hand, I too could say much more. I have certainly found the debate immensely interesting. However, I must end on one further pessimistic note. As an economist, it would be wrong for me not to do so.

The real point is that in the end the consumer boom although stimulated by credit, is predicated on the anticipation of higher and rising incomes and higher and rising wealth. In a sense one is saying, "Though borrowing at these ridiculous rates of interest, I shall subsequently have the income to finance that borrowing". The point is that in the way the economy works it introduces a stronger note of instability into the system because the moment that incomes are expected not to rise as rapidly and do not do so the major problem occurs of financing the existing debt. Incidentally, in terms of stimulus of demand in the economy a major problem emerges of the demand for goods and services falling and further precipitating a recession.

Having produced the boom, it is very difficult for us easily to come out of it. I simply warn noble Lords, without saying definitely, that we shall come out of this state of affairs with a crash. There are certainly dangers. The lending will be a good deal less comfortable and bumpier than would have been the case had we not let the expansion get out of hand in the first place. I repeat my thanks to my noble friend and say again how much I look forward to the Minister's answers.

5.12 p.m.

Lord Strathclyde

My Lords, I am grateful to the noble Baroness, Lady Ewart-Biggs, for raising this important matter today. We have had a most useful, wide-ranging and genuinely interesting debate on her Motion. If falls to me now to speak on behalf of Her Majesty's Government. I am sorry that in her opening remarks the noble Baroness said that she was disappointed not to see my noble friend the Secretary of State in his place. He is detained elsewhere. I hope she will not mind too much that I am here representing him today.

It appears that noble Lords have concentrated mainly on two different but related aspects of credit; namely, the level of credit in the economy as a whole and what is seen as its effect, and the problems of debt experienced by some borrowers. Perhaps I may most usefully begin by putting one or two things into perspective. The Government are fully aware of the current concern about the overall level of consumer debt—a concern which has been expressed so eloquently by a number of noble Lords this afternoon. Moreover, we appreciate the difficulties and anxieties which can be experienced by some individuals and families through over-indebtedness. I would not seek to underestimate that in any way. But in the national context I agree with many noble Lords, and with the right reverend Prelate, that the scale of the problem should not be overstated and that it should be put into perspective.

Let me deal first with the wider question of the amount of credit in the economy and with suggestions that there should be some form of credit control. As noble Lords no doubt will be aware, 80 per cent.—that figure has been mentioned throughout this debate—of borrowing by households is on mortgages. So credit control that applied only to the 15 per cent. of personal debt accounted for by consumer credit would just not work; and restrictions on mortgage lending would be neither fair nor necessarily effective.

Lord Diamond

My Lords, perhaps the noble Lord will forgive me for interrupting him, but he must make clear to the House that half of that mortgage interest leaks out into the consumption economy through some means or other.

Lord Strathclyde

My Lords, I am not sure from where the noble Lord has obtained his figure of half the mortgage spending. No doubt he has a source. As to the general part of his question, the proportion is far lower than the 50 per cent. he mentioned.

However, I should like to continue. It has been suggested, for instance, that mortgage lending could be limited to a maximum proportion of the purchase price. Such a control would be unfair, hitting first-time borrowers hardest. And those who had already had a mortgage for some time would probably have plenty of headroom to borrow more. But, as I have already said, it would also be ineffective because, especially in today's sophisticated financial markets, anyone who wished to do so could top up their mortgage loans from other sources, including, in the absence of exchange controls, overseas brokers and bank branches.

As other forms of consumer credit represent only 15 per cent. of personal debt, imposing restrictions on it would have a proportionately small effect, even if it worked perfectly. But the fact is that it would not work anything like perfectly. The old minimum deposit and terms controls on hire-purchase were becoming increasingly ineffective by the time they were abolished in 1982. Today, much less credit is linked to a particular transaction and, even where it is, any required deposit can easily be raised by borrowing elsewhere; for instance, on credit cards or an overdraft.

The general point about direct controls on lending is that they create inefficiencies and distortions in the market, and these act to the disadvantage of borrowers and lenders alike. They give unregulated (and often less reputable) lenders a competitive advantage and they mean that less well-placed borrowers are driven to more expensive sources of credit. The only effective mechanism for influencing the availability of credit is the price mechanism, which in this context means interest rates. That was mentioned by a number of noble Lords. I shall come to that point later.

Lord Ezra

My Lords, perhaps I may intervene. So far there is no evidence that that is working. How long does it have to take? I refer to a note in The Times yesterday showing that shop sales are at record levels. Every month we see that shops sales are at record levels. When is this measure going to bite?

Lord Strathclyde

My Lords as I said before I sat down I shall come later to the subject of interest rates. As for the specific question asked by the noble Lord, obviously we do not expect a downturn to occur immediately. It will take time. However, there is evidence to show that house prices have been slowing down considerably, which is a sign that other forms of spending will change dramatically in the future as well.

The noble Baroness, Lady Ewart-Biggs, asked some questions in particular about the borrowings and savings ratio. I feel that the noble Baroness gave a rather biased picture, as did the noble Lord, Lord Graham of Edmonton. It is necessary to consider all personal sector financial assets and liabilities. At the moment personal sector financial assets are three times greater than liabilities. They have grown by a total of £447 billion more than liabilities since 1979 despite the fall in the equity markets in late 1987.

I am not suggesting that lending to consumers is or should be unregulated. The fact is that in the Consumer Credit Act 1974 we already have comprehensive legislation which is in advance of that available in any European country. Perhaps it would be useful for me to remind your Lordships of the protection that consumers already have when borrowing money or using credit.

Before I do so I should like to reply to the noble Baroness, Lady Lockwood, who mentioned money management and the role of advertising. I am very pleased to hear that the Advertising Standards Authority is paying special attention to loan adverts. The proposals of the Department of Trade and Industry to require clear information about secured loans in advertisements recognise the urgency to make regulations. Indeed, revised regulations will be made as early as possible in 1989. The Consumer Credit Act ensures that consumers have full information. The noble Baroness, Lady Phillips, has mentioned this. The information must be made available to them before they enter into a commitment.

The measure provides a number of safeguards against unfair practices by lenders. It requires that the main terms of any agreement, including the annual percentage rate of charge (APR), must be set out clearly and unambiguously. Many noble Lords have criticised the APR but I believe that it is a very useful device to enable consumers to compare one form of lending with another. The legislation imposes controls on advertisements to ensure that they are not misleading, and it gives consumers the right to a cooling-off period when they sign agreements at home.

The noble Baroness, Lady Ewart-Biggs, asked why controls should not be put on lending. However, the Government feel that these are wrong in principle and ineffective in practice. In financial markets, as elsewhere, the best way to improve performance is by deregulation and the removal of artificial controls. With the increasing sophistication of the financial sector and the absence of exchange controls, such measures could not be made to work effectively.

Lord Graham of Edmonton

My Lords, the noble Lord referred to the APR being a handy reference point for consumers. Will the Minister say how the interest-free period within the first year will affect the real APR? If consumers need to understand that, is it not a powerful argument for better education on the subject?

Lord Strathclyde

My Lords, the noble Lord, Lord Graham of Edmonton, may well be correct when he refers to further education on the subject. I am not sure how he suggests that that should be done. However, his suggestions on how this kind of communication can be improved would be gratefully received by the Government.

Lord Graham of Edmonton

My Lords, I made one in my speech; namely, the encouragement and extension of consumer advice centres. No doubt he will refer to that in his speech.

Lord Strathclyde

My Lords, citizens' advice centres are only one weapon to use. I shall be coming on to that.

The noble Baroness, Lady Ewart-Biggs, referred to the story in the Sunday Times, as did many other noble Lords. I think that it has been dealt with very capably by my noble friend Lord Jenkin of Roding. I agree with him that there has been a great deal of exaggeration in the press. Like the noble Lord, Lord Graham of Edmonton, I await the response in the paper next week.

My noble friend Lord Rippon of Hexham spoke of alternatives to interest rates, saying that the increase in interest rates only increases inflation. But inflation as measured by the retail prices index, as we know, increases. I apologise, my Lords, I think that I am muddling my arguments. But the inflation rate increases following interest rate increases, since the United Kingdom, unlike most other countries, includes mortgages in the price index. I support my right honourable friend the Chancellor of the Exchequer in the belief that, in due course inflation will come down as a result of these measures.

Lord Rippon of Hexham

My Lords, I do not quite understand the reference to putting interest rates in the retail prices index. Whether or not they are put in the retail prices index, people who have their mortgage rate increased will ask for more money.

Lord Strathclyde

My Lords, I was making a general point that the retail prices index includes the mortgage rate. But I also take the point of my noble friend. Interest rates are an effective weapon against inflation and, in an advanced and mature market economy such as that of the United Kingdom, we believe that they are the only weapon.

Lord Brocket

My Lords, will the Minister explain why he says that they are the only weapon? Why cannot we use some form of credit controls? They have been used in the past. They have been proven to work. I cannot understand why the only weapon is interest rates.

Lord Strathclyde

My Lords, I do not know whether my noble friend Lord Brocket was listening a few moments ago. I said that controls on lending do not work because they are wrong in principle and ineffective in practice. We need to deregulate and to remove these artificial barriers. Consumers who are increasingly sophisticated will quite easily find their way around any artificial controls and barriers that we put up.

Lord Rippon of Hexham

My Lords, I am sorry to interrupt my noble friend yet again. However, will he give attention to the almost criminal rates of interest which are being charged in many cases? Are the Government prepared to control what is virtually criminal behaviour, or does he wish to deregulate crime as well as everything else?

Lord Strathclyde

My Lords, I do not know why my noble friend Lord Rippon states that these rates are necessarily criminal. I regard a high inflation rate as being genuinely criminal. We are trying to reduce the steadily but slowly rising rate of inflation by using the interest rate. We feel that in the long term high interest rates will be far less damaging than the resurgence of high inflation that we saw in preceding decades.

Lord Callaghan of Cardiff

My Lords, I am interested, because the noble Lord has twice stated that the introduction of the kind of proposals that the noble Lord, Lord Brocket, puts forward offends in principle. I often hear that argument from the Government. Would it be possible to explain which principle it offends? I have never been able to understand it.

Lord Strathclyde

My Lords, the Government have many principles. As regards the deregulation of financial controls, since the Government came into power they have always felt that the best way forward was to bring down as many of those artificial barriers as possible that had existed for many years before. That is what they have done and that is why they are committed to a policy of using interest rates as the main weapon against inflation.

My noble friend Lord Brocket stated in his argument that interest rates were a blunt instrument which hit industry in a particularly hard way. But interest rates are effective because they are comprehensive. The household sector is now, for the first time, a substantial net payer of interest. Therefore rises in interest rates are bound to have an effect on its overall spending.

It is also quite wrong to suggest that interest rates and a strong exchange rate are having a detrimental effect on industry. A 1 per cent. rise in interest rates, even if sustained for a full year, costs industry far less than a 1 per cent. increase in wages. As has already been pointed out, investment is booming. In the first nine months of 1988 it rose at an annual rate of 10 per cent. for manufacturing and over 15 per cent. for construction, distribution and financial services.

The noble Lord, Lord Peston, mentioned that the balance of payments deficit and the consumer boom were also due to easy availability of credit. But the current account deficit is due to a variety of factors, in particular a very buoyant growth of domestic demand. But it is quite wrong to think that all of this is due to consumption fuelled by credit itself. It is important to remember that investment is still very strong and this is the start of a genuine increase.

Perhaps at this moment I could return to the subject of current legislation dealing with credit. Comprehensive though it is, the Government recognise that there are one or two aspects which could benefit from being tightened. Several important changes are therefore being proposed.

First, in relation to secured loans, the Government accept that borrowers are in particular need of protection when staking their home as security. We are aware that the concept of a secured loan is not widely understood by borrowers. Terms such as "home owners only" in advertisements do not always sufficiently alert the borrower to what is at stake. The Government are therefore proposing that the regulations governing credit advertisements should be strengthened to require a clear warning in respect of secured loans that the borrower's home may be at risk in the event of failing to keep up the repayments on the loan.

There have also been problems in relation to brokers' fees. Some credit brokers have been charging consumers disgracefully high fees for arranging loans. In some cases the first that the borrower knew about it was when he received his loan minus the fee that had been deducted. The Government are therefore proposing that advertisements placed by credit brokers must state clearly whether a fee is to be charged, together with the amount of the fee and its method of calculation. It is proposed that in such cases the APR must be calculated so as to include the broker's fees.

The Government also propose to strengthen the provisions of the Act which deals with extortionate credit. The Act already allows the court to re-open a credit agreement which it considers to be extortionate. However, that can be done only at the request of the debtor. We accept: the fact that borrowers who enter into potentially extortionate credit arrangements are unlikely to be aware of their legal rights and are unlikely to be legally represented in any enforcement proceedings brought by the lender.

The noble Lord, Lord Meston, will be pleased to hear that the Government are proposing to amend the Act to allow a court to re-open an extortionate credit agreement, without being asked to do so. That would best ultimately be left to the court to decide on the facts of the case. What may be extortionate in one set of circumstances may not be so under another.

Finally, the Government are proposing to make some important changes to the consumer credit licensing system. The changes would enable the Director General of Fair Trading to take more effective and immediate action in those cases where a trader's activities pose a serious threat to the public. Under those proposals those engaged in lending money to the public would be more strictly controlled than they are now because their licences would come up for renewal every three years as against 15 years as at present. Although other categories of business would be relieved of the need to be licensed automatically, the director general would have additional powers to take action against any businesses in those categories whose activities presented a threat to the public.

The noble Baroness, Lady Ewart-Biggs, mentioned loan sharks, as did a number of noble Lords including my noble friend Lord Rippon of Hexham. We are currently reviewing credit licensing. We propose to increase protection for consumers by removing the £30 small loan limit. All lenders will therefore need to be licensed. However, the law as it stands regarding loan sharks is generally adequate.

It should be pointed out that unlicensed trading is a criminal offence punishable by imprisonment. Threatening behaviour or harassment should be reported to the police, although the Government accept that there may be problems in that area and that sometimes it may be difficult to enforce the law. Generally speaking, there is already an excellent working relationship between the Office of Fair Trading and local authority trading standards departments in the administration of the licensing system.

The existing consumer credit legislation and the proposals to tighten its effectiveness even further amply demonstrate the importance which the Government place on the adequate protection of credit users. However, the Government do not accept that there is anything intrinsically wrong or harmful in credit. Borrowing and saving are important economic activities and we should all be worse off if they did not happen. During their lifetime most people go through periods when they want to save and times when they need to borrow. The noble Lord, Lord Diamond, echoed Polonius in saying, "Neither a borrower nor a lender be". But people benefit from the existence of the free and efficient market in savings and loans.

I heartily agree with the view held by the noble Baroness, Lady Phillips, that there is a responsibility on borrowers. No one is forced to have credit cards. I commend her comments to my noble friend Lord Brocket concerning his staff. The Government are conscious of the useful work which is carried out by the Money Management Council of which the noble Baroness is president.

It is a fact that only a small minority of credit agreements give rise to difficulty. For instance, as my noble friend Lord Jenkin of Roding said, Barclaycard has recently estimated that less than 1 per cent. of its customers have a long-term repayment problem. That figure is currently falling. Against that background must be viewed the fact that borrowing on credit cards, which is often singled out as a particular cause of consumer debt, accounts for less than 5 per cent. of total consumer borrowing. Of that credit card debt, an increasing proportion of customers are now repaying their outstanding commitments in full every month. Barclaycard has stated over the past three years the number of their customers doing so has risen from 40 per cent. to 45 per cent. Those are matters for encouragement not for despair or alarm.

The noble Lord, Lord Diamond, said that we must save more and that we have too much borrowing. Recent increases in the interest rate are good news for savers in general. The Government recognise the importance of saving and have recently taken a number of steps to encourage that. For example, the Chancellor of the Exchequer recently announced a new National Savings product, a capital bond, to attract savings in particular.

The Government firmly believe that the ready availability of credit is a good thing provided that there are the kinds of safeguards for consumers that we have in this country. Nevertheless, despite such considerable safeguards it is inevitable that some people will get into difficulties. More often than not it is caused by events which happen after the consumer has taken out a loan, used the credit or mortgaged the house. Events such as redundancy, divorce, separation, injury, serious illness, death and so forth, can seldom be planned for but they can have a devastating effect on the income of a family or an individual. Such cases are not examples of irresponsible lending or reckless borrowing but pure and simple hard luck.

The noble Baroness, Lady Ewart-Biggs, and the noble Lord, Lord Graham of Edmonton, gave statistics from the Stoke-on-Trent CAB. We believe that it not particularly helpful to analyse the statistics of CAB clients in that way. After all, people would not go to CABs for money advice if they did not already have a debt problem. We do not see the significance of the figure of 59 per cent. owner occupiers in this context because, nationally, less than 0.6 per cent. of mortgages are over six months in arrears.

The Government are mindful of such cases, however, and they consider it important that people who get into serious difficulties of personal debt should be able to obtain good, independent advice and help with their problems. It is in everyone's interest that someone with multiple-debt problems should be helped to rehabilitate himself. The debt counselling services provided by CABs are extremely valuable in that respect. The Government not only value most highly the advice and help provided by CABs but they support the service in a real way. It is worth reminding noble Lords that the DTI finances the cost of the association in England and Scotland by a considerable amount. I have the figures on hand. I shall not state them here but they are considerably higher than they were in real terms. In England and Wales the contribution has increased by 165 per cent. and in Scotland it has increased by 232 per cent.

Before I finish it would be remiss of me not to mention the steps which are being taken by the credit industry itself to deal with some of the concerns which have been expressed by noble Lords today. Of course, lenders have a responsibility to adopt sensible lending policies. It cannot be in the lender's interest to lend to borrowers whose ability to repay is doubtful, and lenders are adapting their methods and introducing further safeguards to avoid over-lending. I hope that the noble Lord, Lord Meston, will find that fact encouraging.

Barclaycard rejected some 36 per cent. of applications in 1987. Most lenders now inquire about borrowers before offering credit. There are moves currently to broaden the scope of the information held by credit reference agencies to include details of individuals' current commitments. That would enable lenders to identify cases of multiple debt.

The Visa credit card issuers—

Noble Lords

Order, order!

The Deputy Speaker (The Earl of Listowel)

My Lords, the time allotted for this debate has now elapsed. Does the noble Baroness wish to withdraw her Motion?

Baroness Ewart-Biggs

My Lords, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.