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Correspondence from the Chief Executive of the Financial Conduct Authority Relating to Indebtedness in Young People, Dated 25 Oc

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Correspondence from the Chief Executive of the Financial Conduct Authority Relating to Indebtedness in Young People, Dated 25 Oc FINANCIAL CONDUCT R~~ AUTHORITY 25 The North Colonnade Canary Wharf London E145HS The Rt Hon Nicky Morgan MP Tel: +44 (0)20 7066 1000 Fax: +44 (0)20 7066 1099 Treasury Select Committee www.fca.org.uk House of Commons London SWlA OAA 25 October 2017 Our Ref: SA171020Z Indebtedness among young people Thank you for your letter of 18 October 2017 concerning indebtedness among young people. You have asked me to set out the evidence I have seen on the trends and causes of indebtedness in younger groups and how this debt is being used to fund essential living costs. You also ask for the underlying detail that our Financial Lives Survey was based on. Lastly you would like to know whether the FCA has looked at the macro-economic implications of this indebtedness and if so whether we have considered any solutions. Broad trends in credit use Consumer credit plays an important role in society by enabling borrowers to purchase goods and services and spread repayments over time and by smoothing more erratic income flows. Although consumer credit growth remains well above the rate of growth in household disposable income, the overall level of consumer debt relative to household incomes is in line with historical averages. For reference, I have included this chart in the appendix to this letter. More broadly, the level of household indebtedness, including unsecured consumer credit and mortgage debt, has risen over the past two decades primarily as a result of significant increases in mortgage debt. There are well known and established reasons why debt and savings levels vary quite consistently over people's lifetimes, something that is often referred to by economists as the life cycle model. Younger people and households will typically have higher levels of indebtedness relative to income than older households. The precise form of the life cycle model is evolving in the current environment of very low real interest rates alongside increasing longevity, to point to two major factors at work. These so-called inter-generational changes are profound and challenging. The FCA has a 'number of other sources of information on consumer indebtedness that help inform our work. We work with not-for-profit debt advice agencies such as Citizens Advice and Stepchange and their experience and analysis help us get a sense of the wider picture. Registered as aLimited Company in England and Wales No. 1920623. Registered office as above. After taking over the regulation of consumer credit firms, we have done further work on the way consumers use credit, for example through our Credit Card Market Study. I, along with the other Directors of the FCA, regularly travel around the UK and meet debt advice charities which has enabled me to speak to front line advisors, giving me a firsthand perspective on the issues facing consumers and the severe impact indebtedness can have. This has been invaluable. FCA experience of consumer indebtedness Issues relating to over-indebtedness are complex and involve multiple factors. People who are in difficulty with debt often have a large range of debts, including for utilities and to public sector bodies. We are seeing a picture where a far higher proportion of debts are on essential expenditure (so-called priority debts). I do therefore welcome initiatives such as the "Breathing Space". The Financial Lives survey (involving 13,000 people) offers useful context in relation to consumer credit among younger age groups, for example revealing differences between 18-24 and 25-34 year aids. Sixty nine per cent of 18-24 years hold credit or loan products, compared with 82% of 25-34 year aids and a national average of 78%. Both age groups are more likely to have been overdrawn at some point in the last 12 months on their current account than the general population (29% of 18-24s and 36% of 25-34s, compared with a national average of 25%). Indeed 25-34s are the second most overdrawn age group after the 35-44s (38%). I have attached three charts from the survey (involving 13,000 people) showing potential vulnerability, difficulty in servicing debt and over-indebtedness, all by age. Ideally, we would have a time series of these measures to show changes, but our survey is a new initiative by the FCA, so that will take time. But the survey does give an insight into debt levels and the makeup of debt, by breaking down debt into different categories, such as personal loans. Mean unsecured debt levels, including Student Loans Company (SLC) loans, are highest among these two groups (£8,750 for 18-24s and £8,250 for 25-34s). However, their mean unsecured debts excluding SLC loans are much lower. Those aged 18 to 24 have the lowest mean unsecured debt (£1,460) apart from those 75+ (£540). The situation looks different for 24-35s, who have the third highest mean unsecured debt excluding SLC loans (£4,200), close behind the 45-54s (£4,910) and 35-44s (£5,130) age groups. According to the survey, the 25-34s age group appears to be most likely to be in financial difficultyC1J (13%) and the most likely to be over-indebtedC2J (23%) in comparison with all other age groups. I have set out these differences along with further data and analysis in the appendix to this letter. As supporting information on these points and to add further detail to that already available in Financial Lives, we have also made available on our website the very large amount of data contained in the survey. In addition to our own work to understand these issues, these findings have been supported by the experience of not-for-profit debt advice agencies, who we engage with through our partnerships work. As an example, Christians Against Poverty state that in 2006, on average, non-priority debt accounted for 85% of of an individual's total outstanding debt, and priority debts accounted for 9%. In 2016, priority debts accounted for 32% of an individual's indebtedness and 70% of clients reported falling behind on them. ui Payments for any credit commitments and/or any domestic bills have been missed In any three or more of the last six months c21 Term adopted from the Money Advice Service to describe having one or both of the following characteristics: keeping up with domestic bills and credit commitments Is a heavy burden; payments for any credit commitments and/or any domestic bills have been missed In any three or more of the last six months StepChange have also reported 1 that 63% of their clients in the first six months of 2017 were under 40, a proportion that has grown over the past five years. There is a lot we have done and will continue to do to understand the use of credit and its impact. Since the Financial Conduct Authority (FCA) took over regulation of consumer credit in April 2014, we have focused in particular on products that we believe pose the highest risks to our consumer protection objective, including high-cost credit. We have already taken important steps to address the risk of consumer harm from these products. This has included the introduction of the price cap for High Cost Short Term Credit lenders and other measures specific to the sector, for example, caps on rollovers and restrictions on the use of continuous payment authorities. Our Credit Card Market Study identified significant concerns about the scale, extent and nature of longer-term card debt. We are implementing a package of remedies, including proposed new rules to address persistent credit card debt and requiring firms to assess whether customers are at risk of developing financial difficulties and intervene appropriately. We also want to ensure that customers - especially those at risk of debt problems - are not given unaffordable credit limit increases and have proper control over their credit limits. We will monitor the implementation of these remedies and their outcomes, and take further action if necessary. Drawing on our experience from our credit card work, we will also consider long term use of high-cost credit and what we can do to ensure that consumers are appropriately protected and not trapped in a long term cycle of high-cost debt. We have identified a number of issues which could cause consumer harm, and will consult on proposed solutions by next Spring. The macro-economic implications and the Financial Policy Committee (FPC) The FCA does not have a macroeconomic objective. But I can offer my view as a member of the Bank of England Financial Policy Committee. The FPC noted at its September meeting2 that domestic credit has grown broadly in line with nominal GDP over the past two years. Consumer credit is an important determinant of banks' ability to withstand severe economic downturns, and can therefore pose a risk to financial stability through losses to banks in such a downturn. The FPC has set out the actions it has taken to mitigate this risk, including bringing forward its assessment of the losses the banking system would incur on consumer credit in its 2017 concurrent stress test scenario. I would agree with the point made at a recent hearing by Mark Carney, namely that the macroeconomic picture on the sustainability of household debt is supported by the level of employment and the low debt service ratio. As he noted, the FCA's responsibilities focus on protecting consumers, and thus primarily on firms' conduct at the individual customer level. Our responsible lending rules require firms to assess a consumer's creditworthiness, including the affordability of credit, before entering into a credit agreement.
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