Brown Must Tackle Imbalance Towards Borrowing

10.35.00am BST (GMT +0100) Wed 28th Jul 2004

Liberal Democrat Shadow Chancellor, Dr Vince Cable MP, urged the Chancellor and the Governor of the Bank of England to address the imbalance in incentives in the banking system towards the promotion of debt rather than saving.

Today the Bank of England will announce that the British people have debts of a staggering £1,000,000,000,000 (One trillion Pounds Sterling).

Commenting on these figures Dr Vince Cable MP said: "British consumers have been on the biggest borrowing binge in history. The ratio of debt to income is at unprecedented heights, which are only sustainable if interest rates remain unusually low. 80% of the debt is secured against house prices, which the Governor of the Bank of England and the IMF believe to be seriously overvalued.

"There is a fundamental imbalance in the economy which encourages us to borrow more. Supposed interest free loans, mortgages with flexible repayment schedules and credit card companies with lower interest payments are all ways of encouraging us to keep borrowing.

"The banks are adding fuel to the fire by setting aggressive sales targets to employees for products including loans. It has been reported that HSBC, Lloyds TSB and Barclays all have employee incentives for promoting personal loans (1)."

Dr Cable called on Gordon Brown and the Bank of England to take responsibility for reining in irresponsible lending.

"Incentives placed by banks on employees to sell borrowing needs to be addressed so that employees do not feel compelled to give loans to those who may be unable to repay them.

"The Citizens Advice Bureau and other advice agencies have already reported an increase in referrals. Rising interest rates, falling house prices, and mounting personal debt are all danger signs for the British economy - and a downturn could lead into serious financial difficulty for many.

"I have presented Gordon Brown with a ten-point plan for tackling household debt. The proposals would result in a sustainable borrowing framework that protects consumers from unsustainable levels of personal debt, and protects the financial services industry from the damaging threat of a boom and bust economy (2)."

Ends

Notes

1) Reported by Banking Union UNIFI in Observer 25th July 2004

2) The Liberal Democrats' ten-point plan for dealing with household debt includes:

1. The publication and monitoring by the government along with the Bank of England and the Financial Services Authority of measures of sustainable household debt, along the lines of the government's own fiscal rules.

2. Guidance to banks on safe to loan value ratios and income multiples for mortgage borrowers based on independent assessments of asset values by a group operating in a similar manner to the Bank's Monetary Policy Committee.

3. Active use of reserve deposits to reduce destabilizing boom and bust in mortgage lending.

4. Curbs on the tidal wave of unsolicited credit promotion by demanding a prominently displayed 'Credit health warning' .

5. A crack down on exploitative loan sharking, with promised legislation on consumer credit to tighten up on the issuing and monitoring of credit licenses, coupled with harsher penalties for those guilty of bad practice.

6. Stopping early, often hidden, redemption penalties, so as to discourage the early clearance of debt.

7. Stronger enforcement of OFT rules to prevent abuses associated with misleading advertising by debt management and advice services.

8. Excessive interest rates on store and credit cards to far more vigorously policed by the competition and trading authorities.

9. An extensive network of centres for independent, low cost, financial advice supported by credit providers and the investment industry.

10. Widening the remit of the social fund to permit emergency short term lending in a reaching fund for low income families in financial crises.