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2.3 Liberalisation in the financial services industry

We’ve already touched upon the changing social and economic context by looking at the growth of debt in relation to income and the way that debt impacts upon different types of household. Yet there are other aspects of the social and economic context relevant to understanding debt. One of the most important was the liberalisation of the UK financial services industry. This process brought about great change within financial services and dated back to legislation passed in the 1980s. This included the Financial Services Act 1986, the Building Societies Act 1986, and the Banking Act 1987. Together with policy changes by lenders, these acts prompted the diversification by financial institutions into various new activities; relaxed rules on the use by lenders of borrowing from other financial institutions in the world’s financial markets to finance their personal lending, and encouraged greater price competition among lenders.

Financial services liberalisation has encouraged price competition
Figure 3 Financial services liberalisation has encouraged price competition among lenders and shopping around by borrowers

These developments led to a very different environment from that prevailing in the 1970s. Then, credit and store cards were only starting to emerge in the UK. Most mortgage lending was carried out by building societies while the banks largely limited their personal lending activities to providing overdrafts and personal loans; boundaries were clearly drawn. Other features of financial life before the 1980s were starkly in contrast with life in the mid 2000s. Lenders were less proactive in encouraging debt, and marketing was limited. Borrowers expected to have a long-standing – if not lifetime – relationship with financial institutions: one bank for banking and loans, one building society for a mortgage. When seeking a mortgage from a building society, borrowers were often expected to have a savings account with the same lender. Even after having their mortgage applications approved, borrowers sometimes had to queue for funds until these were available for advancing. By the mid 2000s, it was common for households to have multiple relationships with different lenders.

Accompanying this more competitive environment has been a greater emphasis on marketing. Some newer entrants to the UK credit card market introduced more aggressive marketing techniques and offering interest-free periods to woo consumers (but often with ‘catches’), and higher credit limits, including some limits increased with no reference to the borrower. Marketing is used by companies to encourage people to buy goods and services; it’s now common for banks and other lending institutions to advertise ‘sales’ for their debt products in much the same way as traditional high-street stores selling jeans and trainers, for example, might have January sales.

Consequently, it can be argued that the liberalisation of the financial services industry in the UK is linked to the consumer society: the increased availability of debt products helps to provide the money that fuels immediate consumption. One partial explanation for people’s willingness to borrow is that there has been a shift from deferred gratification, where one might save before purchasing a good, towards immediate reward, obtained through using credit (Lury, 2004). It’s possible to see the strength of this argument in practice when you consider the number of adverts encouraging you to ‘buy now and pay later’.

This discussion can be carried a step further: it can be claimed that the financial services industry is not simply meeting the demand for debt, but it is part of a process which encourages debt. There is some evidence to support this argument. For instance, a study in the USA found that increases in credit card limits, 90 per cent of which are initiated by the issuers rather than card holders, generated an immediate and significant rise in debt (Gross and Souleles, 2002).

There are also claims that the liberalisation of financial services has not made the debt market as competitive as it would appear. The Competition Commission found, in a report into store cards, that: ‘there is an adverse effect on competition in connection with the supply of consumer credit through store cards and associated insurance in the UK’; this report also found that the charges on store cards were ‘on average some 10 to 20 per cent higher across the store card market as a whole than they would have been had they reflected providers’ costs, including the cost of capital’ (Competition Commission, 2005). In essence, this is arguing that there is a lack of competition in the provision of such cards, and that consequently the charges for them are higher than they need be. The report suggests that the estimated cost to cardholders in terms of the excess prices paid for credit and insurance was in the region of £80 to £100 million a year.

Liberalisation also tends to be accompanied by increased regulation. The Office of Fair Trading (OFT) and local authority Trading Standards Departments enforce the Consumer Credit Act 2006. The 2006 Act amended the Consumer Credit Act 1974, which had started to come under increasing strain in the 1990s and 2000s and was arguably unable to cope with the more liberalised debt market. The 2006 Act regulates consumer credit and consumer hire agreements and lays down rules covering issues such as: the form and content of agreements; what can and cannot be stated in advertisements for debt products; and the procedures for debtors to challenge unfair relationships with creditors. The Act requires lenders to provide annual statements for some types of loan and more information to be given to customers who are not keeping up with their payments. The 2006 Act also increased the number of credit deals that are regulated.

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