A major debate has opened on the issues of access to credit and the cost of that credit, writes Paul Joyce, but the debate is not without confusion.
The Central Bank produced some alarming figures this week which showed that, over Christmas, consumers put €166 million more on their credit cards compared to Christmas 2005.
In total, shoppers charged €1.2 billion to their credit cards during December and at month's end the credit card debt stood at €2.7 billion.
The growth in credit card debt would be mirrored by an increase in debt to financial institutions as a whole. But those borrowing from financial institutions have a degree of protection which is not available to borrowers whose circumstances oblige them to avail of the services of money-lenders.
It is appropriate therefore that a major debate has opened on the issues of access to credit and the cost of that credit. The debate so far, however, is not without some confusion. The Minister for Social and Family Affairs, Séamus Brennan, announced last October that he intended to introduce legislation that would put the Money Advice and Budgeting Service (Mabs) on a statutory footing. This is a welcome move as the ongoing necessity for good quality money advice for those in debt is clear.
As part of this legislation, he also laudably announced that he wished to "confront the totally unacceptable high levels of interest being charged by financial institutions and companies on loans to those who are often most vulnerable in society, particularly those on welfare and low incomes".
Mr Brennan recently announced his intention to put Mabs on a statutory basis. However, on this occasion he added that as part of this legislation, he intended to include a section that would give Mabs a role in deciding whether a moneylender should be granted a licence or have a licence renewed by the Financial Regulator on the basis of proposed rates of interest and past record.
Significantly, the previous reference to unacceptable high levels of interest being charged by financial institutions seems to have gone by the wayside. The focus appears to have shifted to licensed moneylenders only. Other high-cost credit providers seem to have escaped potential control. In any case, no detail of how this might be done was provided and such a strategy may be fraught with difficulties. Money advisers will invariably from time to time have clients who are in debt to licensed moneylenders and will be attempting to negotiate affordable repayments with them. To then suggest that the same service might have a role in the decision-making process on licences would leave it open to allegations of a conflict of interest.
Equally, it is far from clear that Mabs would welcome such powers. In any case, the present system already allows any person (including a Mabs money adviser) to object to the granting of a moneylender's licence. One also wonders where the Department of Finance and the Financial Regulator's office, from whom the silence has been deafening, stand on these issues.
Has the Minister for Social and Family Affairs received Cabinet approval to introduce such a measure?
Licensed moneylenders certainly provide expensive credit and there is a good case for far more rigorous control of the rates of interest they charge. However, they are for many a vital and only source of credit and before taking steps that might potentially lead to the reduction of that option, the Government should be satisfied that the extent of the problem and how it can be redressed has been thoroughly researched. It must also be said that licensed moneylenders are an easy target, being often associated in the public mind with usury and loan sharks when they are in fact commercial entities regulated by the State.
The recent debates have also seen high rates of interest quoted in dramatic terms, frequently omitting to mention that these are APR (annual percentage rate of charge) interest rates, an accurate method of calculating the cost of credit that is only valid when comparing like with like. Put simply, a loan of short duration provided by a licensed moneylender (say €200 to pay back €260 over 26 weeks) will invariably involve a high APR, in this instance 96.2 per cent. A 20-year mortgage that involves repaying over twice the amount borrowed will carry a low APR, generally about 4.5 per cent. In essence, it is all about how long you have the use of the money.
While the focus remains on licensed moneylenders, another subject of the Prime Time special, the sub prime-lender, seems to have gone off the Minister's radar. Sub prime-lenders provide loans at above market rates to people whom they deem, according to themselves, to be credit risks or who have a bad credit rating. The personal loan rates may not be so dramatic but with the period of the loans much longer and the amount to be repaid ultimately far greater, the cost of credit is just as excessive. Equally, the hard sell of payment protection insurance at equally high rates of interest relieves the lender of much of the risk but this is not passed on to the borrower.
Other such lenders provide loans at high rates secured on property to persons on moderate incomes and are not slow to foreclose when a default occurs. The Minister has become fond of saying that "the poor pay more", borrowing from the title of a report issued by the One Parent Exchange Network (Open) in association with Mabs in 2005 and what evidence there is confirms this. This being the case, the debate should be about a range of affordable credit options being provided to people on low incomes and not just curtailing the charges of licensed moneylenders.
The credit union movement needs to further develop its social funding role here, but neither should the associated banks escape a social responsibility to provide small loans at reasonable rates in view of the vast profits that they return. Indeed, the mounting anecdotal evidence is that in many instances, persons with limited incomes are receiving disproportionately large amounts of credit from banks. Equally, credit card companies are flooding the market with plastic and persons on very moderate incomes have access to dangerously high credit limits. Default in payment and legal proceedings often follow.
Finally, it must be asked what the State itself is doing in terms of providing access to low cost credit to those in crisis debt situations? Reform and development of the "urgent needs" loan scheme operated through the Health ServiceExecutive for the Department of Social and Family Affairs should be examined.
The past decade has seen a massive increase in the provision of consumer credit in Ireland. This has happened at breakneck speed and with little by way of discussion on the costs, financial and otherwise. New providers, some licensed in other EU member states, have created a growing sub prime market. The mantra that competition will protect the consumer no longer applies in many cases. Over-indebtedness is increasing in tandem with European Central Bank interest rates. In terms of controlling the cost of credit, regulating the activities of all credit providers and promoting responsible and appropriate access to and provision of credit, it is now time to take a longer-term view, with legislative intervention where necessary.
Paul Joyce is the senior policy researcher with FLAC (Free Legal Advice Centres Ltd).