Plastic fantastic?

Dear Ian,
Britain is now an indebted society. In the run-up to Christmas, it is natural to use credit cards to see us through, but increasing numbers of people are coming to rely on expensive credit from banks, your members, to pay off everyday bills. One in five of us has a credit card debt of more than ?2,000. Don't get me wrong - credit can be a boon and a convenience. But, as MPs report this week, it is clear that banks are making profits hand over fist at the expense of consumers, because your members are still not being clear and upfront about the charges.

But what is going to be more destructive of people's lives is the way that credit is being pushed to a minority of more vulnerable consumers, where the loss of a job, a downturn in property prices or simply a hike in council taxes tips people into the trap of overindebtedness. I am not saying that the main banks are always the worst offenders but, alongside the rest of the financial sector, your members are pushing credit, with no less danger than the pushing of drugs.
Yours,
Ed

Dear Ed,
The vast majority of the UK population use credit as a valuable tool to help balance the financial peaks and troughs of life. With personal assets increasingly locked into property equity, it makes sense to consider borrowing responsibly against this new-found wealth when the need arises. As Gordon Brown also said this week, household wealth has risen by 50% since 1997, whereas household debt as a proportion has stayed the same.

Usually, people get into difficulties with debts because of a life-changing event such as loss of employment, divorce or bereavement. Banks work with and pay towards the free independent money advice sector to help people like this. They also work with other bodies to provide financial education both to children and adults.

Whilst there is a tiny minority addicted to credit, banks offer services which the vast majority of people choose to help manage their lives. And because the market place is so competitive, consumers can even pick up deals which give them free credit. Around half of credit card users, for example, pay off their monthly bill in full each month, giving them free credit for a month. Far from being detrimental to society, the banks contribute massively to the UK on a number of levels. Would you dispute the importance of the credit market and the banking sector to the economy? Where would the economy now be without the level of consumer borrowing that currently exists?
Yours,
Ian

Ian
So, we agree on one thing. There are some people, certainly a minority, that are now addicted to credit. That is a pretty major admission from you, particularly when these are people that continue to get offers of new loans coming through their letterbox on a daily basis. Yes, that comes in part from having a more competitive market. But, for some, that simply means more straws for the camel's back.

This is not about whether credit is a good thing or a bad thing, as if economics was a Christmas fairy tale. It is about whether banks have a basic responsibility to ensure that what they offer is suitable for the people they are selling to. And whether you are upfront enough about the hidden charges and small print loaded onto consumers.

I do think banks are important, by the way. My granddad was a banker - well, a clerk really. He worked his life in a branch. With a disability, he wasn't going to get promotion. If anything, banks are too important - that's why the National Consumer Council keeps an eye on you!
Yours,
Ed

Ed
I repeat, there is a tiny minority that needs help, but they are identified and there are a host of advice and counselling services and systems in place to deal with their individual circumstances, much of its funding contributed to by the banks, as you know. Let's agree that we have closure on this point.

However, you go on to confuse the offering of credit with the granting of it. People receive just as many offers from other industries such as the travel sector, but likewise they are under no obligation to take them.

Let's be clear, banks are responsible lenders and they assess their customers' ability to repay before lending, as it isn't in anyone's interest to lend money to people who cannot afford to repay. However, banks do have a duty to balance the provision of appropriate advice with the customer's need for freedom of choice. I would say this is the issue of the moment.

Whilst there is much that addresses these issues in the Banking Code, you must also be aware that improvements have been agreed, such as the honesty box for credit card promotions. In other words, the industry has recognised that this is an area that needs attention and measures are being put in place.

On your last point, I see we come from similar backgrounds. And I agree that modern society needs a professional and effective consumer lobby, which in the UK's case, complements the most effective banking industry in the world. However, I also welcome the NCC's change of focus towards educating people to help bring them into the financial mainstream, rather than on whether specific products are appropriate or not.
Ian

Ian
Let's not paper over the cracks. There are up to six million people with unsecured credit balances between ?10,000 and ?40,000, averaging ?25,000. Perhaps one million of these has a low income and a mortgage. We don't know the degree of overlap between sub-prime (ie higher risk) mortgages and unsecured credit. We have good aggregate data on household assets and levels of debt, but we don't have accurate figures broken down by socio-economic group.

Meanwhile, the heroic advice services you refer to are understaffed, patchy in areas, and reporting a fivefold increase in debt problems over recent years. Certainly, if products were better designed and targeted, it would stop some people getting into trouble.

We are in uncharted waters. There is a lot we don't know and can't predict (whether for better or for worse). But I accept that you and I are disagreeing about the scale of the problem, not whether it exists and that must be welcome. I notice, though, that your own members can't agree in the same way. One high street bank says "relax", the other talks of "financial nemesis" for consumers.

The Treasury Select Committee report is a hard-hitting read on charges and irresponsible lending. It also debunks the nonsense that hundreds of credit cards and generous introductory offers amount to a competitive market. As you say, the Banking Code needs an overhaul. Are you drinking in the last chance saloon?
Yours,
Ed

Ed
Let's keep a perspective. Listening to those undeniably informed, neither Gordon Brown nor the Bank of England would agree with your sums. Are you saying that people on a low income should not be given the opportunity to enter the property market?

I'm not sure that there's too much to gain by averaging unsecured balances to build an argument that as a nation we are on the verge of an indebtedness crisis. Notwithstanding, current interest to income ratios and the impressive growth in household wealth more than balance your arguments.

You know we work closely and comprehensively with the money advice industry and Government to fix what you dismiss as patchy delivery, so do you want to be a player or a spectator? Because it sounds like you are dismissive of the whole regime. I also await your further comments on the perfect lending product that attracts no risk. Enough of the posturing, tell me your three-point plan to alleviate overindebtedness and we can move the debate forward.
Best wishes,
Ian

Ian
You are losing the Christmas spirit. The Bank of England has made sensible cautionary comments on borrowing. Gordon Brown has been as energetic as any chancellor on the failings of the banking sector - from small business lending to payment systems. And the National Consumer Council helped to found the Money Advice Association and the principle of advice for all as a right of citizenship. So we are not alone, and neither are we a spectator.

But I agree that action is what we need. So, here are three points for starters: 1. Cut out the restrictive terms, small print and exit charges that bedevil products like credit cards and payment protection insurance. And encourage the big boys to cut APRs and overdraft rates to fairer levels compared to interest rates and others in the market; 2. Agree to cut back on unsolicited increases in credit limits; 3. Get the government to overhaul the Social Fund, designed to give emergency cash as a lifeline to those on benefit, so it fits into the modern world of credit and debt.

Will you add three to these, Ian?
Ed

Ed
Your first two points are all about greater transparency, and, as I said, the industry is already working towards improving this. The Banking Code is about to be reviewed and we see your input into this as crucial. With regard to the social fund, we share your view and you can count on our support.

Our three priorities are built around bringing people who have been financially excluded into the mainstream. We think this is far more positive than denying them access to products. The first two key elements to this are financial inclusion and financial education.

The scale of this year's changes - with 17 banks offering basic bank accounts via 17,000 Post Office branches - is a major achievement by government, the Post Office and the banks. Six million plus basic bank accounts have now been opened. At the same time, our work with other stakeholders in driving up financial capability in children and adults is clearly a key part of this, and here we will continue to work with you and other stakeholders.

The third element is that the loan shark market will be hardest hit as banks lend more responsibly, financial awareness improves and there is greater financial inclusion in mainstream financial services.

Now, that would make a real difference to those most at risk in society.
Merry Christmas,
Ian

· Ed Mayo is chief executive of the National Consumer Council; Ian Mullen is chief executive of the British Bankers Association.