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2 Exploration of debt

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.

2.4 Structure of the financial services industry

Although the global financial crisis which began in 2007 wrought havoc with the UK
financial services industry, the sector has continued to be dominated by banks. This
domination had been reinforced by the conversion of most of the large building societies
to banks in the 1980s and 1990s – although all those that did convert were subsequently
either acquired by other banks or, in the case of Northern Rock Bank and parts of
Bradford & Bingley Bank, taken into public ownership during the financial crisis.

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