Archbishop - Protect the Poorest From the Effects of Economic Downturn

Palace of Westminster from Lambeth Palace

Speaking in the House of Lords the Archbishop highlighted the fact that government targets on alleviating poverty, particularly child poverty, risked not being met and warned that in a period of economic decline the poorest in society, who carry a higher proportion of personal debt, were most at risk. In the debate, called by the Archbishop, he suggested ways in which government might help low income families avoid entering into cycles of unsustainable debt -by improving  financial education in schools, enforcing tighter controls on doorstep credit agencies and by helping to foster responsible alternatives to doorstep lending, such as those offered by Credit Unions.

The debate was entitled "The Archbishop of Canterbury, to call attention to the impact on the family of economic inequality, credit and indebtedness; and to move for papers."

In his speech the Archbishop talked about the 'poverty trap' and the effect this has, particularly on children:

"One of the matters I wish to underline in this debate is that, because of a variety of problems around debt and credit, children in poverty are in fact caught in a particularly toxic version of the 'poverty trap': families with children face heavier pressures in regard to basic expenditure, pressures that push their outgoings beyond their weekly income levels.  And this is not to do with purchasing luxuries: it is a matter of school uniforms, adequate diet and heating in the home, access to routine leisure activities (how much does it cost to travel to the nearest swimming pool?) and so on – never mind the extra expectations around Christmas or birthdays. ... "

He called for greater financial education to help prepare young people understand the risks of borrowing:

"There is an urgent case for more support for financial education in schools and FE institutions.  Young people are vulnerable to considerable pressure – sometimes from banks themselves – to embark on risky and costly ventures into borrowing.  They need skills in assessing risks, in interpreting borrowing conditions, in factoring in to their decisions some better awareness of the uncertainties of the whole system. And this needs to start early. The present situation is not good.  It is estimated by Credit Action that less than 5% of secondary schools in this country give anything like adequate priority to education in money management as part of their citizenship and PHSE curriculum." 

He spoke of how Credit Unions provided a better, alternative source of credit for borrowers, encouraging the government to do more to foster their growth:

"... one of the most effective agencies we have in reducing unmanageable debt and developing the skills that help people avoid the worst traps of the credit business.  I refer of course to Credit Unions ....... The work of Credit Unions is still all too little known in most of the UK – though there are 172,000,000 members of unions worldwide, with over a quarter of the populations of the US, Canada and Australia being members. The potential is enormous. It is evident at the simplest level in terms of the financial burden involved in the arranging of a loan: the Credit Union makes no charges for arranging this, includes loan insurance at no extra cost and has no penalties for early repayment.  Even the most reputable home credit company will be about a third more expensive than a Credit Union.  Increasing numbers of Unions organise Child Trust Funds and ISAs, and provide special Christmas accounts to help prevent seasonal debt.  Some have effective partnerships with local CABs and housing associations, and there is some highly imaginative work through schools to promote financial literacy."

The Archbishop warned of the dangers of the doorstep lending in relation to excessive charges and rates of interest, and praised the campaign 'Debt on our Doorstep' for their work in calling for:

"... tighter regulation of the lending market, with a proper investigation of payday lending and a cap on charges. The Consumer Credit legislation of 2005 built helpfully on the last review of practice in this area by the DTI and other agencies, but shied away from a ceiling on interest rates.  While there is debate about the effects of capping interest rates in the world of home credit, with some arguing that it could encourage unofficial practice even worse than what now prevails, there is a growing consensus that a situation in which charges can legally be as high as they are in the world of doorstep lending is indefensible: it gives the message that borrowing is a business in which you can only be a long-term loser, and so gives a further turn to the despair and low self-esteem that afflicts those caught up in the debt spiral"

He said that more could be done to regulate the worst excesses of parts of the industry, suggesting that:

"a sharper regulation of the terms and methods of advertising for doorstep credit, which at present is often deliberately unclear about charges and rates of repayment, would bring some checks upon what is increasingly seen as an open scandal

The Archbishop also welcomed government attempts to combat poverty but pointed out that current targets were unlikely to be met on child poverty - an issue likely to be taken up by over 45 major NGO's in 2008 under the umbrella coalition of the 'Get Fair' campaign:

"We can applaud the declared aim of the Government, stated in 1999, to halve child poverty by 2010, but we have to recognise that this goal is sadly unlikely to be attained on present showing.  So serious is the prospect that over 45 major NGO's are launching later this year a national campaign, 'Get Fair', aimed at galvanising once again the commitment to end child poverty by 2020, the date originally set – and at tackling the negative and unjust image of people living in poverty that prevails in a worryingly large percentage of the population."

The full transcript of the speech is below:

Your Lordships will need no reminding from me of the present crisis around credit in our economy, indeed in the global economy.  Daily headlines highlight the effects of the 'credit crunch' on average incomes and home prices.  What they do not always underline is the disproportionate effect of this on those in our society who are already most disadvantaged – and in particular the effects on vulnerable families.

Even before the current crisis, the situation was disturbing enough.  The estimate that almost one third of children in the UK are living in poverty is a statistic that ought to be shouted from the housetops: we can applaud the declared aim of the Government, stated in 1999, to halve child poverty by 2010, but we have to recognise that this goal is sadly unlikely to be attained on present showing.  So serious is the prospect that over 45 major NGO's are launching later this year a national campaign, 'Get Fair', aimed at galvanising once again the commitment to end child poverty by 2020, the date originally set – and at tackling the negative and unjust image of people living in poverty that prevails in a worryingly large percentage of the population. 

One of the matters I wish to underline in this debate is that, because of a variety of problems around debt and credit, children in poverty are in fact caught in a particularly toxic version of the 'poverty trap': families with children face heavier pressures in regard to basic expenditure, pressures that push their outgoings beyond their weekly income levels.  And this is not to do with purchasing luxuries: it is a matter of school uniforms, adequate diet and heating in the home, access to routine leisure activities (how much does it cost to travel to the nearest swimming pool?) and so on – never mind the extra expectations around Christmas or birthdays. A recent (2007) report commissioned by Barnardo's quoted a mother facing a choice in winter between putting the fire on and using the cooker to prepare a meal.  Households using pre-payment meters, incidentally, are generally reckoned as 'fuel-poor', (i.e.with over 10% of household income going on fuel) because the expense of this system is so much greater than payment of fuel bills by direct debit – impossible if you have no reliable credit arrangements, of course.  The Government's pledge to tackle the issue of fuel poverty in the recent Budget is a welcome if overdue recognition of the scale of this problem.

The results of living in such a trap are long-term.  The Children's Society's Good Childhood Inquiry, of which I have the honour to be patron, has tabulated evidence of the outcomes in adolescence and early adulthood of child poverty, including a lower likelihood of planning to marry, and a belief that health was a matter of luck – unhappy auguries for the stability and welfare of the next generation.

But the more immediate consequence of situations like this is that such families are far more likely to resort to borrowing, and to what might be called 'panic borrowing' – that is resorting to whatever means of credit they can discover, by word of mouth or advertisement.  If they then borrow from 'doorstep lenders', even relatively reputable companies (and there are plenty of others) will impose interest levels whose impact is crippling.  The cycle of financial deprivation and anxiety is continued and the vulnerability of children in such a family situation is intensified.

It is not surprising that – to use figures extrapolated from a Bank of England report on Financial Pressures some few years ago and circulated by Church Action on Poverty – households with an income of less than £12,000 have unsecured debts corresponding to an average 36% of this income (the figure for households with over £50,000 income is a little over 12%).  These percentages have increased dramatically for low-income families in the last decade, more than doubling for the lowest sector.  Apart from the bare fact of chronic financial insecurity, the effect in terms of mental health is increasingly serious.  There is still a stigma attached to unsecured debt in any case; being caught in the spiral of indebtedness produces depression and demoralisation, stress on relationships and on consistent and responsible parenting, with an intensified risk of so many of those things which we currently spend millions of pounds trying to eradicate – underachievement in schools, teenage pregnancy, lack of motivation in relation to work and self-care.  The marriage guidance organisation, Relate, notes that money worries are one of the primary factors in relationship breakdown, and the award-winning charity, Christians Against Poverty report that one in three of their clients have considered suicide before approaching them for help. The impact of debt is enormous in these respects and we badly need more joined –up thinking that can factor into our response to debt an awareness of costs to the NHS, the education services and overall productivity.

Some of Your Lordships may not be familiar with the world of doorstep credit, in which charges of more than 1,000% are not unknown.  The rapidly expanding system of payday lending, where a customer in employment is encouraged to write a cheque or more often a number of cheques postdated to the next payday and is given a cash advance on a certain proportion (perhaps 7 or 8 %) of the sum, the remainder being treated as a fee, traps the borrower in a spiral of debt as the arrangement is 'rolled over' into a new phase if there are problems with repayment.  The initial debt remains, augmented by soaring charges and the mortgaging of all income for long periods ahead.  For those without bank accounts in the first place, the pressure of informal credit arrangements is still harsher.  It is not surprising that loan companies are reporting massive profits at the moment.

What needs to be done?  The Church of England's campaign, A Matter of Life and Debt, launched at the beginning of this year, has offered what has been widely recognized as a sane and practical set of guidelines for church members and the wider public about avoiding the worst traps of the present situation.  But if we ask what needs to change, there are some obvious proposals to consider. The campaigning association, 'Debt on our Doorstep', led by  Church Action on Poverty, is pressing for tighter regulation of the lending market, with a proper investigation of payday lending and a cap on charges. The Consumer Credit legislation of 2005 built helpfully on the last review of practice in this area by the DTI and other agencies, but shied away from a ceiling on interest rates.  While there is debate about the effects of capping interest rates in the world of home credit, with some arguing that it could encourage unofficial practice even worse than what now prevails, there is a growing consensus that a situation in which charges can legally be as high as they are in the world of doorstep lending is indefensible: it gives the message that borrowing is a business in which you can only be a long-term loser, and so gives a further turn to the despair and low self-esteem that afflicts those caught up in the debt spiral.  If the historic sin of usury still has any meaning in the world of smoke and mirrors that our modern credit economy seems to have become, it is surely in this context.  And at the very least, a sharper regulation of the terms and methods of advertising for doorstep credit, which at present is often deliberately unclear about charges and rates of repayment, would bring some checks upon what is increasingly seen as an open scandal.

As I noted earlier, all this has been true for some years; in an economic turndown, it is likely to be far worse.  Hence the urgency I wish to underline today.  A precarious economic situation does not impact equally upon rich and poor; if banks are forced to become more restrictive about where and with whom they operate, it is those whose access to credit is already limited who will feel it most sharply.  And within that group, I have argued, it is those who have least control over the circumstances in which they live who will suffer most – children and vulnerable family units without secure income (particularly households in which lone women have the pivotal financial responsibility).

My Lords, there is a twofold ethical concern to hold in mind as we consider what should be recommended to meet this challenge.  Christian morality undoubtedly mandates the defence of the vulnerable, and this is central to any society that claims any residual loyalty to our traditional ethic; but it is also about the equipping of people for the exercise of their human dignity as citizens both of their own societies and of the City of God: St Paul in Second Thessalonians famously commends not only generosity to the poorest but also responsibility on the part of those who can work to do so and to support themselves and their families.  Giving to others is part of a process that enables those others to grow in their own dignity and to become givers in their turn.  There is no question of Christian ethics idealising a state of dependence.  In the time left to me, I want to outline two areas in which more could be done to support this positive goal of drawing people out of dependency.

The first is a matter flagged by many commentators.  Young people who have grown up in a context where debt is seen as a routine thing – a perspective which student loans have reinforced – are likely to be very ill-prepared indeed to tackle the challenges of family budgeting or even personal budgeting as adults in a climate where economic fluctuations make their reliance on credit a highly risky affair.  There is an urgent case for more support for financial education in schools and FE institutions.  Young people are vulnerable to considerable pressure – sometimes from banks themselves – to embark on risky and costly ventures into borrowing.  They need skills in assessing risks, in interpreting borrowing conditions, in factoring in to their decisions some better awareness of the uncertainties of the whole system.  And this needs to start early.  The present situation is not good.  It is estimated by Credit Action that less than 5% of secondary schools in this country give anything like adequate priority to education in money management as part of their citizenship and PHSE curriculum. 

Furthermore, as the Commission chaired by the noble Lord, my fellow-townsman Lord Griffiths of Fforestfach argued three years ago in a very significant document entitled What Price Credit?, lenders need to take more active responsibility for educating borrowers.  The proposal that lenders should routinely 'audit' letters and information materials sent out in their name, using the independent resources of a recognised debt advice charity, to ensure that they are 'accurate, fair and easy to understand', deserves strong support.

But the second area I should like Your Lordships to consider is how we support one of the most effective agencies we have in reducing unmanageable debt and developing the skills that help people avoid the worst traps of the credit business.  I refer of course to Credit Unions – declaring an interest as a member of the Canterbury and District Credit Union and a former sponsor of a national initiative in Wales which brought together the resources of the Wales Co-operative Centre and the Anglican Church.  The work of Credit Unions is still all too little known in most of the UK – though there are 172,000,000 members of unions worldwide, with over a quarter of the populations of the US, Canada and Australia being members. The potential is enormous.  It is evident at the simplest level in terms of the financial burden involved in the arranging of a loan: the Credit Union makes no charges for arranging this, includes loan insurance at no extra cost and has no penalties for early repayment.  Even the most reputable home credit company will be about a third more expensive than a Credit Union.  Increasing numbers of Unions organise Child Trust Funds and ISAs, and provide special Christmas accounts to help prevent seasonal debt.  Some have effective partnerships with local CABs and housing associations, and there is some highly imaginative work through schools to promote financial literacy.  The Saving Gateway initiative, piloted by the UK Government and due for a national launch in 2010, allows for matching contributions to be added to the savings of low income members.

My Lords, the encouragement of locally based, entirely trustworthy and user-friendly, educationally sensitive and confidence-building methods of managing debt should be among Government's highest priorities in combating the poverty traps I have described.  Many of Your Lordships will be aware that a review is under way of legislation around Credit Unions and other co-operative ventures, and it is much to be hoped that fresh legislation will bring increased flexibility – for example, enabling Credit Unions to work with corporate members (small family businesses, local co-operative networks, religious groups active in community work and so on), and also giving the option to members of paying interest on continuing savings retained in the Credit Union rather than receiving a dividend; the latter would have an enormously positive impact on the further development of Child Trust funds and similar arrangements.  And a broadening of the definition of a 'common bond' area to enable services to be shared across different localities would help these organisations to move more effectively into neighbourhoods where there is no accessible credit.  All these new liberties might make the Credit Union movement in due course as significant a presence in our credit economy as it is elsewhere – bearing in mind also that the pressures arising from our current crisis will not be exclusively a matter of concern for the poorest sectors of our society.          

My Lords, the causes of poverty are many.  Setting aside the lazy but persistent mythology that blames all poor people for their poverty, the majority of people in this country who experience deprivation and disadvantage are caught in events beyond their control – and this is manifestly true of children.  In recognising the destructive impact of indebtedness upon such people, we may find ourselves asking harder questions about the sustainability of any economy, global or local, that depends disproportionately on endlessly spiralling credit, detached from the realities of material ownership and production.  But whatever our views on these large and contentious questions, I would argue that we should resolve on specific, targeted measures that will protect those currently so ill-protected against the tyrannies of doorstep credit, and will also provide the tools needed to reclaim some skill and competence in the management of money and resource, so that the ongoing destructive effects of economic privation on the life of families can be arrested.     

© Rowan Williams