It was suggested that once upon a time, if a person wanted a loan or a mortgage they had to have a record of responsible financial management with their bank or society.
Then they would have to make a formal appointment to see the aforesaid institution’s branch manager, a responsible figure who would weigh up the pros and cons of allowing them the money.
Only once they had jumped through all these hoops would they be considered for a loan.
Then came the commoditisation of lending. Face-to-face, branchbased lending decisions were costly and time-consuming. New computer systems allowed loan decisions to be made by the millions in seconds.
The result? An explosion in personal borrowing – especially unsecured debt – and a tidy profit for banks.
Now it seems that consumers have had the last laugh. While lending has become commoditised, so has consumers’ response – as can be seen in the mass take-up of IVAs, which is expected to hit 150,000 this year.
It’s a bit rich, suggested the commentator mentioned above, for financial services firms to whinge now that the beast they created is turning on them.
This commentary misses a number of crucial points. While it is undoubtedly the case that some people have been lent money irresponsibly, many more sensibly use debt as part of their financial management strategy.
The so-called golden age when the Captain Mainwarings of this world had a god-like control over people’s finances was a myth.
In 1960 only eight million people had bank accounts. This represented just a third of the working population, mainly the prosperous middle classes.
Back then, if people had a sudden downward turn in their circumstances and could not afford the weekly family shop that was the end of it – no overdraft, credit card or loan to tide them over.
The poverty experienced by people in relatively recent history is shocking by today’s standards. Since then, access to all types of financial services has opened up to all but the most excluded. While there is still work to be done, we have come a long way.
But there are still people who borrow irresponsibly. And there are many more – as the recent national financial capability baseline study shows – who don’t understand basic financial products and jargon.
These people are vulnerable to dodgy sales tactics. This is why the crackdown by the Office of Fair Trading on IVA adverts is so timely and should be applauded.
Extreme debt brings misery, despair, ill-health and relationship breakdown. In short, vulnerability. For some it can be overwhelming. For any firm dealing with people in such circumstances there is a duty of care which, judging by the examples cited by the OFT, some IVA arrangers are not exercising.
As the Financial Services Authority points out, IVAs are a solution for many but those arranging them must be honest about what they can achieve for people who are in debt and the possible negative implications of entering into such arrangements.