Consumer confidence hit again, but there are reasons for optimism

August 27th, 2010

Two market research organisations have found that general household finances came under increasing pressure during August. Markit and YouGov’s Household Finance Index (HFI) showed that despite the growing economy people are increasingly worried about losing their jobs and the higher cost of living.

About 30% of the 2,000 households polled said their finances had worsened from last month while only 6% said they had improved.

Nearly 69% of HFI respondents reported a rise in the price of their goods and services in August from July, the highest level since Markit and YouGov began their survey 18 months ago.

The HFI is intended to accurately anticipate changing consumer behaviour, and its latest findings seem to contradict the official data which shows the UK economy had grown quite well in the second quarter while UK inflation eased to 3.1% in July from 3.2% in June

The Bank of England says “temporary” factors are to blame for the recent strength in inflation – and that it is likely to fall back below the Bank’s 2% target in 2012.
But it seems individuals are not as confident. The survey found 86% of those polled expected a rise in their cost of living.

With government cutbacks and likely tax rises looming, nearly half of the respondents expected their finances to weaken further over the coming year – while only a quarter felt their incomes would improve.

Job security featured prominently in the results with 22% of private sector respondents reporting a drop in job security, compared to 6% who said they felt more secure. A weak housing market completes the depressing picture, with about 23% believing their property had lost value in August, compared with 9% who thought it had increased.

In addition to the HFI, a Centre for Economics and Business Research (CEBR) study showed family spending power falling 2.5% in a year. The CEBR survey, carried out on behalf of supermarket chain Asda and based on Office for National Statistics data, measured the amount of money that households had left to spend after paying taxes and buying basic items.

It indicated that the average UK household had discretionary income of £175 a week in July 2010, down from £180 a year earlier.

There is an extent to which consumer confidence in the UK is based not on reality but the perceptions of reality portrayed in the media. Press gossip about the coming ‘age of austerity’ based on ‘savage’ government cuts are likely to have fuelled the pessimism revealed in these surveys just as much as real economic indicators. However, this makes the data more difficult to interpret and not less.

Generally speaking, as the economy continues to grow slowly it will take a long time for consumer confidence to really take off. The influence of the media will increase in this time as public sector job cuts start to bite, but the reality beneath will have an effect and confidence will begin to return.

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Payday Loans: Yes or No?

August 19th, 2010

The watchdog Consumer Focus has produced some startling and worrying figures this week about the thorny issue of payday loans. The figures show that the number of people using the payday facilities has risen by 400% since 1996.

The figures have prompted the watchdog to call for more safeguards to protect potentially vulnerable borrowers from interest rates which can soar to an astronomical 2,500% per year.

1.2 million people are now taking out payday loans every year, borrowing a total of £1.2bn.

For many people a payday loan is a quick and efficient way of getting hold of short-term credit. If the money is paid back promptly on the next pay day, this type of lending can be cheaper than paying an unauthorised overdraft or a credit card charge.

The problem is that if the loans are rolled over, debts can quickly escalate.

The payday loan industry makes the valid point that, when managed properly, many people find this type of lending easy to understand and less risky.

There is a reluctance among many consumers to take on long term loans from traditional lenders, because they feel their financial situation could change. But they find that the short term credit offered by the pay day loans industry does meet their needs.

Payday loans are a valid form of credit however, analysts believe that there needs to be a limit on the number of loans people take out and how many loans they are able to roll over.

Consumer Focus has now joined forces with the Consumer Credit Counselling Service (CCCS) to find out how to help borrowers who fall into problems with the first suggestion being that traditional banks could do more to provide the short term credit people need.

The British Bankers Association (BBA) has been quick to move against this claiming its members are already being as flexible as they can. A spokesman said that banks ‘have to make a risk assessment on every lending proposal they receive and quite frankly it does not do any good to lend money out to people if they can’t afford to repay it’. He has a point.

However, this lack of traditional options means that, for many people, a payday loan is still the only legal option for short term lending, when money is tight and there is nowhere else to turn. Although they are not recommended, payday loans are still preferable to using loan sharks.

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Can you keep mis-applied credit?

August 4th, 2010

Unsurprising yet disheartening news about banks this week from the Financial Ombudsman Service, which has warned customers not to expect to keep any money accidentally credited to their accounts.

The free ombudsman service was set up by law to settle complaints between consumers and financial businesses on anything from pawnbroking to mortgages. Mis-applied credit is counted under complaints about current accounts made to the ombudsman.

About 100 cases of mis-applied credit are dealt with by the Ombudsman each year but only in a few rulings have the bank customers been allowed to keep the cash.

Some people complain that after a bank has mistakenly added money into their account, the bank then chases them for the return of the cash. Although the customer might argue that the error was the fault of the bank and so the customer should keep the money, the ombudsman usually favours the bank.

Writing in the thrilling must-read Ombudsman News, a senior official said ‘in the board game Monopoly it is good news if you get a card telling you that the bank has made an error in your favour as you do get to keep the money. But in real life, things are different. When dealing with complaints about mis-applied credit, we generally take the view that consumers are required to return any money paid to them by mistake.’

An example was when one customer had £1,000 transferred into his account. The bank accidentally duplicated the transfer, putting another £1,000 in the account. The bank asked for the extra £1,000 to be repaid two weeks later, but the customer refused, saying that it was the bank’s mistake and that he had already spent the money. The ombudsman ruled that he should pay the money back to the bank, which was acting reasonably when asking for the money in 10 interest-free instalments.

However, in a separate case, the ombudsman decided that a different customer could keep the extra cash. Her account had been credited with £1,000 after she paid in a cheque of just £100. After spotting the error when checking a balance on a cash machine, the customer spoke to a cashier inside a branch, who claimed it was in fact correct. The customer was expecting a tax rebate and assumed the money was from this. She took her niece on a holiday to Italy with the money. Nearly four months later, she was understandably distressed to receive a demand for £900 from the bank. The ombudsman ruled that she had acted in good faith, had checked with the cashier and could not recover any of the money spent on the holiday. As a result, the ombudsman ruled that the bank was not entitled to demand the £900 back.

Although these examples may seem to highlight an inconsistent approach by the Ombudsman the key tenets of good faith and reason hold true in both. Although it would be nice to keep money mis-applied by banks, most customers have no real reason to expect to do so.

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