According Precious Plastic, a new report published by PricewaterhouseCoopers (PwC), the introduction of the consumer credit directive by next June and recent announcements by the UK government with the prospect of further industry regulation will add to the pressure on lenders. In addition, there is the prospect of further regulation specifically concerning credit and store cards along the lines due to be implemented in the US.
PwC said that lenders’ current business model is unsustainable with increasing bad debts, funding constraints and the toughest macro-economic climate in a generation. Total household borrowing has remained broadly constant over the last 12 months at around GBP1.5 trillion, secured lending (mainly mortgages) stood at around GBP1.2 trillion with unsecured lending (personal loans and credit cards etc) accounting for the balance of GBP230 billion.
Despite the fact that UK consumers have called a halt to increases in their debt levels, they still remain noticeably high in comparison to the rest of Europe. On average, each UK household has total debt of around GBP60,000, made up of approximately GBP50,000 of secured debt and GBP10,000 of unsecured debt.
These debt levels mean that the average household will need to spend approximately 15% of its net income purely to service the interest payments arising from this debt.
Richard Thompson, partner of PricewaterhouseCoopers, said: “Bad debts in the sector have reached historic highs, standing at nearly 6% of outstanding balances. Our analysis suggests that bad debts are likely to continue to rise and could reach 9% by the end of 2010.
“This would have enormous implications for the profitability of credit cards in the UK market. Large scale change within the sector over the next few years is inevitable. We’re likely to see credit cards being reinvented as payment rather than borrowing tools.”
“We expect there to be an increasing number of transactions in debt portfolios as lenders make these operational decisions about whether they want exposures to particular segments of the population or geographies.”
