William Kay: Middle-class regulator fails the debtors who need most aid

Debt is a four-letter word, just ask stock-market investors. The FTSE-100 index this week hit new lows partly because of the impact debt is likely to have on ending the consumer boom, which has been the main engine of the UK economy for some time now. If you hold shares in retailers or manufacturers of consumer goods, prepare for nasty falls.

The Financial Services Authority (FSA) uttered home truths about debt this week, mainly to the effect that we have too much of it, an average of more than £5,000 per family, plus mortgage debt of more than £23,000.

These commitments are often combined with a level of financial ignorance that makes the eyes water. Yet, as the FSA's Financial Risk Outlook points out, consumers are increasingly expected to take responsibility for their own financial provision, especially for higher education at the outset of their adult lives and retirement at the other end. The Government this week blithely set out a university funding policy which involves burdening new graduates with as much as £21,000 to repay, yet it will be years before the government-funded Personal Finance Education Group's worthy efforts equip every school-leaver with the basic mental tools to cut a sensible path through this jungle.

Nearly a year ago, John Tiner, the FSA managing director of the consumer, investment and insurance directorate, described Britain as a nation of financial illiterates. Now he has decided the time has come for desperate measures: post offices are to be bombarded with copies of a 16-page leaflet on how to get your finances back into shape.

It would have been more useful for supermarkets and corner shops to stick these guides on their counters, but maybe that would have been too bold.

As it is, those turning to the leaflet to help them out of a hole can expect some stern edicts, ranging from the hectoring: sort out your borrowing, plan your budget, to the blindingly obvious: boost your income, and, for many, the downright unattainable: buy your own home.

Like most FSA publications aimed at the public, this one smacks of middle-class products of grammar school and university doing their very best to talk to the great unwashed, and making a hash of it.

There is useful advice, such as telling your creditors you are in trouble and how you intend to repay them, and visiting the likes of Citizens' Advice Bureaux or the Consumer Credit Counselling Service.

But those in the deepest debt are often those least able to get out of it, because they are on the lowest incomes. They need their hands to be held, in the sort of initiatives that Barclays announced last week, to cater for poorer but still respectable borrowers. We need to go a lot further than that and reach down into those prone to prey to loan sharks and other "informal lenders".

Hard though it may be for the FSA staff to believe this, such borrowers do not read much at all, let alone a money booklet. They need the most expensive advice of all: one to one, slowly and patiently.

* It's as if flared trousers, kipper ties and hairy side-whiskers never went away. After the bout of Seventies nostalgia in the shape of the Chancellor Gordon Brown's commitment to tax and spend, we are now being treated to a rerun of the notion that market misbehaviour can be corrected by judicious meddling.

Dr Vincent Cable, the Liberal Democrat's vocal spokesman on trade and industry, fears the housing market is heading for a crash to rival those of 1973 and 1989. His solution is to re-invent the so-called special deposits which banks used to have to leave at the Bank of England when they got carried away with lending too much. Such deposits could not be touched, and so were not available to the banks for lending. It was an alternative to higher interest rates which was discredited long ago as being an unnecessary and harmful misallocation of resources.

Yet Dr Cable now suggests calming the housing market "using capital requirements to moderate excessive and risky mortgage lending". These measures, he adds, could be refined "to create a more sensitive system for aligning mortgage-lenders' capital requirements to their lending practices and to the market, including regional variations".

Alternatively, Dr Cable puts forward the Hong Kong custom of clamping down on loan-to-value (LTV) ratios, the proportion of a property's value which a bank or building society is willing to lend. Aggressive lenders, he notes, have been raising their LTVs to levels which contribute to market overheating.

Dr Cable hastily concludes that these solutions would need to be explored further at a technical level and discussed with the lending industry. But the devil lies precisely in the detail. Telling lenders to lend less, by whatever superficially scientific method, is a crude device in which the Treasury or Bank of England would basically have to guess at the level which would have the desired affect on the housing market, assuming that could be divined.

And would-be borrowers will be denied the mortgages they need, savings rates will presumably fall to the detriment of savers, bank shareholders will be denied legitimate profit, and Mr Brown will cop the political flak for playing God with people's lives.

The fact is that the housing market is cooling of its own accord. There may be bumps along the way, but arrears and repossessions are staying low. Long before Dr Cable's medicine has worked, house prices will be clobbered by the knock-on effects from the end of the consumer boom.

w.kay@independent.co.uk

The writer is personal finance editor of 'The Independent'