Last week something totally new happened in Walthamstow. For the first time in the UK, £1.2 million worth of personal debt, bought on the secondary market, was unilaterally written off. This was not done by politicians or bankers but instead was the work of an amazing collective of film makers, activists, campaigners and local people to create radical economic change. The project is called Bank Job. The idea was to engage local people to create their own money, teach them traditional printing techniques, sell those notes for real legal tender, then use the legal tender to fund projects actively doing good in the local community and write off some local high interest debt.
The notes that local people designed and printed raised over £40,000. £5000 of the money each went to four local projects (local food bank Eat or Heat, homeless kitchen Pl84U-Al Suffa, youth project The Soul Project and Barn Croft Primary School) and the rest to buying debt on the secondary market.
Debt isn’t always held by the person or institution who initially gave the loan. It is often sold on the secondary market to specialised investors and funds. If repayment of the debt is likely, buying the debt can lead to a steady stream of income. If the debt is unlikely to be repaid, then the debt can be sold as a fraction of its value. This means that the buyer pays very little for the debt, but can still chase the debtor for the full value of the money owed — which could lead to a potential windfall.
The secondary debt market is rarely visible, generally working in the shadows. It only makes it into the news when predatory actors known as ‘vulture funds’ try to buy debt in order to extract the maximum possible value irrespective of its local impact on people and governments. As typical example is the country of Argentina, which maintained a 14 year battle with vulture funds who owned its debt, which culminated in the country paying back almost £3.5billion representing almost 75% of the face value. Vulture funds hold huge volumes of ‘distressed’ debt (debt that has been defaulted on) both personal and sovereign. They were active worldwide following the 2008 financial crisis. The idea of buying debt on the secondary market in order to cancel it was pioneered in the US by the Strike Debt movement who raised money to buy and cancel old medical debt. But while in the US anybody can buy secondary debt, in the UK it is a highly regulated market with only a small number of authorised people allowed access.
Bank Job have done a huge service by drawing attention to how debt is bought and sold — and the impacts this has on society. Approximately eight million people in the UK are caught in a debt trap: paying out on average of a quarter of their incomes each month to their lenders. This puts household budgets under extreme pressure, which inevitably leads to more borrowing to pay off previous debt or make ends meet.
In 2015, the government mandated a ‘total cost cap’ on payday loans, meaning that all interest, fees and charges can never amount to more than the amount originally borrowed. The cap has been highly successful, and could work for other forms of debt. Payday lending constitutes a tiny fraction of the overall consumer credit market. We now need action to help the many millions of people who are paying back more than £2 for every £1 they borrow on their credit cards and overdrafts. People can often use a variety of debt products to get by, so the cap needs to be extended to all forms of borrowing including catalogues, door-to-door moneylenders, and rent-to-own stores. A recent NEF report estimated that implementing this reform would put £6 billion back in the pockets of households.