Examination of Witness (Questions 1 -
WEDNESDAY 7 FEBRUARY 2001
1. Good morning, ladies and gentlemen. Can I
open the public session of evidence. This is a new inquiry that
the Committee is doing into the Social Fund, and we are lucky
to have with us this morning Elaine Kempson. Elaine has been a
distinguished author in the whole field and we are particularly
interested in the DSS Research Report No.125, last year, called
Saving and Borrowing. We are also grateful for the written submission
you have made, which is enormously helpful. If you wanted to say
something by way of a short opening statement, that would be fine,
too. We have got one or two questions that we would like to ask.
A good place to start might be for you to set the scene, maybe
giving us a picture of the kind of client group, in your experience,
that has access to this particular Social Fund provision.
(Ms Kempson) In fact, what I am saying
relates solely to the Budgeting Loans scheme, because that is
the one that I know best. I should make that point clear, to begin
2. Of course, yes, thank you.
(Ms Kempson) There is no doubt at all that the people
who use the Social Fund Budgeting Loans scheme are definitely
amongst the most vulnerable people we have got in British society.
They are not only on Income Support or income-based JSA but, from
amongst that client group, they are the most vulnerable, so that,
compared with others on Income Support, they are much more likely
to have a high incidence of health problems, family breakdown,
of housing instability, and are much more likely to have been
on benefit for long periods of time. That is derived primarily
from qualitative research, not from quantitative. It is not statistical
but it was quite striking when we looked at the characteristics
of those who had and had not used the scheme, that they are certainly
very vulnerable. And, indeed, the reasons why they apply to the
scheme usually derive from that vulnerability: they arise because
people have health problems; because of housing instability, in
particular, they frequently borrow in order to set up new homes;
and because they have got a fairly high level of family breakdown,
in the wider sense, that is, with parents and the wider family,
they often have nobody else they can turn to if they need money.
So the reasons for applying to the Social Fund are very much tied
up with those instabilities in their lives.
3. This paraphrases you slightly, and correct
me if I am wrong, but you could be interpreted as being quite
positive about some aspects of Budgeting Loans, because they are
interest-free and can be a beneficial source of income. But do
you have a professional view about the weekly level of benefits
being able to meet things like removal expenses and furniture
costs, in reality, at current levels?
(Ms Kempson) They are too low, quite simply. For anybody
who lives on Income Support or income-based JSA, more likely Income
Support, of course, for any length of time, it is quite inadequate
to meet the unexpected expenses. And by that I do not mean major
expenses, it could be something like a pair of shoes for a child,
a pair of torn trousers, small things like that can really upset
the financial circumstances of somebody on Income Support, particularly
families with children, who find it the greatest strain, and single
people living on benefit alone, who lead a very isolated life,
socially very isolated, because of the levels of benefit.
4. I wanted to look at the position of Budgeting
Loans in the wider context of the availability of credit and loans
for people on low incomes. What other alternatives are there available
for people on low incomes who need to borrow money?
(Ms Kempson) Far fewer than the rest of us, in short.
They use mail order extensively, weekly collected credit quite
a great deal, they would also use some of the newer forms of credit
that have arisen over the last few years, the rental purchase
schemes, known as Crazy Georges; it is a rental purchase scheme
that operates a little bit like hire purchase, except that the
goods can be repossessed at any stage until you have paid the
total amount, and that often happens with people. It is because
of the terms of those loans, as much as the costs, that people
learn, to their cost, that it is not an advisable source for them.
There are then variants on pawnbroking; pawnbroking is increasing
and has increased over the last decade, it was in the doldrums
at the beginning of the nineties. There are new forms of that,
for example a company called Cash Converters, that operates in
a broadly similar way, but offers a sale and a buy-back, you have
the right to buy back your goods, rather than pledging them for
pawning. So that is the range of options that people have. It
is fairly constrained, it is fairly expensive, and some bits of
it are designed to meet the needs of poor people, particularly,
say, weekly collected credit, in the sense that the products are
designed in a way that meets their method of budgeting. There
are no penalties for late payment with that particular form of
credit but it is very expensive, and a great deal more expensive
than borrowing from the Social Fund.
5. Obviously, we might expect it to be more
expensive than borrowing from the Social Fund because that is
interest-free, but if I just put that to one side for the moment,
what APR differential is there between more conventional borrowing
and those available, a sort of ballpark figure?
(Ms Kempson) To make it more real, what I have tried
to do, in fact, in the report, we have costed a washing-machine,
bought through different routes, and I think that perhaps illustrates
it rather more realistically for these people, because APR is
a little difficult to grapple with and it gets rather distorted
at this bottom end of the market. If someone were to use the Social
Fund Budgeting Loans scheme to buy a washing-machine in the high
street for about £400, if they bought it through a mail order
catalogue and spread the cost over about 50 weeks of the year,
it would cost them about £500, to go to Crazy Georges, or
one of the rental purchase schemes, about £600, a £400
loan from one of the weekly collector credit companies could cost
you £700. Some people, in extremis, do need to go
to unlicensed lenders, and, in our experience in this study, more
than in any other, they are really quite prevalent in some neighbourhoods,
and people spoke very openly about them. One of the women in one
of our focus groups, her cousin was a money-lender; there you
might be looking at £2,000 pay-back. So that is the kind
of prices that people are paying for their credit.
6. And for a family in work, without financial
difficulties, who want to borrow, they might be able to get 0
per cent finance for a year or two, to buy some item?
(Ms Kempson) Someone in work, with a reasonable income
and a stable work history and a stable housing history, all of
which go into credit scoring, yes, you could get a loan a lot
7. What share of this low income credit market
do you think the Budgeting Loans have, compared with the overall
amount that people borrow?
(Ms Kempson) That is rather difficult to answer. I
might be able to calculate it, but I have not come with the answer
in my head. We know that about a third of people who have a Budgeting
Loan are using other forms of commercial credit, at any one time.
I probably could give you an answer, but I cannot give it off
the top of my head; if it is acceptable, I will give it to you
in writing later, if I can calculate it.
8. Yes, if you could. So it would follow from
that then that about a third of the people on Income Support are
carrying debt burdens apart from Social Fund?
(Ms Kempson) Yes, in the commercial credit area; and
that leaves aside mail order, actually, mail order would increase
that quite considerably, to well over a half.
9. Can I just ask something? Is that getting
worse, that proportion?
(Ms Kempson) I cannot tell you that.
10. You do not know if the trend is changing?
(Ms Kempson) It is really difficult; there are almost
no figures on use of credit, across the whole board, so tracking
trends is extremely difficult.
11. There is evidence in the commercial market,
and looking at newspapers, the availability and the fairly aggressive
selling of credit is a bit more significant at the moment?
(Ms Kempson) In the general market, the use of credit
has increased dramatically. I would not know, at the bottom end
of the income scale.
12. Do you think it would be better if the system
for calculating Budgeting Loans took account of the general indebtedness
of applicants, rather than just the money they have borrowed from
Social Fund loans that they are already committed to repaying?
(Ms Kempson) Better for whom, is the question I would
13. Better for the individual rather than the
(Ms Kempson) I think it would not, because some people
manage quite heavy levels of borrowing on very low incomes, whereas
others simply fail to do so. But, also, if you did take it into
account, you would be cutting off a stream of low-cost credit,
which would make it almost inevitable that they would have to
turn to high-cost. Because there is plenty of evidence already
that if people do not get the full amount that they apply for,
which is one of the major problems, currently, or if they get
turned down, then they do turn to high-cost credit. So I think
if it were added in, then it would increase the likelihood that
they would have to borrow. Because they are not coming to the
Social Fund for discretionary items, they are coming to the Social
Fund for things that it is really quite important for them to
replace or to acquire.
14. So, effectively, people end up in a Catch
22. If the true level of indebtedness were taken into account
they would not get the Social Fund loan, but if they get the Social
Fund loan then that adds to their indebtedness?
(Ms Kempson) Yes, but if you turned them down they
would still borrow the money and they would borrow the money at
a higher rate of interest, and then they would be in a worse financial
15. What about rescheduling, or the rate at
which people have to pay back; to what extent do you think that
the 15 per cent rate is variable when people actually apply for
the loan and set the terms for it from the Social Fund, and to
what extent do people come back later to ask for rescheduling?
(Ms Kempson) It seems, from the evidence we have,
that they do not, and they do not realise they can come back for
rescheduling. The whole question of repayment levels is something
that I have raised in my written submission. It is problematic,
for two reasons. One, people have absolutely no idea how the amounts
have been arrived at, and our report cites examples of people
saying, "Well, when I had an £800 loan, the repayments
were £16 a week. I have now borrowed only £400, and
it's still £16 a week; now why is that?" So they simply
do not understand what the repayment levels will be, and so it
makes it quite difficult for them to work out, in advance of deciding
how much to apply for, and what they are going to have to bear
within their budgets, and that is quite a significant thing for
somebody on a very low income. The point about rescheduling, it
does cause some people problems, the high levels of repayment,
and they do comment on how high they are, and they do not realise
that if they are in financial difficulties they could ask for
them to be rescheduled. In fact, the levels of repayment are very
similar to those that the weekly collected credit industry would
charge, and yet those repayments can be rescheduled at no further
cost (there is a cost to it built into the initial cost of credit).
And people are accustomed to being able to do that. I think the
problem with the Social Fund is that it is perceived by its applicants
to be a form of credit, and yet it operates like no other form
of credit they know, both in terms of the amounts they get or
in terms of the repayment schedules.
16. What proportion of the weekly income of
somebody on benefit is actually going on servicing debts, whether
it be to the Social Fund or to other sources of loans?
(Ms Kempson) I cannot give you an up-to-date figure
on that. I think others might better be able to do that; or I
could try to calculate for you, again.
17. Do you think these levels of debt prevent
people moving from benefit into work?
(Ms Kempson) There is some evidence that where people,
certainly where they have arrears, rather than amounts they have
borrowed, if they fall into arrears, that does act as a brake;
although, I think, given the current rules on taking work then
maybe that is rather less than it was in the past. But, certainly,
some creditors are prepared to hold off while somebody is unemployed,
and will pursue arrears much more rigorously once they are in
work. And so the amount that you owe, particularly in arrears,
rather than as amounts borrowed, can play an important part in
people's decisions, and their fears, actually, their fears about,
"What will happen if suddenly I've got to repay all of this
money? I simply won't be able to do it on the wage that I'm getting."
18. That is the people who have borrowed not
from the Social Fund?
(Ms Kempson) These are the people who are in arrears,
so that could be housing arrears, rent arrears, council tax arrears,
gas, electricity; it is not so much the amounts borrowed, because
those have to be repaid, in or out of work.
19. So that is to other, big institutions, as
it were, rather than to the people they borrow the money from
for the washing-machine?
(Ms Kempson) No. I think I am drawing the distinction
between money that has been borrowed and missed payments, where
you are in arrears and, technically, in default, and so creditors
will pursue you for the repayment of the total amount of default,
and that does play a part. I do not know immediately of any evidence
of levels of borrowing having an impact on the decisions to work
2 Note by Witness: I have checked and this information
is not available. I have, however, been able to locate figures
for the turnover of Provident Financial-the largest of the weekly
collected credit companies, accounting for about a third of the
business in this market. In 1999, their turnover was just over
£583 million. In addition, there are the other companies
I mentioned-Crazy Georges and Cash Converters. So, excluding mail
order catalogues, I would say that the 1999 annual turnover in
this commercial market would have been around £2,400 million,
compared with around £417 million lent through the Social
Fund. In other words, the Social Fund is a major player. Back
Note by Witness: I was asked what proportion of the weekly
income of somebody on benefit is used to repay outstanding loans.
Again I have checked and up-to-date information is not available,
although it could be calculated using data from the Family
Expenditure Survey. Back