Select Committee on Social Security Minutes of Evidence

Examination of Witness (Questions 20 - 39)



  20. Because, in relation to Social Fund loans, it is my understanding that, if somebody gets a job, they do not really pursue them whilst they are in work. It is only when they are actually on benefit that the DSS really starts to take an interest, because, presumably, it will be not cost-effective to chase these relatively small amounts of money through debt recovery through the county court, or whatever, where you spend more on chasing them than you are getting back. So, whilst, on the one hand, when somebody is on benefit, they have got a really easy way of getting the money back, just clawing it back from the benefit, and if somebody comes back onto benefit they are in the same position, I suppose you could say, in relation to the Social Fund loans, the incentive is to get a job, because you are out of repayment until you lose it again?
  (Ms Kempson) I am not sure people are that calculating, actually. It is quite remarkable, all the work we do on people in arrears, people who are owing money, shows how incredibly honourable the great majority of people are, they really firmly believe, "I owe this money, I must repay it." And, going slightly off at a tangent, even when we talked to people who owed large amounts of money to the then British Gas, they were saying, "Well, they had to disconnect me because I owe them money. I can't pay them; they have no choice." When most people are actually quite honourable and would not, I think, see it as a way of sliding out of payment. I am not even aware of any evidence that people know that they will not be pursued when they go back into work. I suppose experience might tell you that.

  21. I suppose that is supported by the figures for the net cost of Budgeting Loans, compared with the overall budget for Budgeting Loans, in that the net cost, which presumably is the money that has not been repaid, is tiny, compared with the overall total?
  (Ms Kempson) Yes.

  Chairman: I want to move on to how the Budgeting Loans scheme is working; but, before that, we have got just a quick supplementary from Ann Winterton.

Mrs Winterton

  22. Could I just ask, because I have a very good credit union in my own constituency, what role you feel that they can play in providing low-cost credit, and whether they can play an enhanced role? I realise that there are perhaps not enough of them throughout the UK, but do you feel that there is a path which might assist the people about whom you have been talking?
  (Ms Kempson) I think credit unions do have a role to play, and it is quite important, but they serve a different group from the people who go to the Social Fund, there is a small amount of overlap. The work we did for the DSS we did in areas of high Social Fund applications, and ones that had a very active, community-based credit union, including probably the biggest one, certainly in England. We found that the people were in very different circumstances. The people who were members of a credit union had greater stability in their lives, had been on benefit for shorter periods of time, therefore found it possible to save in order to borrow. But I think the other, very interesting distinction that we were not aware of until we did this work was how people on very low incomes used their credit union savings and their loans. They used their savings merely as a means of getting loans, not as a means of saving, and they used their loans for discretionary items that they would otherwise have saved up for. And so what they were seeing it as was, almost like an advance on my savings; "I save £100 and I can only get an advance on my savings." So they spent it on confirmations, on weddings, on holidays, on treats, in strict contrast to the Social Fund, which the others were using for essentials. But the members of the credit union did not have those same, very basic needs as the people using Social Fund.

Mr Thomas

  23. When you refer to mail order, I was not quite clear whether you mean what many people call catalogue debts?
  (Ms Kempson) I mean catalogues, mail order catalogues.

  24. So, basically, it is not mail order for a sum of money, it is mail order in the sense that you buy goods through credit?
  (Ms Kempson) It is buying goods, but it is the sorts of goods that people would buy using their Social Fund loans.

  25. The other question is, we have already touched upon this, has any work been done on the breakdown of indebtedness, of the source of credit, and how the Social Fund compares with other forms of sources of credit? Would it be fair to say, for instance, that really the Social Fund is catering for a small part of the market share, if one can say that, compared with the majority of alternative forms of credit?
  (Ms Kempson) As I said earlier, we have a great lack of information about credit usage generally. The last time we did a national survey, or indeed anybody did a national survey, to look at levels of borrowing and levels of arrears and the types of borrowing, right across the board, was in 1990, and it was quite clear that the Social Fund then was very much in what we call the secondary market, along with all the sources of credit that I have just described.[4]

  26. Would you like to hazard a guess, in percentage terms, I suppose the parameters of that question are difficult, hazard a guess as to the percentage of the population who actually take up Social Fund credit?
  (Ms Kempson) We know how many applications there are, but we do not know what proportion of the population that is; any figures we have on proportions of population are just so old that it would be meaningless. We know there are about a million successful applications every year, some people will make more than one. I do not know whether that helps give you some idea of the scale.

Ms Buck

  27. Does anybody monitor ethnicity?
  (Ms Kempson) No. As I keep saying, there is an awful lack of hard information, statistically, across the population; we do know that it is quite attractive to Moslems, from qualitative work, for whom other sources of credit are quite unacceptable, because of Islamic teaching. Mail order catalogues, strangely, well, apparently strangely, they do not charge interest, they charge an increased price for the goods, which is then spread, and so, therefore, that is acceptable to a Moslem, although they are quite unaware of that, by and large. But the Social Fund is quite valuable, or very valuable, for the Moslems, particularly poor Moslems.

Dr Naysmith

  28. I am going to ask a little bit about how the Budgeting Loans scheme is working, but, like everyone else, I am just interested in your alternative sources of credit that we have just been talking about; so if I could have a quick question on that. You talk about credit unions serving a different section of the population. Now lots of local authorities and community trusts, and so on, devote quite a lot of resources to stimulating credit union formation and backing them; you are not suggesting, are you, that that is, in any sense, a waste of money?
  (Ms Kempson) Not at all.

  29. Could it be that the different section of the population they are serving prevents other people dropping down, to put it crudely, to the other situation?
  (Ms Kempson) They could do. They do draw some people from amongst the main group for Social Fund, the Income Support and income-based JSA, although not disproportionately. I would say that those people are underrepresented amongst community credit union membership. Credit Unions do serve a need, and it is important that they are there, there is no doubt about that, within that income group, people whose circumstances are slightly better than the ones who come to Social Fund. I think also one very welcome trend from within the credit unions, and indeed schemes like Cambridge New Horizons, run by Cambridge Building Society, which I can explain more if you are interested, is that they are beginning to experiment with debt buy-out. If somebody is in financial difficulties, they can buy out their existing loans and convert a high-cost loan to a very low-cost one, and try to break the cycle of constant borrowing, because you are borrowing. And I think that would be a very welcome development, but it is very much in its infancy. Really, to reach the people for whom Social Fund is a vital resource at the moment then I think we are going to have to look at more of those schemes.

  30. Thank you. If we can move on now to the Budgeting Loans scheme and how it is working, you are quite positive about the advantages of the new scheme in providing speedy and more straightforward and more simple access to interest-free credit, but you also talk about the major drawbacks, that lots of people are rejected, and most of those who receive rewards get less than they apply for. Don't these fundamental drawbacks outweigh matters such as simple application forms and quick decisions?
  (Ms Kempson) I do not think the advantages outweigh the administrative advantages, for sure. I think the fact that this is an interest-free source of credit certainly plays a very big part in people's minds. But if we are looking just at the changes then I think, although the scheme set out to be simpler and more transparent after the changes, it has not actually achieved that. It has achieved a more streamlined, a quicker decision-making process, but one that is still not transparent. And it is not transparent for the reason that I raised earlier, which is that it operates like no other form of credit. With other forms of credit, if you borrow and you repay part of that loan, you know what you can get by way of a top-up loan. If you borrow £500 and you pay back £100, you can almost certainly get the £100 again; it is not guaranteed, but people have some notion. People have no idea with the Social Fund, in fact. It is quite difficult even for quite educated people to get their minds around calculating how much somebody might get, because it is a much more complex sum. The Social Fund Commissioner, I see, has tried to simplify it for us slightly. So people have no idea how much they will get. The indication is there may be a worrying trend, with the revised scheme, and that is, that already people are applying for double the amount that they want, in the expectation they will get half of what they apply for; and that is generally the rule, people get half of the amount that they apply for. If that is the case then we are going back to some of the defects of the old scheme, where it was considered a lottery. People said they needed cookers and bedding when, in actual fact, they needed to pay a bill, or something that was not considered a high priority at their local office. They were lying about what they wanted, and would tell us in surveys that they had lied, because they knew they would not get the money and they were desperate to get it. And I think that is now quite widely accepted to be the case. We may be in danger of moving towards a situation where people now lie about how much they want, in order to get the amount they really want, which is a waste of resources really.

  31. So people get no explanation of why their loans are turned down, or why they get less than they asked for?
  (Ms Kempson) Understanding the calculation of how much you are entitled to, when you are applying for a top-up, or indeed why you have been turned down altogether, is quite complicated. People do not understand it, they absolutely do not, they cannot explain to us why, they just say, "I can't get it because I've already got a loan," and that is as far as they can go.

  32. So is that the major problem, that people ask for more than they really need for the purpose they are applying for?
  (Ms Kempson) No, only a few are beginning to do that; the major problem is that most people do not get the sum that they need and therefore have to look elsewhere for it. If they are fortunate, they have got friends and family they can go to who will make up the difference; more often, they have to borrow commercially. Although I did not put it in my written submission, there was evidence, in one local office, that people were actively being directed to sources of high-cost credit, and particularly this rental purchase scheme, where people were getting their goods repossessed. So they were quite angry about having been directed to a source of credit they considered inappropriate for somebody in their circumstances. Others go without, and we talked to people who, despite having small children, in one case a disabled child, had to go without a washing-machine. There was no launderette nearby and she was trying to wash all the clothing by hand, until such time as she could manage to get another washing-machine. People were usually buying white goods that they really needed.

  33. People have a choice, they can ask for higher loans with higher repayments, and lower loans with lower repayments, but is there any evidence at all that people who are applying for these loans can afford the repayments from their weekly benefits anyway?
  (Ms Kempson) I think that raises several separate questions really. On the levels of repayment, people struggle, they really do struggle, and if there is any change, tiny change, in their circumstances, that can cause them to fall into arrears elsewhere. As I said earlier, they may get several offers and they usually take the offer that will give them the sum of money they want.

  34. Is that common, to get several offers, does that happen frequently?
  (Ms Kempson) I do not know how common it is, I could not tell you statistically how common it is, but I know that people are often made more than one offer. That is quite different from any other lender, who would not say, `I'll either lend you £500 at this rate of repayment, or £300 at that;' other lenders would say, `You can borrow it for a longer period of time', and that is what they are accustomed to, being able to spread the repayments. They simply do not know how these repayments have been arrived at, and do not know that they could appeal against the high levels, and they are disproportionately high for small loans. People presume, and I think presume correctly, that they are set high in order to get the money back into the kitty again quite quickly, so it can be lent to somebody else. But it does cause them hardship.

  35. Does anyone talk to them about this, or is this just a written offer, or an offer over the telephone?
  (Ms Kempson) I do not know the answer to that.

  36. Is there any kind of negotiation in the process?
  (Ms Kempson) Most are just paper-based these days, so there is no evidence, from talking to the applicants themselves, that they have ever discussed any of this with anybody, which is in absolute contrast to, say, a credit union, where you would discuss how much you could afford to pay, how much you needed to borrow, and indeed actually even with the weekly collected credit companies, who get a very bad press, they will discuss with you how much you can afford, very often, and set the terms of the loan accordingly. That does not happen with Social Fund.

  Dr Naysmith: Thank you. That has been very helpful.

Ms Buck

  37. Just on that, is it not true, to some extent, at least, that people access the system often through social workers and other advice agencies, or is that not your experience, because that has certainly been my experience, but that could be unusual? Are people facilitated into the system by somebody, more often that not?
  (Ms Kempson) No, I do not think so. I think most people who apply have applied before, so it is difficult to catch somebody on their first application. I think probably not. That is one of the benefits of the current scheme. People do find it easy to apply on their own, they do not find it difficult to do so. They find the form quite straightforward, and comment on that, although they had absolutely no idea that anything had changed until they applied. But there is a very high level of repeat applications, so most would not, therefore, go in through a social worker, they would be applying on their own. But I think you ought to check that with officials, to be absolutely sure.

Mrs Humble

  38. It is often a lot easier to criticise a system than to come up with proposals to change it that people can agree on; so can I just talk to you a little about options for the future, suggestions that we, the Committee, might make for altering the system. In answer to a question that the Chairman asked, right at the beginning, you commented about the low level of income that people had in order to repay these Budgeting Loans. So, even if these loans are interest-free, is that really the answer for people living barely above subsistence level? Should we be looking at grants, at going back to the old single payments? And I have looked at the statistics that we have had provided about Community Care Grants, and, even though the amounts of money have gone up, although it has only gone up by 2 per cent from 1995 through to this last year, two-thirds of people who apply for Community Care Grants were refused. Should we be looking at a grants system, rather than a loans system, especially for essentials? You know how the old single payments used to work, and we were talking about people using loans for essentials, not for discretionary items, and the old single payments covered that area, it covered the cooker and the bed and essential items?
  (Ms Kempson) There is a case to be made for just that. I think there is also a case to be made for people's benefit levels to be higher, which I think is probably stronger than the case for grants, looking at it from their point of view. In financial terms, grants are better than loans; psychologically, people do not like asking for handouts, and they would sooner have a level of income from which they could be affording the basic things that they need.

  39. But is that based on an assumption then that somebody may be on benefit for a long time; if you are going to build into that benefit level an amount that that person realistically could be expected to save then for a new bed, or a new cooker, are you building in assumptions that people are going to be on benefit for a longer length of time? And in the changing world that we have now, with the Government trying to encourage people into work, and doing everything that they can to make work an attractive option financially for people rather than remaining on benefit, do we want to do that? How do we want to see benefit, do we want to see benefit just for supporting people for a relatively short length of time?
  (Ms Kempson) Some people do live on benefit for very long periods of time, and they are quite easily identifiable, and for those, particularly for the lone parents, pensioners on Income Support, it is a struggle, and they will be there for a long period of time. And I think we need to look, quite broadly, at whether their rates of benefit are high enough to enable them to live without the constant worry and without the indignity of having to apply for a grant in order to replace their cooker. It is a difficult one to answer, because, of course, grants would be better than loans. The one thing that comes through to us, in all the work we have done on financial exclusion, in particular, is that what people on very low incomes, poor, vulnerable people, want, more than anything else, is to be like others, they do not actually want to be stigmatised, they do not want to be made to look different, they do not want alternative solutions to their needs. What they want, if at all possible, is to be integrated into something that looks like what everybody else uses. So that is why I would put the emphasis rather on higher scale rates for those that we know are on benefit for very long periods of time than on giving them grants. But if it came to a choice, it would all depend whether the grants would be as generous; presumably, we would then have to go back to tie it to particular needs again. And I think we would then be back into all the difficulties of people having to pretend they need one thing when they need another, because their needs may not necessarily be for something for which you could get a grant, and yet they may still need to borrow for that, and their needs are wider, really, than the old items for which they could previously get loans, which is why the scheme has been relaxed as it is.

4   Note by Witness: I was asked how the amounts borrowed from the Social Fund compare with the amounts from other sources of credit. I am not entirely sure whether Mr Thomas was referring to all forms of consumer credit or just those catering for the needs of people on low incomes. If he meant all forms of credit, the figures are as follows: In the financial year 1999-2000 around £429 million was lent from the Social Fund. Bank of England figures show that over the same period, a total of £14,780 million was borrowed in consumer credit. But, of course, the Social Fund is only available to people on IS or income based JSA, while the Bank of England figures relate to borrowing across the population as a whole. As I have said above, we do not know exactly how much is borrowed from companies that specialise in the supply of credit to people on low incomes, although I have produced a broad estimate. Back

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