Examination of Witnesses (Questions 40-59)
MR MICK
MCATEER,
MS TERESA
PERCHARD, MR
MIKE BARRY
AND MS
CLAIRE WHYLEY
24 JANUARY 2006
Q40 Chairman: That was a question.
Mr McAteer: And I am not going
to say that in public. But certainly our opinion would be that
the banks are unwilling to let the Post Office join LINK—not
because of the Post Office threat, funnily enough, but because
of the potential impact then of Sainsbury's and others in joining
the system. That is where they see the threat to competition.
We would argue that having the Post Office join LINK would serve
two public policy purposes. It would tackle financial exclusion
and would probably bring more competition into the banking sector
as well, so it would have a dual benefit. Could I make a point
about this, because, whether or not the Post Office is the right
place or whatever for tackling financial inclusion is a big question
which needs to be tackled, but we should not forget that according
to the Treasury's analysis 68% of excluded groups live in 10%
of the postcodes around the country, so you can tackle financial
inclusion if you look at the areas most affected.
Q41 Chairman: We will get research
from the Treasury on that matter. As you know, the Treasury's
response to a cash machine inquiry was pretty woeful. They were
"head in the sand" and I told them that. But there is
an issue of public policy here. You did limited research in your
submission to us.[4]
Do you think that the number of free ATM black out areas is going
to increase?
Mr McAteer: Yes, we do, for a
number of reasons.
Q42 Chairman: There is a public policy
element there.
Mr McAteer: I think the public
policy element is crucial. We were very disappointed in the past
to hear Treasury ministers saying that the matter of ATM charges
and so on was a commercial matter for the banks. Of course it
is, but there is a public policy aspect to that as well, and we
fear that the number of black out areas will grow. I do not think
everybody is calling for a universal service obligation overnight,
but the point we would make is that five years ago we had the
Cruickshank review into competition in banking and Don Cruickshank
himself was reported in our magazine as saying there has been
lamentable progress towards the introduction of competition in
the banking sector. We would argue that the Treasury now should
be looking closely at some form of universal service obligation,
if only in preparation for the end of this voluntary partnership
approach. There is no point in waiting until the experiment is
over and then doing the research into whether or not there should
be a universal service obligation. We think you should be starting
to look at that now, just in the expectation that the banks are
not playing ball.
Q43 Mr Love: To follow on, one of
the ways you can respond to the problem that will occur through
the Post Office network is to get the banks to allow the universal
bank account to be cashed at post offices, and, indeed, we will
ask those banks that have not allowed that so far whether they
will. But one of the other ways is coming back to this issue of
quality and not quantity in relation to basic bank accounts. If
I could ask Claire from the National Consumer Council: you have
suggested a redesign of the basic bank account that talks about
counter access, small overdrafts, making the system fit with weekly
budgeting cycles. Do you have any idea, recognising also from
some of your earlier comments, that the banks are somewhat hacked
off by the amount of money they have had to pay out for universal
banking and to set up basic bank accounts? Have you made any estimate
of what that redesign is likely to cost the banks? Have you had
any discussion with the banks about whether they are willing to
undertake a redesign along those lines?
Ms Whyley: We have not costed
it. I know the Financial Inclusion Taskforce is looking into costing
out some elements that we have suggested, such as automatic payments
out of an account that are triggered by credits in. They have
been exploring the cost of that and what it would take to put
the infrastructure in place. We have talked to some banks about
it. The reluctance they express tends to focus more on whether
these ideas would help people on low incomes. They say they have
yet to be convinced that this is what people on low incomes want.
We have not managed to get to the point of having conversations
about what it would cost and how they might meet that. I think
these accounts and this target group will always be problematic
for the banks while they are trying to fit them into something
that does not work for them. To invest in finding out what it
is people want and looking at ways to deliver it would make a
huge difference. I think banks have a responsibility to this group
of customers. They do not just have a responsibility to customers
that are profitable to them; they have a responsibility to this
sector of the market as well. They spend a fortune on customer
research among their profitable customers and I would like to
see them do a bit more at this end of the market.
Q44 Mr Love: I assume the NCC did
some consumer research in drawing up this redesign. How do the
others feel? Is that a redesign that meets with general support
across the table?
Ms Perchard: There are certainly
product features that we are looking for which are quite straightforward,
in terms of creating at least a small overdraft facility, a small
buffer zone, like £10. When you get into looking at what
is in the market, three banks do offer this as part of their basic
account features. Then the debate about what it costs. Some banks
have come up with an approach which does give a small overdraft
facility—which might help people who are, say, within £5
of making the payments, avoid those direct debit charges. The
direct debit charges for failed direct debits when there is insufficient
money in the account, vary hugely, from nothing to £39. What
can you do for £39? £39 is outrageous. Looking at some
of the differences between individual bank accounts is quite helpful
in the debate about costs because you can say "Why can they
do this and you cannot?" I think we need to progress those
kinds of debates. The more challenging thing is matching mainstream
banking practices, mainstream utility practices (monthly direct
debits to pay your utility bills) and frequent monthly payments
of regular outgoings to a weekly income. That is the biggest challenge
in redesign. People on the lowest incomes budget week by week,
but, to gain the benefits of paying on a direct debit basis through
banking and to get lower costs for goods and services, they need
to be budgeting for monthly payments. We need to help people make
that transition, or perhaps have product or product features which
enable that to happen. The debate is about how to do that.
Chairman: Mr Newmark, do you have one
question, before we move on?
Mr Newmark: I have so many questions
I will not take up the Committee's time at this stage.
Chairman: Thank you.
Q45 Susan Kramer: You have talked
extensively about the problem of financial exclusion. It is not
merely a matter of having a bank account to receive payments and
make payments; it is access to a wider range of services. I wonder
if we could talk for a few minutes about access to affordable
credit. From your experience, how many consumers are finding it
difficult to access affordable mainstream sources of credit?
Ms Whyley: The figure that we
have is 7.8 million who are excluded from mainstream financial
services. I think those figures are based on having applied and
been refused a number of times. There will be a bigger population
who have self-excluded but that is the most definite figure that
we have.
Q46 Susan Kramer: That is a huge
number. There is perhaps some misconception that there are many
people who are at the very low end who are somehow or other accessing
inappropriate forms of mainstream credit. Is that another set
of problems that we have to lay alongside this?
Ms Perchard: Our evidence goes
to the heart of what one means by financial inclusion or exclusion.[5]
Because the Government strategy is concerned with tackling over-indebtedness,
if you are genuinely excluded then perhaps you are not over-indebted
in the way that many of our clients are. We come across many people
who are on very low incomes and benefits who have an astonishing
amount of very mainstream credit borrowing which causes them problems.
There is a lack of match going on in the market between the individual,
their ability to repay and the products. Backed up by the Competition
Commission research on use of home credit, we have also come across
people who are using home credit whom you might think are excluded
from the mainstream but who have very mainstream credit cards.
They have a whole range of different lending sources that they
are using to manage their finances. This is not a surprise to
us but things are not quite as black or white or as in or out
as they might seem. People are not in or out; they have a more
complex pattern of financial services than one might typically
expect. That is what we have tried to illustrate in our evidence
to you.
Ms Whyley: Some research in which
I was involved in the late 1990s showed that financial inclusion/exclusion
is dynamic. It is not black and white. People move in and out
quite frequently. The survey analysis that we did showed that
there were roughly twice as many people on the margins of financial
exclusion than are financially excluded at any one time. I would
argue, as Teresa has said, that clearly the completely excluded
is a group on which we have to focus and work with, but there
is an element of exclusion which is also about being forced to
use inappropriate products, which is definitely something we cannot
ignore. I think we have to see it as that continuum, from having
nothing to being able to access only things that are inappropriate
and which cause you problems.
Q47 Susan Kramer: If we were to look
at that group which would probably be described as "completely
excluded", at least from the mainstream, do you have any
sense of how many of them are using the doorstep lender, the kind
of tally man?
Mr Barry: We have been doing a
survey of our debt advisors recently to look at just at that issue.
One of our advisors found that 72% of the people who came for
debt advice, had debts to the doorstep lenders but not exclusively
to the doorstep lenders. They also had mainstream bank loans and
credit cards. So it definitely is a mixture of the two rather
than one.
Q48 Mr Love: You are not talking
about the illegal lenders.
Mr Barry: No, not the illegal
lenders, the doorstep lenders.
Q49 Susan Kramer: The legal doorstep
lenders.
Mr Barry: Absolutely. Provident,
Greenwood, Welcome Finance and Shopper Check were the ones that
we took as prime lenders.
Q50 Susan Kramer: We have another
group, as it were, who are turning to sub-prime, and, again, there
is a merger of the two—people who have access to mainstream
but probably inappropriately. That is another group which is working
with the doorstep lenders and there is a sort of crossover between
the two. Do you have any sense of people who are turning to the
illegal sources? Do we have any kind of feel on how big that group
is?
Ms Whyley: The DTI is currently
funding research into illegal lending which is due to report I
think in June—but I am sure there will be some earlier findings
than that. They are finding that it is incredibly concentrated.
It is not something you can pick up on a national level at all,
but my understanding is that you can identify those areas quite
easily by characteristics such as the type of housing, levels
of unemployment, levels of lone parenthood, for example, and then
you find it is incredibly concentrated. So it will become much
easier to identify and to start to extrapolate from what we know
about those areas to the numbers, but I do not have that information
just yet.
Ms Perchard: There are two extremely
interesting projects the DTI has run in Birmingham and Glasgow
to invest in a greater level of enforcement, undercover trading
standards enforcement, in deprived communities to round up illegal
money lenders. Some men—they seem to be men—have gone
to jail in Birmingham as a result of this more intense enforcement
activity—using old legislation, the 1960s and 1970s law,
not the New Consumer Credit Act stuff. It shows millions of pounds
circulating in an informal and illegal economy, linked to drugs,
linked to prostitution and other antisocial behaviour. That perhaps
demonstrates, as part of the financial exclusion agenda, that
we ought to be looking at how we can enforce consumer credit law
more effectively to look after those people who are being exploited
in some of these communities. You might find it really helpful
to look at those projects. They are really exciting actually.
Q51 Susan Kramer: That sounds really
interesting. It would be fascinating to take a look at that. I
am trying to explore a little bit the solutions, as it were, to
tackling this problem. They often seem to centre around: How can
we make the mainstream take all these financially excluded people
and fit them into their world as well?—and there I am really
talking about the sub-prime sources. I suppose my question is:
Are we barking up the wrong tree? I have the sense, certainly
with the legal doorstep lenders, that, even though their rates
are extraordinarily high, they are being widely used because they
are both trusted and convenient. So we have a set of issues there,
and then, when I go and talk to the banks, they all say that if
people are borrowing £200 or £20 the administrative
costs alone are going to mean that they have to levy charges that
are phenomenally high. Are we heading down the wrong route by
constantly trying to look for a mainstream banking structure to
absorb these people or do we need to be looking at different structures?
Mr McAteer: Without going into
too much detail, if you have a problem with financial exclusion
there are two ways you can deal with it. You can either require
the mainstream banking sector to cross-subsidise it or else you
develop alternative solutions. As a general matter of policy we
think it is very unlikely that you will ever be successful enough
in persuading the mainstream institutions to cross-subsidise the
solutions to financial exclusion, with the exception of access
to mainstream banking, because there is no alternative. It is
only the mainstream banks who have the infrastructure to deliver
general banking services. In other areas, like access to affordable
credit, then we think the only solution is to promote alternative
solutions like credit unions and so on. So I think you are absolutely
right on that point.
Ms Whyley: It is another of those
issues that is not black and white. I think we are barking up
the wrong tree if we want mainstream to open its arms and welcome
all these customers; however, I think there are more ways that
the mainstream can get involved than directly offering products
to those people. I feel quite strongly that creating alternative
solutions which just create divisions and which might be quite
difficult for people to move between is not the solution. I think
we need to be building a series of stepping stones so that, if
people want to, they can move into the mainstream and out of it
as they see fit. I do not think that solution that collects people
completely separately is the right one. Certainly I do not think
it is what people who are financially excluded would want. I think
they want the option of getting into the mainstream if that is
appropriate. There are lots of ways that the mainstream can get
involved, not least because they have the scale and the coverage
that the alternative sector just does not have and is not even
going to aspire to for decades probably. They have very minor
coverage in this country and I think we have to be realistic about
what they can deliver. That is why I think it is crucial that
the mainstream remains involved even if they are not the people
directly offering products to people who are financial excluded.
Ms Perchard: Some of the key things
that make home credit very attractive to people are: the small
amount of weekly payments (affordable for someone on a low income);
how much they are paying back each week, not what the total cost
of the borrowing actually is, which is beyond most of us; and
the fact that you can skip a week and it does not cost you any
more, but it helps with budgeting because of the flexibility of
the personal service—all things you do not find in the mainstream.
A bank wants to lend you no less than a thousand pounds or give
you a credit card with a limit of at least that to start you off,
not two hundred, which may be exactly what people who are newly
joining the banking system and who are on a low income need as
a budgeting aid. This is a really challenging question about where
the supply of affordable credit is going to come from. Is it from
the market or the state or from a mixture of those things? Will
the contribution from the Financial Inclusion Fund to growing
third sector lenders actually address that huge number of people
that Claire has identified as being outside the mainstream. At
only £36 million in the growth fund from the DWP, I doubt
it. Over at the DWP they are spending about £500 million
a year, which is coming back in recoveries in Social Fund loans,
and so we need to talk about the Government's role here and about
making the Social Fund expenditure—
Chairman: We have some questions on the
Social Fund. The issue of joint approach is important. Susan and
I went to an event last week with community institutions, Lloyd's
Bank in particular, so I take the point you are making here. I
think there are steps to financial inclusion with mainstreaming.
Q52 Mr Mudie: Another doubtful New
Labour initiative is this business of giving private lenders deduction
rights off benefits. I would just like to ask, and maybe you cannot
do it, but it would be good for the Committee to get a feel for
the amounts—this is the Citizens Advice Bureau. This is
you again, Teresa. You mention amounts?
Ms Perchard: Yes.
Q53 Mr Mudie: Say there is a person
on benefit, a single person in their thirties on income support,
how much can be taken at the moment as a maximum figure? What
is their benefit and how much can be taken by deductions for arrears
from the five main lenders?
Ms Perchard: There is an amount
per debt which is a percentage of weekly income support (JSA)
for an adult.
Q54 Mr Mudie: There is £2.80
mentioned here?
Ms Perchard: Yes.
Q55 Mr Mudie: Is that £2.80
per debt?
Ms Perchard: Yes.
Q56 Mr Mudie: Does that hit the £8.40
maximum?
Ms Perchard: The Social Fund loan
repayments are another matter, so that may be much larger, and
this is towards the debt as well. This scheme of direct payments,
which has been running for a very long time, is essentially designed
to safeguard essential supplies to stop people losing their home
or losing their fuel or water. The way it works is that the utility
will get an amount paid out of the benefit towards the debt but
they will also have an amount out for the current consumption
estimate. But then there is a cap on the total amount that can
come out of anybody's benefit towards the debt, which, as we have
mentioned, is the £8.40 a week. There is a priority order
as well, so that debts are included in the direct payment scheme
in order of priority. Our feeling about this is it is a fairly
marginal initiative. The idea is that if your third sector lender—credit
union or community development finance institution will perhaps
be more prepared to lend to someone on benefits knowing that they
could recover their debt through a direct payment from benefit.
The reality of that might be quite different with the scheme as
it stands, because there are other debts that will come out before
that debt, which is a discretionary debt, and, in addition, the
total cost of creating the system to be able to make the payments
is about £10 million. What we have been saying is: has not
the time come to look properly at the system of direct payments
from benefit, to look at the amounts that can come out for any
debt and to look at how to create a better scheme, rather than
simply adding another debt on the list which may not improve access
to affordable credit, which is the policy intention.
Q57 Mr Mudie: Is there any intention
the cap will be raised—the £8.40—with this input
to the private sector?
Ms Perchard: I am not aware that
is DWP's intention.
Q58 Mr Mudie: Secondly, can you give
us the benefit level for a 30-year old single parent on income
support? What would it be?
Mr Barry: Fifty-six pounds twenty
per week at the moment for a single person, thirty years old on
income support.
Q59 Mr Mudie: So he can lose £8.40
in terms of attachments to benefit?
Ms Perchard: Towards debts.
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