Examination of Witnesses (Questions 60-79)
MR MICK
MCATEER,
MS TERESA
PERCHARD, MR
MIKE BARRY
AND MS
CLAIRE WHYLEY
24 JANUARY 2006
Q60 Mr Mudie: That would take them
down to £47?
Mr Barry: I would point out that
if there are Social Fund loans as well being deducted, they would
be deducted externally.
Q61 Mr Mudie: You can see why I am
on the Treasury Committee!
Ms Perchard: In consequence of
setting up a direct payment from income support for electricity,
gas and water in addition to the £2.80 for each debt there
might be, there will be an estimate of a weekly current consumption
to keep up-to-date with current consumption, which can be quite
large for fuel.
Q62 Mr Mudie: What consultations
have you had? It was announced in the Pre-Budget 2004 report.
Is there a start date and have you discussed in principle and
in detail in terms of safeguards? Michael, would you like to say
something?
Mr McAteer: No.
Ms Perchard: I am afraid I am
a bit hazy about the actual start date, because some of these
DWP things take a long time to change the system, but I think
it is within 2006. The Financial Inclusion Taskforce, which Claire
and I are both members of, have been consulted about the scheme.
Citizens Advice has also had discussion with the DWP about the
scheme and submitted a report to DWP on direct payments urging
a wider review of the whole scheme. Within the last six months
we have published that report.
Q63 Mr Mudie: You ask us to raise
with the Treasury and the DWP the 10 million and ask for a break-down?
Ms Perchard: Yes.
Q64 Mr Mudie: Why are you getting
so excited about 10 million?
Ms Perchard: Perhaps we are used
to living on a tight budget, but it does seem rather a large amount
to spend on administrative and system changes to simply bring
an additional debt into this scheme, and I think it is worth asking—that
is out of £120 million being spent, so it is a reasonable
chunk of the £120 million—will it deliver the equivalent
amount of benefits that maybe could be spent on something else?
Ms Whyley: I think it is absolutely
crucial to work out whether it is going to deliver before £10
million is spent, and I am not convinced we have done that. Teresa
is right, we have discussed this at the Taskforce. I am not sure
whether we have been consulted on it, because I am not sure whether
the decision is up for grabs. I am not sure it ever has been.
I think it has been decided and, although we have commented, I
am not sure there has been any sort of formal consultation.
Ms Perchard: I know that what
we have just said might not sound that clear, but basically, if
you are going to spend £10 million in system changes with
the idea that it will improve access to affordable credit, i.e.
those people in the benefit system will be lent more affordable
money than they would otherwise have been, then I think you will
need to know what your returns on the 10 million are. I do not
know what the evidence is to say that there will even be as much
as £10 million lent as a result of that.
Ms Whyley: I think until we have
cracked the issue of the supply of affordable credit, it is a
bit elementary.
Q65 Mr Mudie: Michael, I will get
you at last. You are not supporting at the moment the idea of
a cap on interest rates charged. Why?
Mr McAteer: We have thought long
and hard about this. It may seem counter-intuitive, but we took
the view, looking at the evidence around Europe and so on, that
if you did impose a price cap at the moment, given the lack of
alternative credit sources, we feared it would actually displace
even more people out into the normal mainstream sector. We thought,
on balance, the consequences would have been worse for consumers.
That was the reason. In principle we have got no problem with
price caps, because we have argued for price caps in other financial
services sectors, but within this particular sector at the moment
we thought the consequences, on balance, would have been detrimental
for consumers.
Mr Mudie: Going on to secured lending,
are there any bad practices in the market for secured debts that
we should be looking at? I did a debate on equity release,[6]
so we have clocked that one. Are there any other practices that
hit home-owners on low incomes?
Mr McAteer: We very much appreciated
the debate in Westminster Hall, because we think financial exclusion
will be a growing problem because of things like equity release
and so on. There is a real limit to which the market can actually
serve people who need equity release most, so we think that is
bound to be a growing problem in the future, but, more generally
on secured lending, no, we are concerned that there seems to be
a trend—and it is very hard to get the concrete figures
on this—where people are required to refinance loans on
secured terms, and so on, and then they fall into the hands of
the types of lender who are within the law but just about, who
indulge in some practices which are very unsavoury, and so on.
What you see happening, we have come across some contracts where
people have taken out what seem to be very small loans, but then
the application of penalty fees, and so on, escalates the debts
completely out of control to amounts that would take your breath
away when you see some of the case stories. That is another problem
area we think needs to be looked at.
Q66 Mr Mudie: If we can, just as
a last question, go back to where we were on the private people
who were doing an attachment to benefit, somebody listening could
say, "Well, we cannot allow people to get away with taking
out loans, borrowing money and not repaying it", but there
must be legal steps at the moment for a lender who is not being
repaid his money to go to court and take whatever steps are available
within the law. What are they?
Mr Barry: There are steps.
Q67 Mr Mudie: Why is this necessary,
in other words?
Mr Barry: They are taken all the
time, but there needs to be a shared responsibility between the
lending institutions and the borrowers. The banks tell me all
the time when I am negotiating with them that, if someone could
not afford to pay the bank, they should not have taken out the
loan, but they do not accept their own responsibility.
Q68 Mr Mudie: What I am saying is
at the moment that bank has legal recourse. Is that breaking down
or something?
Mr Barry: It is not breaking down,
it is just that they are lending to people who cannot pay back,
and if you cannot pay back then no amount of legal action is going
to get you your money back, it is going to be an expensive course
of action for the lending institution with very little return
on that expenditure.
Q69 Mr Mudie: So they just go for
the attachment to benefit?
Ms Perchard: Yes. On the DWP scheme
for extending the range of debts that people pay directly from
benefits, our understanding was this was intended to be for third-sector
lenders, credit unions and CDFIs in order to improve the risk
profile of consumers that they did not know so that they were
more likely to lend to them. I sensed there might have been a
mission creep if people are talking about it being extended to
private sector lenders on a larger scale. Certainly what we have
highlighted in our evidence[7]
is how, if people are in debt to the bank, if there is any money
in your account they take it for their debts first anyway, so
they have a huge advantage over other creditors, so I cannot see
them queuing up at DWP's doors; and many of the wide variety of
other lenders—car finance, secured lenders—that we
know of would not be happy at getting £2.80 a week for many
years from the DWP. They will send the boys round to get more
money more quickly. This is not really a scheme that is aimed
at them, those sort of raw in tooth and claw lenders out in the
market, it is intended for the credit unions and the CDFIs, but
it is still debatable whether it is going to yield improvements
in available affordable credit, which is what it is intended to
do. That is why we highlighted it.
Q70 Chairman: We saw in the newspapers
yesterday, uSwitch.com, the price comparison website, said that
88% of banks did not do any checks on an individual's income.
Ms Perchard: Yes.
Q71 Chairman: Do you think this is
a problem? The issue of data sharing, which we have highlighted
before, saying that we need to action this, do you think there
is a long way to go yet in this data sharing? Do you think it
would help?
Ms Perchard: Yes. I would say
that the evidence we have given you on that group of consumers
who are being lent too much by the mainstream, including mainstream
banks, this issue goes to the heart of it. It is about matching
what you lend somebody and the repayments to their ability to
pay and knowing your customer. The banks will know what money
is coming into the account, it is just not connecting up the two
bits of information in the corporate brain to actually make appropriate
lending decisions. We have supported some voluntary initiatives
that are going on to share data across lenders. We think if that
does focus on income data and what people know about the earnings
of customers, that ought to improve the quality of lending decisions
for people on low incomes.
Q72 Chairman: We know Barclay's,
Egg and the Co-op have started something, but you need a bigger
scale of things?
Ms Perchard: Yes.
Q73 Sally Keeble: On secured loans,
specifically on right-to-buy properties, are you concerned about
the practices of some organisations, because we all know there
have been those cases where they go round leafleting the council
estates exercising the right to buy, then the prices rise, and
guess who ends up owning the property or controlling the property.
That is one aspect of it, and the second one: is there is a list
of approved organisations that can provide mortgages for right-to-buy?
Some of those are obviously organisations that are prepared to
provide loans to, let us say, challenging customers who might
not be able to get through the larger financial institutions.
I know there have been criticisms of some of the organisations
abroad. Do you think that that list has got the balance right
between ensuring that people who otherwise might not be able to
buy their own homes get access to the financing and accepting
organisations, which do have sometimes some rather different practices
from the mainstream?
Ms Perchard: To the first part
of your question, yes, we are concerned.
Q74 Sally Keeble: Still?
Ms Perchard: Yes, and we have
highlighted secured lending as being a feature here where really
people are being charged far too much for a secured loan. One
feature of extortionate lending is that you are being charged
too much for the risk you really represent, and also there is
a huge potential for targeting and exploitation, particularly
for loans that are sold in people's own homes where undue pressure
may be brought to bear and where loans get churned from being
unsecured to secured, perhaps with the intention of the company
being able to repossess the property at some point in time and
they clearly know the consumer is on low income.
Q75 Sally Keeble: On the issue of
the right-to-buy, specifically about the right-to-buy difficulties?
Ms Perchard: Yes. I am not briefed
on the specific lenders that you have referred to, but I would
be very happy for us to have a look at the evidence on that. We
would expect that, if they have been vetted to being given access
to that market, somebody is taking into account whether they have
reasonable and fair lending and debt recovery practices and are
offering a good deal, because the consumer will assume that that
has happened if they are only able to use those firms.
Sally Keeble: Perhaps we can just have
your comments on that.[8]
Q76 Chairman: As you know, the Government
regulated for equity release, not least at the request of this
Committee a few years ago to get it done, to which they responded
equally directly, and the DTI are responsible for some aspects
of secured lending. Given that we are going to be speaking at
a later date to both the FSA and government departments, is there
a need for further regulation there? I am mindful, by the way,
in relation to equity release, that it was the industry that was
suggesting to us to get it regulated. Is there a need for a government
FSA to look at that yet?
Mr McAteer: I think there is.
I take the point that many responsible equity release providers
did see the case for good regulation, so fair play to them on
that. As we say in our evidence, we are producing a policy report
on the future of FSA quite soon, probably some time in the spring,
and one of the things we are struggling with is whether or not
the FSA should take on more responsibility for regulating debt.
Ideally it would be better if it was a one-stop shop across the
whole spectrum of financial products, but at the moment, given
the way the FSA is structured, we question whether or not the
FSA could cope with that. That is the big problem we have with
that.
Chairman: But there is an issue here
of regulation. If you could send us further information on that,
it would be helpful.[9]
Q77 Mr Love: Can I go back very briefly
to the question about yesterday's report that the Chairman raised,
because the quotes in the press say that in one case a consumer
earning less than £10,000 was given a credit limit of between
£10,000 and £12,000, which I think everyone will agree
is outrageous, but the response that Barclay's gave as a defence
is that they are now turning down 55% of new applications for
credit. The question then arises, with horrific reports like that,
are we not in danger of the people who are excluded being even
more excluded because of the banks' reaction to the publicity
given to this type of report?
Ms Perchard: Last summer there
was quite a ripple running through the financial services industry,
the credit industry anyway, particularly starting with Barclay's
Barclaycard, where people were concerned that their bad debt was
increasing and they wondered whether they had actually got the
quality of their lending practices right and whether they had
got the incentives right, and Barclaycard has certainly shifted
to a position where you might pay lower interest on your credit
card if you pay back more. I suspect that the case you have just
highlighted with Barclay's is perhaps more a reflection of a change
in the market, more widely, than a response to yet more research
about responsible or irresponsible lending. In our evidence we
have highlighted a number of cases where it was incredible to
us, and we have many more, where people on benefits, particularly
older people, whose income is not going to dramatically increase
and probably will decline, can obtain or are offered very huge
credit card limits or loans from mainstream banks, and that cannot
be in their or the bank's interests.
Mr McAteer: We think they seem
to be getting the balance right, because the other defence we
often hear from the banking industry as well is, "It is not
in our interests to over extend debt to people who cannot afford
to repay", and technically that maybe right, but quite often
what happens is that they are locking the stable door after the
horse has bolted and it is the consumer who is left to pick up
the pieces. Again, it is absolutely right that there should be
shared responsibility and people should take responsibility as
well, but we are very concerned that there are a number of practices
and processes that the banks could improve to ensure that they
lend more fairly and more responsibly.
Q78 Mr Love: Someone mentioned earlier
on the definition of a financial exclusion, those that had applied
and been refused was round about 7.8 million people, but in the
Which report you speak about three different groups. I am particularly
interested in one of them, which is consumers who are permanently
excluded and whose core financial needs can only be met by state-sponsored
and provided solutions. I would suggest that they are the non-market
segment of consumers. Can Which give us any idea of the magnitude
of that in rough terms and then go on to tell us what they think
those state-sponsored solutions are?
Mr McAteer: It is very difficult
to pin down precisely what the numbers are, because it depends
how you define exclusion, it depends what products you are talking
about, but I think the figures in the Treasury's financial inclusion
report around that 7.8 million do target that particular group.
Again, the point I would stress is that so many of those excluded
groups are concentrated in the most deprived areas, so it is not
always a national problem but it can be focused in particular
local areas, which is why we think a coordinated approach to tackling
exclusion is needed. What we mean by "alternative solutions"
is that in some cases, when we come to pensions, there is no alternative;
only the state can provide access to a decent pension for people
who can never afford to save. I think that is one of the bottom
lines. On other occasions it may well be that the Social Fund
is the only place people can go to get access to loans, because
even with the best will in the world—I am a board member
of a credit union in Hackney—we cannot lend out unless we
have sufficient savings, and so there is a limit to what alternative
solution credit unions can do. So again, there must be a rule
for the state for meeting the needs of the permanently excluded
in society. I think it very much depends. It does not always have
to be a state-delivered solution, but there is certainly a case
for the state to underwrite alternative solutions, and I would
like to see the Government do more to help credit unions and the
like to lend out to people who are more excluded than they are
prepared to be concerned at the moment, because there is a national
constraint to which credit unions can lend, because we have to
build up savings before we can lend out. I think, whilst the process
is simple—it is a simple balance sheet thing—and we
are not churlish, we have to look after our members savings as
well, so again, there is a need for the Government to look at
more radical solutions to underwrite alternative delivery.
Q79 Mr Love: Let me just pose for
you the thinking process I am trying to go through. There is a
market sector, there is then, if you like, a sub-market sector,
which is the sub-sector providers, and I will come back to them.
What I am trying to look at very specifically is the non-market
sector, the extent of that, and to some extent does the Social
Fund address the extent of that non-market sector?
Ms Whyley: No. The 7.8 million
were people who had applied for mainstream credit and been refused,
so that is not a measure of broader financial exclusion. No, the
Social Fund currently cannot meet the needs of everybody who cannot
find other solutions to credit. I think half of applications at
the moment for budgeting loans are refused. There is a huge problem
of capacity; there is a huge problem of priorities. It is still
a complex system for individuals to negotiate and for officials
to administer, even though there have been steps to simplify it.
We would argue that the Social Fund is not the solution here.
There is clearly a role for the state, there is a role for state-sponsored
interest-free loans, possibly even small interest-bearing loans,
but we would not argue that the Social Fund is capable or designed
to pick up everybody that is currently outside the mainstream
or the sub-sector market at the moment.
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