Examination of Witnesses (Questions 80-99)
MR MICK
MCATEER,
MS TERESA
PERCHARD, MR
MIKE BARRY
AND MS
CLAIRE WHYLEY
24 JANUARY 2006
Q80 Mr Love: Perhaps, Teresa, you
could comment on what kinds of households. Who would be the typical
household that should be able to borrow, I will come on to whether
they should be grants or borrowing in a second, but let us just
talk about borrowing. On what basis, should you be able to borrow
from the Social Fund?
Ms Perchard: We would like eligibility
for Social Fund borrowing to be extended to a wide range of households
on low incomes, including those who are working perhaps part-time
with support from tax credits, anybody who is on a low and fixed
income or in a working pattern where their income is usually low
but they might have quite a lot of intermittent effects—perhaps
they are working temporarily, they get laid off, their income
goes up and down—because borrowing for them is not about
a holiday in the Caribbean, it is about smoothing over the ups
and downs of weekly income and budgeting and essential items,
and that should really be where the Social Fund comes in. It has
not perhaps kept pace with the requirements of its users, and
it has not been aimed at doing that, or kept pace with government
policy, where we are positively encouraging people to work more
and move from benefits into work. It is difficult to borrow money
to help you with the things you might need to take up a job—a
monthly season ticketso that your travel cost is lower, suits,
things like that to actually take up and hold down a job. We would
like to see the Social Fund moved into a more positive constructive
approach where it is perhaps less costly to administer, because
there is less time spent saying, "No", more time spent
saying, "Yes", and more positive benefits for individuals
and the public as a result. Alongside that, the role of grants
also needs looking at, because they are the things which help
you, if you are living on benefits, with lumpy expenditure. We
would like to think you could get a school uniform grant out of
that system, but you cannot. It is those sorts of things which
people are going to have to afford from time to time but may not,
because they are on benefits, be expected reasonably to have saved
up for because benefits are at a subsistence level.
Q81 Mr Love: Can I ask you two questions?
One relates to issues that Mr Mudie raised earlier on about the
amount that can be taken from your benefit in order to pay back
loans. Clearly a lot of people reach the margin and still cannot
afford the expenses of life. Therefore, a grant would be more
appropriate. What increase in the level of grants do you think
would necessitate addressing that particular problem? On the other
hand, you mentioned earlier that half of the people get refused
for a loan, yet one suspects that the client group concerned do
not bother going to the Social Fund because they will probably
be turned down a few times?
Ms Perchard: Yes.
Q82 Mr Love: What is the level of
real need out there that might not be being met by the Social
Fund?
Ms Perchard: On the loans side,
over £500 million of the £850 million spent on the Social
Fund is put out in loans, and 93% of that is recovered; so the
net costs of the lending side of the Social Fund are really quite
small. It sounds like an efficient lending system! That will change
because the Government has agreed to reduce the amount for debt
recovery. The current max is about 25% of benefit that could go
to repay a Social Fund loan, so, like the banks coming first,
the DWP comes first when it comes to paying back your debts. Also,
the abolition of something called a "double-debt rule"—which
has been a real reason for refusal—which is that if you
already owe money to the Social Fund and you want to apply again,
the amount that you already owe is doubled in making the estimate
of whether you can afford to repay—has acted as a real bar
to people being able to borrow again from the Social Fund, and
that rule is going within this year, so that will increase the
amount of spending on the Social Fund. So the Government is putting
more into access to interest-free lending for people on benefits,
and those things are good. I think scaling up the unmet need,
I do not have any additional new evidence to offer on that other
than that which we have provided you with, but we and other charities
have suggested ways that the grant scheme could be reformed to
help families with a whole series of life event grants that were
more constructive and positive than the current system. I would
be happy to see if we can send you a further note on that and
have a bash at some estimates, but we are not the only people
in describing the Social Fund as a huge pool of disappointment.
The Social Fund Commissioner has also expressed great dissatisfaction
with the quality of decision-making and the lack of access to
loans and grants. The picture is improving, but we would like
to see a more fundamental review of the purpose of the fund, how
to make it help more people more, both on the loans and the grant
side, and how we can deliver it more effectively: because the
Government, through the Social Fund, is putting out, I would think,
much more than credit unions in terms of small-scale lending.
Five hundred million a year going out to people is a lot. If you
doubled that and made it more accessible and friendly, that would
help.
Q83 Mr Love: Can I press you on whether
there are any particular reforms. You mentioned the double-debt
rule and they have recently reduced the repayment rate at 12%.
Are there any other specific changes getting away from increasing
overall the amount?
Ms Perchard: Eligibility about
who can apply and extending the eligibility to a wider range of
people receiving benefit and tax credits is one of the main changes
we would advocate.
Ms Whyley: And the predictability
of success, because people need to have a reasonable assumption
that it is going to be worth the effort applying; and if you think
that Social Fund loans are not in effect loans, they are an advance
on income, and if we treat the Social Fund as something which
could enable people to smooth their income over time and allow
people to be more proactive in their decisions about that, I think
the Social Fund could work an awful lot better.
Q84 Mr Love: Can I press you on the
third sector lenders now—credit unions have been mentioned,
CDFIs. The National Consumer Council have said neither have been
able to achieve the scale of sustainability and professionalism
necessary and therefore the commercial sector has to be part of
the solution. What did you mean by that?
Ms Whyley: I think there is a
lot of scope for the commercial sector to work better in partnership
with the third sector and perhaps to enable them to benefit from
more economies of scale, enable them to work more efficiently
as well as investing funding in the operation of that sector perhaps
in the form of loan-guarantee funds, or something like that, but
I would see that third sector operating within an infrastructure
that includes the commercial sector rather than one that runs
in parallel to it.
Mr McAteer: Can I come back on
something. As I say, I am one of a group of people who have just
set up a credit union in Hackney. We opened for business in October
last year and we already have over 500 savings accounts opened;
so there is clearly a demand for credit unions even in places
like Hackney, one of the most deprived boroughs in the country,
but there is an even bigger demand for loans. My point is that
at the moment we cannot meet the need for those loans. If there
were two things that I would love to see the Government do to
help credit unions, we could give away money in terms of loans;
where there is enough demand for loans the Government could actually
underwrite some of those loans for us to distribute. I think if
they were to underwrite low-interest rate loans, that would go
a long way to meeting the demand for loans in places like Hackney,
but clearly that would have to have some kind of government underwriting
across subsidised loans. The second option would be that Which?
is also working with an organisation called the Consumer Credit
Counselling Service to try and give them access to our content,
and so on. I would love to see the CCCS being able to refer their
clients who are in trouble to credit unions—they would act
as gateway providers to credit unions and they could administer
loans to people who are in serious emergency trouble—because
there are a number of practical measures the Government could
take to make credit unions work better.
Q85 Mr Love: One of the credit unions
said an issue that would arise from that would be—
Mr McAteer: I do not agree. Where
I come from in Ireland the credit unions are a mainstream rival
to the banks.
Ms Whyley: But the infrastructure
subsidy in Ireland is very different.
Mr McAteer: But they are not poor-man's
banks. I think it is wrong to try and accuse them of being poor-man's
banks.
Ms Whyley: Nobody has said that.
Mr Love: Some of years ago there was
a proposal to set up a central services organisation for credit
unions that would have been supported by that commercial sector.
Do you have any responses on that, and you can tie that into whatever
else you wanted to say?
Q86 Chairman: I think there is a
lot of thinking that has to go on. There are more innovative ways
we could engage the Social Fund with local organisations. Why
do you not put your thinking hats on and, in response to Andrew's
question, write into us?[10]
You want to say something as well?
Ms Perchard: I do, actually. Barclays
and the Co-op are both good examples of ways that the commercial
sector can work with the third sector to help develop their skills
but also their technical capacity, so they can become a banking
partner for those credit unions that want to join in with it,
which is an issue about the central services organisation, because
you are talking about individual organisations and do they really
want to join in. Barclays has provided a lot of intellectual and
capacity building support to credit unions, they have also helped
with some research on the effectiveness or otherwise of loan guarantee
schemes which have been proliferating, but some credit unions
will say, "You might as well put the money in a bucket outside
the front door." Unless you give people advice on budgeting
and dealing with their other debts, you might as well just give
it away. So there has to be effective quality lending really to
be sustaining it.
Ms Whyley: One very quick thing.
The £36 million growth fund that DWP is administering from
the financial inclusion fund is exactly the kind of thing that
Mick has called for to increase the supply of lending, and I think
it is important to see how successful that is before we actually
plough more government money into that. I think we really need
to see how successful that is in increasing supply.
Ms Perchard: Just on the Social
Fund, we have advocated delivering it outside of the DWP and looking
at other ways of delivering it.
Q87 Chairman: Do you want to join
in?
Mr McAteer: No thanks.
Mr Love: Can we take up what you said,
Chairman? Maybe they can put their thinking caps on and let us
know?
Chairman: Yes.
Q88 Mr Newmark: I want to discuss
the national strategy for financial capability, which, I think,
is Teresa and Mike, not to get you too excited. I think this is
a point from SAFE, but the financial capability sector has been
characterised as diverse, uncoordinated and varying in quality
of delivery. Is this a fair description and in the context of
that, is the FSA the right body to be coordinating work towards
improvements in financial education and in capability?
Ms Whyley: I think that is a fairly
good description of how the financial capability strategy has
developed. I think one of the key issues in terms of financial
inclusion was it was never clear at the outset how financial inclusion
fitted within the strategy, and so I think what has happened is
that over time that element has become slightly sidelined, because
the quicker, easier, bigger hits are elsewhere, and I think that
it would have needed a lot stronger direction in terms of what
it was due to deliver on financial inclusion much earlier to avoid
that. I also think that without a systematic strategy for implementing
financial capability, it will continue to be fragmented and uneven
and quite difficult to work out what the benefits of it are because
it is not very clear exactly what is happening at local level.
A lot of it is very diverse. A lot of very good practice is going
on, but it is not part of any coordinated strategy and so it is
very difficult to see what effect it has and to learn from it.
Q89 Mr Newmark: Does the fault lie,
in your view, with the FSA in developing this or does the responsibility
lie elsewhere? Effectively it has been put into the pocket of
the FSA saying, "Here is the challenge. You get on with it"?
Ms Perchard: Yes. The Financial
Services Authority does have a statutory objective to promote
consumer understanding of the financial system, so I find it difficult
to argue that it is not their job to be playing a very prominent
role here. We were very excited about their initiative to try
and create a ten-year plan for financial capability and to bring
together, as they have done, people from government, people from
the public sector, from the private sector and the voluntary sector
to look at what needs to be done, what would work, for the first
time ever and looking at work with adults as well as with children.
The fact that we are not there yet, on which point I think there
is unanimity across all of those people who have been involved,
I do not think is a reason to say, "They failed. They are
not the right agency. Let us move on", because I am not sure
who else could pick it up. They are the only body that could,
if it decided to, actually raise, through industry levy, substantial
funds to invest in financial capability other than the Government
taxing taxpayers.
Q90 Mr Newmark: I am curious. You
think that a mechanism for achieving this is through some sort
of financial levy, which, I understand, has been ruled out, and
the Chancellor has decided to go down a track in which he is raiding
dormant funds to effectively fund this scheme. Your advice to
government would be, "Let us have some form of financial
levy"?
Ms Perchard: I think the issue
there is what we need to do, what works, what does it cost, who
should pay and how do we get the money together? All of those
issues have been under debate in the work we have all done with
the FSA over the past couple of years. The issue of a levy comes
into the debate, goes out again—I do not think it is ever
permanently out of the debate. As for the use of the dormant accounts,
so far it is not clear that it would be used for financial capability
for people of all ages—perhaps for younger people,
about getting them on to a career path—but what about the
rest and those who are financially excluded, older people? The
question we need to be asking the FSA strategy in the context
of this inquiry is: "What does your strategy do for people
who are financially excluded?"
Q91 Mr Newmark: Exactly right.
Ms Perchard: Why are they bottom
of the priorities rather than the top? Because they need the most
help.
Q92 Mr Newmark: I am still not clear.
You say there needs to be greater joined up thinking by the various
stakeholders in this process?
Ms Perchard: Yes.
Q93 Mr Newmark: But at the end of
the day they are not getting together to be a talking shop. At
the end of the day it is about delivering this to those who are
excluded in society, and I am still not clear here how you reach
that end game?
Ms Perchard: To be frank, by having
the resources on offer. Together with many other advice agencies,
Citizens Advice has been very energetically putting in bids to
the DTI for a stake in the £45 million they are going to
spend on money advice. There is nothing quite like the availability
of resources for getting people together quickly to work out what
they can do and plan services in double quick time. What we have
been doing in the FSA financial capability strategy is pushing
around cold food about what we could do with no sense of where
the resources might come from, which has, I think, ossified development,
lost people's attention, when we are all actually very desperately
wanting to do more in this area. If only the resources were there
and were clearly available, we would go and get them and deliver
on a bigger scale than we are already.
Ms Whyley: I agree with what you
said. I do think the FSA is the organisation that should be doing
this. I think one of the things that went wrong, and I think it
was admirable to construct the strategy as part of a really wide
consultation, but I think with a consultation that wide you need
quite a clear remit and you need to keep a strong grip on it,
and I think that is the bit that slipped. Then I think we had
lots of working groups all working to slightly different agendas,
and there was not really much of a backbone to it. In terms of
how it could have met the needs of financially excluded people,
it would seem to me that a strategic way of approaching this would
be to work out what it is that financial capability means, what
skills that incorporates and then look at how you might deliver
it. The first one—"What do you mean by financial capability?"—would
apply to everybody whether you are financially excluded or not.
The delivery mechanisms will depend on how connected you are with
the market and what your life experience is and so on, and it
would seem to me that one of the very simplest ways to have addressed
this would have been to pool resources into meeting the needs
of the hardest to reach—that is going to be your most complex
delivery strategy—and then you can take bits off it for
the people who are much easier to serve, who are quite happy with
the web-based services, the telephone based services and so on.
In fact what has happened is that we have done it the other way
round—we have said who is the easiest to meet, how can we
reach the most people with the least input—and that is how
we have ended up so far from anything that is aimed at people
who are financially excluded.
Q94 Mr Newmark: So it needs to be
much more of a rifle shot towards those who are effectively most
in need, and you are saying the FSA is the best to take the lead
in ensuring that those who are most excluded in our society are
getting what they should be getting?
Ms Whyley: I think it is one of
the issues in the way it comes up in the questions on this, because
I think one of the key ways of achieving that is for greater clarity
at the FSA about its responsibility for the financially excluded
and its remit in that area. I had not realised that that remit
was so unclear at the start of the financial capability strategy,
and now I realise that, either there has been some drift or it
was never clear, I think that is one of the key drawbacks. If
the FSA does not see itself as the key body to ensure that the
financial services industry can meet the needs of the financially
excluded, then I am not surprised with what has happened with
the capability strategy.
Q95 Mr Newmark: A different question
now and it is to do with financial literacy. Citizens Advice say
that many enquiries require their financial advisers to translate
for clients letters and contracts sent out to them by the financial
services industry. There have been calls for firms to make their
communications and literature easier to understand. Has there
been any response from the industry in this area? This goes back
to the point that I think you made earlier in this discussion,
which has to do with those that are lending and providing these
services to create a very simple way of communicating, because
the people they are providing these services for, or lending to,
perhaps are not the most sophisticated and you are almost creating
double the work by all the small-print and caveats, and, therefore,
how do we overcome this sort of problem?
Ms Perchard: It is a long, steep
hill to climb. This Committee has previously had very significant
forays into the world of transparency of consumer credit information,
and we have seen some improvements as a result of the Committee
simply asking for things to improve and without regulation. I
think we have got a long way to go in terms of really getting
very simple language into information about financial products
and also having the people on the front-line in firms, particularly
over the phone, being able to explain things simply to consumers
who ring them up. This was highlighted in the work we have done
recently where we have been piloting services with IFAs to work
pro bono with CAB and their clients and they have said
that quite a lot of the things that bureaus referred to them was
to simply translate letters about pensions and about insurance
products because the consumer could not understand what it was
they had been sent. Obviously it is in the business interest that
you do not fully understand, but I think businesses need to make
a leap to see that it is in their interests to have confident
consumers who do understand what they are getting into and that
prevents long-term risks arising down the line—the consumer
had no idea what this product was—and that is where regulation
comes in, perhaps, to reward firms who do take the right steps
to inform their consumers properly and punish those who do not.
Mr McAteer: Can I make a point
about this education issue? I think everyone supports financial
education and programmes to improve management of the proceedings—all
motherhood and apple pie—but it is going to take a generation
to actually have this informed power which the FSA dreams about.
I think I have to disagree quite strongly with my colleagues here
about the role of the FSA on this, because it employs two and
a half thousand people, it is already struggling to deal with
the conflicts of interest between wholesale market regulation
and retail market regulation. I am not sure it can actually cope
with the amount of resources and the amount of dedicated people
who can deliver a financial education strategy at the time. If
it is to be a dedicated body, I would prefer to see it set up
similar to the financial ombudsman service where it is linked
to the FSA but it is operationally independent. I do not think
the FSA is the best place to deliver this education strategy.
To give you another example on the issue of literacy and parity
in financial productions and communications and so on, this Committee
has previously recommended that the industry should create simple
risk measures to help consumers understand the difference between
simple products and risky products. Most of the industry was in
favour of developing these common standards, but it was the FSA
itself who refused to go ahead with developing this common risk
standard because of the dangers to their reputation.
Q96 Mr Newmark: But surely that is
an issue of allocation of resources.
Mr McAteer: Of course it is.
Q97 Mr Newmark: Part of the problem,
I believe, the FSA has is that it is being distracted probably
in areas that it should not be spending as much time and money.
Surely it would be better to reallocate those resources to protecting
the most vulnerable in our society?
Mr McAteer: I think if you are
going to deliver a proper financial strategy it is a combination
of resources and dedication. I think you are absolutely right,
it needs more resources, and we question whether or not the FSA
can deliver that because of the other objectives, the other responsibilities,
it currently has. That is why I am suggesting if you want them
to do it properly, you should set it up in the same way as the
financial ombudsman service is set up, linked to the FSA but operationally
independent. I think that is the only way you are going to get
your bang for your buck.
Mr Newmark: Going back to what Teresa
says, it is not necessarily a generational change, it is actually
a culture change and in order to change that culture it should
be fairly quick, and that just means giving them direction to
create more simplicity and clarity rather than complexity: because
the tendency is that lawyers get hold of things and one sentence
becomes a paragraph and then a ten-page book becomes a 250-page
document. There is no culture of shrinking the message and delivery,
it is a culture of expanding, and that is something we need to
change.
Susan Kramer: Chairman, could we at some
point take a proper look at this particular set of issues, because
it is very much a subset of what we are looking at today.
Chairman: What are you talking about?
Susan Kramer: About the role of the FSA
and financial proclivity in this area.
Chairman: That issue is on our agenda,
Susan. It is an example of risk indicators. We want them taken
back because we feel that they are reluctant to move on that,
and also I think there are informal signals that the FSA do not
really feel that financial proclivity is their responsibility.
Susan Kramer: I found a strong echo with
what Mick was saying.
Q98 Mr Mudie: Further on in the agenda,
one of the questions the brief touches on and I think we might
as well deal with, the FSA said to us, quite specifically, "We
have no explicit statutory responsibility for financial inclusion,
nor is it included in the principles of good regulation as an
issue to which we formally have regard." They then go on
to say, "However, we take the issue very seriously."
Anybody who quotes that as a pre-runner to "We take it seriously"
is telling you how seriously they take it. Do you think the FSA's
remit should be changed to include statutory responsibility for
financial improvement?
Mr McAteer: No, I do not.
Q99 Mr Mudie: Not from education?
Mr McAteer: No.
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