Examination of Witnesses (Questions 160-179)
MR MARK
LOVELL, MR
JON TRIGG
AND MR
STEVE HART
14 FEBRUARY 2006
Q160 Susan Kramer: Ironically, as
you will be well aware, just over four million people who probably
fall into this client group who were offered the opportunity to
take up Post Office card accounts have done so, well above the
government's expectation of the numbers who would choose this
route rather than a basic bank account or a current account. Can
you help me think through why the Post Office card account has
been so attractive and the take-up so high?
Mr Trigg: I think there are a
whole host of issues, probably the foremost of which is that for
a lot of individuals who have opened those accounts it is in the
belief that by doing so they demonstrate support for the Post
Office network. For them that means their local Post Office, and
that by doing so it will stay open and will continue to be ever
thus, and they feel that very, very strongly. It is also because
what we find with customers a lot is that they do not want to
change their pattern; they have a pattern, which is that they
will go to the same place on the same day to do the same thing.
So drawing their pension or benefit or whatever from the Post
Office now by a card account is as much a social interaction as
anything else because they will meet their friends there and they
will go on and have a cup of tea at somebody's house or whatever.
So we find that it is very much a social interaction and that
is why they are doing it. There have been some instances as well
of Post Offices—and it is definitely not official Post Office
policy—saying, "If you do not receive a Post Office
card account your local branch will close," and there have
been quite a few instances of that, which is obviously inappropriate.
I think that is why there has been a very high take-up.
Mr Hart: We have actually done
a lot of work with Post Offices and what we are finding is that
a lot of the people, particularly pensioners, who are opening
Post Office card accounts are opening it for exactly that reason,
which is to support the Post Office, but they are not actually
following it through and picking up the card. So there are hundreds
of Post Office card account cards sat in Post Offices where the
individuals are still cashing their exception cheques. We also
have an example, I was talking to a pensioner the other day who
literally went to the Post Office to cash her cheque, took the
cash out, went next door to the Lloyds TSB and actually banked
it in there, when in fact she could actually have banked it within
the Post Office through the bank, which is supporting the Post
Office. So it is around that education of the products and services
that are available from the Post Office.
Mr Lovell: I think another reason
for its success—and I think this was in the narrative from
one of the previous evidence sessions—is that it is one
of the few products, even though it is quite a job to get through
the application process, that has literature available which says,
"This is how it can help you." I think in a previous
session somebody said they went into a bank and could not find
anything; it was not freely available. So I think that also helps
because people look at it and it rings true to people.
Q161 Susan Kramer: From your experience
has the Post Office card account acted as a sort of stepping stone,
taking people into other financial services, or do they get the
account and that is the end of the story and there is no engagement
more broadly?
Mr Hart: I think it has acted
as a stepping-stone and, again, I think it is an education thing.
With our work with the POCA to Bank pilot that we are working
on, the pilot project, it is around that education. Again, going
back to that pensioner it would be easy to sit and talk with that
pensioner and talk her through the products that are available
through the Post Office. They are in huge support to the Post
Office and I believe it is a stepping-stone, and I think you will
find that a lot of people will continue to use the Post Office
but using banking services.
Mr Lovell: I think the other fact
that we would like to explore on that through the pilot that Steve
referenced is I get a sense that there will be a difference in
terms of the demographic of Post Office card account holders,
so it may well be that it is a stepping stone for a certain proportion
of POCA account holders whereas for others, where there is a different
motivation, for example, if it is supporting keeping your local
Post Office open, for some of those clients there was a different
motivation for participating in the first place. So it will be
interesting to evaluate that.
Q162 Susan Kramer: As you know, the
Post Office card account, the contract is up for renewal in 2010
and the indication is that there will not be a renewal and we
now understand that they are going to start on a trial phasing
out the Post Office card account much earlier. What do you think
should be happening with that account? Should it be retained,
should it go and how should the government handle the decision
if it does decide that it is not going to support this?
Mr Trigg: I think we definitely
need to declare an interest here in that obviously we are one
of the organisations that is carrying out a pilot to support individuals
to convert from POCA to another account.
Chairman: We are coming on to this at
a later time anyway, and there is an issue of cost here that the
government says £1 per transaction compared to a penny per
transaction of banks, so there is a big issue and we will look
at that another time. So, given our interest in that I think we
have to pass on.
Q163 Susan Kramer: You are basically
saying that your role is piloting the conversion so you do not
want to comment on whether or not it is appropriate.
Mr Trigg: I am happy to comment
on it.
Q164 Susan Kramer: Then perhaps you
could just wrap into that what role you would see the Post Office
on an ongoing basis in the whole financial inclusion picture?
Mr Lovell: I speak at this distance
from the Post Office. My understanding from the work that our
teams have been dealing with with the Post Office is that they
have quite a firm strategy in terms of where they want to take
their financial products and services, which will include some
of the POCA client group, and my understanding is that they have
quite a focused proportion of that client group where they can
see moving them on. I think in terms of suitability of product
my view would be that there is a need for an evolution, and it
comes back to the point that ideally I think there needs to be
a better portfolio of financial services to support this client
group. The POCA I think addresses some of the baseline issues
and it is the same question really as is a basic bank account
fit for purpose? Actually opening a basic account for a client
is not the solution; I think we need to be a little bit more broad-based
in our thinking and have that range of services available. The
anecdotal evidence again from some clients would be that there
are a variety of reasons, obviously as you will know, why people
do not have a bank account. For some people it is that they have
selected no longer to have a bank account because the challenge
on those tough days when they have no money and that credit card
application landing through from their bank that is so easy to
fill in and gives them money, which they know they will not be
able to control themselves and not spend, will be something that
they will just want to cut out. We talked to the banks about a
very simple process that would be do not include any of that literature
for some clients. It could be administratively quite a simple
thing to do but in practice again a very difficult thing to do
because people will vote with their feet by saying, "I will
not have a bank account." So I think there is a much more
challenging range of issues to address that encompasses what POCA
does and what basic bank accounts do in the broader financial
services.
Q165 Mr Newmark: I live in an area
that is semi-rural and many of the most financially excluded tend
to be pensioners and poor people living in rural areas. What we
have faced is a significant closure of Post Offices in our area;
so, given that there are no banking facilities and no post offices,
how do we deal with that big issue for two-thirds of the country,
which is effectively rural?
Mr Lovell: One of the solutions
that we have been looking at from overseas—and this will
be the wrong title—it is essentially "bank in a boot".
Because it is based on a different technology platform you can
take services out in a mobile way to communities. So that is one
solution, probably outwith some of the existing banking infrastructure.
Related to that I think it comes back to Susan's point, which
is around also the co-location of different organisations; it
is about organisations dropping their boundaries and saying, "We
need to hub services here," and I think for rural communities
it is a particularly important issue. I do not think there is
the will at the moment between public, private and voluntary to
make that happen, but I think it is essential if we are going
to tackle it.
Chairman: David Gauke.
Q166 Mr Gauke: Looking at competition
within the sub-prime lending market, you have mentioned in your
submission that competition has failed to drive down costs and
improve services. Can I ask you what the evidence is to support
that assertion? Also, what can we do to improve conditions and
what are the barriers to competition in this area?
Mr Trigg: My issue, if I can broaden
that out a bit, is that I have never heard sub-prime used anywhere
apart from with livestock and this market place, and that is an
issue because it is a perception of where these individuals are
and their value in the market place. The people who operate in
this sub-prime market at present, it is pretty much a closed market
because the really big players in terms of the high street banks
to all intents and purposes have withdrawn. They may operate in
that market through some subsidiaries—the Black Horse for
Lloyds TSB, et cetera, is an example—but really that
market place has been allowed to operate without new players and
new entrants for some time.
Q167 Mr Gauke: Why have the major
players withdrawn from this market? Is it reputation or is it
risk?
Mr Trigg: A lot is reputation,
and so on. There are consistent stories flashed across the Daily
Mail of individuals being given inappropriate credit and someone
getting themselves in horrendous debt and granny somewhere having
her toaster repossessed by the bank and so on, and that does not
look good, absolutely, and banks do not want to be in that market
place, they do not want to be perceived in that way. I think there
are some false perceptions as well around the market place in
that they believe that the risk factor on defaulting payments
is very, very high. I think that is so in the way that it is done
at present but, again, from overseas models and so on in market
places where, because of the legacy they have, they do not even
have the legal structures in place to enable it to go down a legal
route if people default, and their repayment rates are very, very
high indeed. So I think it is a false perception that if you lend
to this sector of the market place they do pay back. I think that
they do pay back because if they do not they do not have access
to any other credit; there is nowhere else to go. In fact, I would
say that it is probably the educated middle classes who default
more because everyone is going to lend them money. No one is going
to lend this sector of the market place money so they have to
stay on good relations with who is providing that access in the
market place.
Mr Lovell: I think the other issue
related to customer engagement is that for a number of years I
do not think the main banks have necessarily addressed this market,
and that does not go unnoticed by the market. There is an oft-quoted
one that I saw in the Press a couple of years ago, that one of
the high street banks stuck a note in the window and said, "We
will give you £5 if you just walk through the door"
and over a week no one walked in, not one single person. That
is an indication of trust, and part of the difficulty is that
as the high street banks turn around and say, "Okay, we will
see what we can do in this market place," actually if you
have lost the faith and the trust of your consumer base it is
a tough thing to do, so you have to demonstrate that through behaviour
and that can take time to build. Coming back to the point of competition,
in simple terms one of the examples that we looked at overseas
was the analysis that has been done in a number of areas is that
it is not actually APR or the interest charges that are the critical
components for this client group, it is actually the repayment
and transparency. I think transparency is a big word for us to
use in the UK because it is very hard to look like for like across
community finance, credit unions, banks and credit cards. So what
they did is in launching a banking service which took on high
street banks in their country—and they were scoffed and
mocked by the high street banks in that, "You will never
create a market by working with this client group"—in
the past six years they have reduced by a third their interest
charges because they started with a small client group and it
is a commercial proposition and they have reduced it, but they
have used the new technology platform to drive it forward. I would
look for evidence to me that suggests that in the UK, for example,
we have effective competition that is driving those levels down,
and I do not see it here.
Q168 Mr Gauke: Which countries are
they where this is the position?
Mr Lovell: We have looked in the
US and we have also looked in South Africa as two key areas. The
South African models for us were interesting because you were
talking of people in rural communities, isolated communities with
no banking services, so the whole engagement process was completely
a different approach, and that is why they are using the retail
methodology—went straight to chip and pin, did not have
a cheque book, the process of opening an account is that you are
in and half an hour later you are back out again and there is
no detailed assessment, but they use the technology underpinning
it a really creative and inventive way. And they also use facilities
that people are used to. So on mobile phone technology—and
Jon and I have talked about this before—if people are illiterate
and have trouble signing their name cheque books were not a great
thing for them, so now we have to look at technology and say,
"Actually are there ways in which we can overcome 50 or 60
years of a banking methodology?" People are pretty sweet
on using a mobile telephone and if you can do your transactions
through that vehicle then it is a very appropriate mechanism.
So we just need to shake up the debate a little bit, and I think
that is one of the challenges in the UK.
Q169 Mr Gauke: Is there anything
that government could be doing in this area, or is it something
that you see to be led by the banks and other financial institutions?
Mr Lovell: No, I think that government—as
you are doing today—needs to force the pace from the discussion.
I think if it is left to the commercial sector to do it it probably
will not get done, and that is why I also come back to I think
it requires a much better integration between public, private
and the voluntary community sector to address this issue. The
other point that we come back to, is if you look at the poverty
ridden areas in the UK over the past 100 years have those locations
changed? Has that significantly changed in terms of where we are?
So that the things that we are doing—and it is not just
about this, it is about health, it is about jobs—is not
a simple issue to tackle, but I think you can break it down into
some component parts and begin to measure your progress, and I
think it is right that these questions are being asked. Joining
up the strategy is the tough one and at the moment I would say
it is quite fragmented in terms of the way that government approaches
it.
Chairman: That is an issue that has come
out before in the evidence. Susan, do you want to put one more
question on this?
Q170 Susan Kramer: Again, when we
were in the United States the banks looked at us, both the community
development banks and the small banks that work in this market
place, as though we were mad when we talked about sub-prime lending
because the notion was that either they lent you money, in which
case it was at a rate pretty much the same rate as anybody else,
or they did not lend you money. Do you think that has to be an
essential element to this, the notion that you price it up is
not the way to go with this and it has to be opening it up?
Mr Lovell: We have wrestled with
that intellectual debate a lot and I think it probably depends
on the way the constituent parties are joining their thinking
together. If we were to do it on a purely commercial basis, using
the South African example, you would come in at a high rate as
you build up your customer base—it is the mechanics of it.
If someone can put more capital in here you can reduce it and
our ideal would be, let us start at exactly the same rate. The
challenge in the UK is—and my understanding is that the
Ministers, you guys are wrestling with this in the same way—that
if this is where the loan shark is and this is where unscrupulous
door to door—my personal favourite—debt consolidation
agencies begins to sit, and this is where the banks are, and then
we have this big gap that no one is addressing, if we are going
to do it we are going to come in here. If we did it with some
government support we can squeeze that down because the more capital
you put in the lower you put your interest charges, but you have
to understand the mechanics and it comes down to the fundamental
basis of the way you deliver the service. I think it requires
competitors who are thoroughly focused on this market place to
the exclusion of all else because this is their client group and
as they develop the products and services the high street banks
will say, "Actually we like a bit of that, we can see a way
of doing that," and you will get more competition, they will
come to the market. But it is a really challenging process that
the entry point and the starting point is going to be challenging
for people. You have to set out an agenda that says, "Over
a decade we are going to get it down to here," and you have
to be measured on that and you have to live to it. Again, we tend
to talk about the interest charges applied to these things rather
than the broader financial service and products and the savings
products that Jon outlined, for example, and the models that we
have looked at and liked is that they pay double base rate on
your savings account but cap the amount that you can spend so
that you do not have a load of middle level earners dumping a
load of money in. So it also addresses the money laundering issues.
But you have your holiday savings, you have your repayments on
the car, you have your cooker savings, and it is a really effective
model designed for these clients.
Q171 Kerry McCarthy: In terms of
providing affordable loans to people it seems that basically there
are three different routes that people would go down. One is relying
on mainstream banking; the other is the credit union, community
development financial institutions sector; and the other one is
looking to the social fund. I know there has been criticism that
there is just not enough money in the social fund, but to what
extent, if the market develops in the way that you would like
it to, and the credit union sector develops as well, is there
still a role for the social fund?
Mr Lovell: My personal opinion
is yes, and it is interesting because I had a discussion with
a senior member in DWP a couple of weeks ago on this. I think
the criticism of the social fund is valid in many respects and
some good observations have been made about how it needs to improve.
I think sometimes we tend to miss out that it also provides a
safety net which is sometimes the alternative to going to see
the loan shark. So it is a crisis proposition. I think it is a
very important part of the way in which we take our social responsibility
seriously in the UK, and sometimes that is missed out in the debate.
I think there is a role for the social fund but, as with some
of the other areas we have discussed, it needs to be re-engineered.
My understanding is that that is currently happening and thought
processes are looking at it. I also think that there is a role—and
I understand this is also being considered—where you merge
the social fund with what would notionally be called private equity
to develop the type of stepping-stone principle that we just talked
about, to move people into financial services. So I think again
the debate seems to be heading in the right direction and I think
there is an important role there. If you could make it almost
like a revolving facility that tops up it will reduce the dependence
of government input, and I think that is doable. I say that without
a calculator in front of me, and all the complex things that we
need to go through to do it, but I think there is a theme and
a thought there.
Q172 Kerry McCarthy: I know that
the DWP and the Treasury have decided for the growth fund where
money is going to be put—about £36m or so is going
to be put through credit unions and other financial institutions.
Is that a good way of using the resources or would it be better
to use those resources to just bump up the money that is available
through the social fund?
Mr Lovell: It is a loaded question
that one, is it not? because it gives me two options in which
to go? They are probably achieving different things, so I think
it is right to test the things that the financial inclusion fund
is testing, because I do not think at the moment we have enough
evidence or enough solutions on the table to say what is the right
approach. So I think the financial inclusion fund is definitely
being used sensibly to look at that. I think one of the challenges
in it from our perspective—and we are involved in a number
of different directions with different government departments—is
that it is quite fragmented and consequently maybe we are losing
the impact of the investment, given the level of investment. However,
I think that is also, as I have stated, a necessary part of beginning
to learn how to use it more effectively. I do not think it will
be the solution to kind of wrap it into the social fund and do
more with it, but I think on of the back of evaluating what we
have learned there is a broader review of how we tackle financial
inclusion. Our experience is that lots of different government
departments are doing lots of different things. I think it is
within the DTI that a lot of loan shark activities are focused—there
was a £2m project in Aston, I think it was, Birmingham. As
you begin to look around—and no doubt this will be picked
up in the comprehensive Spending Review—if you could wrap
your arms around all of that activity, resource and finance and
bring it together and marshal it then we would have greater impact,
but these are difficult things that government do.
Q173 Kerry McCarthy: Is there also
greater scope for merging the advice on financial services and
the loans that are available with closer working with people who
administer the benefits system? It seems to me that if you are
going to move towards a situation where the private sector is
more involved in issuing what are basically safety net loans then
there needs to be a greater understanding of people's situations,
if you are talking about people who are dependent on the welfare
system. Do you think there is scope?
Mr Lovell: That probably needs
exploring. I think it is a good question and I probably do not
have an answer to that. I think the challenge of the social fund
at the moment in the way that it is administered is also that
it sits out with the type of integration that you are talking
about. In practical terms, though, people who are administering
many of the welfare services and benefits services also have a
range of other challenging issues to address. So it becomes quite
a difficult balance because you do need a core of expertise and
knowledge. I think the co-location point is perhaps more relevant
as to who delivers it—I am not sure yet, and we will find
out.
Q174 Kerry McCarthy: One of the examples
I am thinking of, which is not particularly in the context of
people who are on benefits but I guess could be relevant, is that
when we were in the US last week there was some discussion about
what I think are called payday loans or pay cheque loans where
fairly disreputable companies will charge exorbitant interest
just on very short-term loans to tide people over until payday,
and the more established CDFIs we were talking to wanted to step
into that market of very short-term lending. That is something
where I guess in some ways it is even more relevant to people
who are on benefits because they are going to be struggling even
more to tide themselves over until the next benefits cheque comes
through, or particularly if there is a delay in receiving their
benefits. So is that something where you think there might be
a role for the market to step in?
Mr Lovell: Yes, I think it would.
I think the challenging thing about looking at the US versus the
UK is that the US welfare system is more about welfare administration,
so the responsibilities and activities placed upon an individual
in working in that system are more about managing the welfare
payments and making sure they are appropriate. What we do with
our welfare system and the staff who are involved in this is actually
to focus more on the job creation element of it because it is
inexorably linked into our welfare to work strategy. The US has
a much more entrepreneurial based economy which drives growth
and so they rely upon that with their welfare service providers,
focusing on the money management and the benefits activity, which
I guess is where I come back to the kind of role that you would
be stretching someone within our system to cope with so much,
and asking a lot of them unless we redefine the role. So perhaps
the introduction of private and voluntary sector organisations
into that environment, co-locating them—hopefully some of
the Job Centres are still in existence in some of the rural areas,
although some of them are being cut back—there is something
to be done there, but it is going to require flexibility and responsiveness
on the ground, which I think in this debate is something which
is often the reason why things are not working. We can have a
principle and a strategy but actually how you apply it on the
ground is the challenging bit.
Q175 Mr Fallon: You have referred
to the various different bits of government activity around the
various departments. How well integrated are the financial education
programmes with mainstream programmes like the New Deal?
Mr Lovell: There is more work
to be done, to give you another diplomatic answer on that one.
I think one of the reasons why we changed the focus—or I
am keen to change the focus, I am not sure we have achieved it
yet, so it is another challenge for us—from financial education
is that if you walk into many of the disadvantaged areas where
our offices are located and say, "Would you like to come
and join my financial educational and literacy training programme?"
you can see the tumbleweed and the dust as people scoot out. When
you begin to say to them, "Actually we have a really good
consumer here and are you interested in buying an iPod on ebay?
Do you want to know how to buy a plane ticket for £1?"
and you begin to talk about how you might apply this knowledge,
it is a different approach. It is a very good question because
I think a lot of this activity sits out with a lot of the broader
areas of intervention and structure. So the best providers will
integrate it but I think it is not necessarily built into the
framework that we apply.
Q176 Mr Fallon: What changes would
you like to see to other programmes like the Basic Skills Assessments?
Mr Lovell: I think they need to
take account of the reality that people face day to day in their
lives. The challenge with doing things like this is that you have
to take an abstract education and training approach. The skill
is then adapting that to meet the needs of your customer group,
and you need to put these programmes in the context of people's
daily lives, and I think that is where we are failing, and I think
that is also a job for organisations like ours to be clever about
the way we make that linkage.
Q177 Lorely Burt: Continuing on with
financial education and access to financial advice, SAFE has described
the financial capability sector as "diverse, uncoordinated
and varying in quality of delivery"; do you think that is
a fair description?
Mr Lovell: I would say probably
yes.
Mr Trigg: I would say that they
have absolutely hit the nail on the head with that one. It is
the one sector that everybody is struggling with as to when is
it most appropriate to have an intervention and what that intervention
should look like? I think there is an issue with language and
the point that Mark made that if you call anything financial literacy,
and so on, the individual facing you will say, "What, do
you think I am illiterate?" and you have lost them from that
moment. There is no join-up and we are doing a programme ourselves,
supported by Halifax Bank of Scotland and the MoneyHelp Programme
and that has been very, very successful; but it is now trying
to link up with a financial capability framework and all of the
new work in terms of NVQs and so on, and it is a bit of a mess
really, if I can say that. Everyone is trying to operate in it
and it is quite crowded, but there is not a strong framework of
operation.
Q178 Lorely Burt: The FSA has put
forward a financial capability strategy. Do you think that properly
encompasses everybody that it needs to cover?
Mr Lovell: The difficulty with
the strategy is that it is coming out of what is a regulatory
body, which is appropriate in some respects but then—and
we are going to sound as if we are on a stuck record here—it
is practical application, it is application of common sense. I
think in the very broadest terms it says that these are the issues
that we need to be addressed. I think there is a challenge for
the organisations working in this market place to better align
themselves to respond to that challenge, and being asked questions
and being encouraged to do it is a good way of starting them to
move in that direction. I think the high level of visibility on
financial inclusion as an agenda item will begin to move it in
the right direction, but it will take time; it requires a lot
of coordination and I do not think there is necessarily a solution
yet to see how that strategy can be applied.
Q179 Lorely Burt: Do you think it
will cover everybody that needs to be covered?
Mr Hart: I think it probably will,
but I still puzzle over that responsibility of the FSA in terms
of looking after financial capability sitting with its primary
role of supervision and regulation, and if I am struggling with
it I think the FSA probably is as well, and so I would be more
concerned about where their focus is and do we want the organisation
to focus on regulation in the financial services sector or do
we want it to have a broader role? I am yet to be convinced it
should be the latter.
Mr Lovell: It relates back to
the Member's point that DfES have led on some of this and indeed
we wrap into a bit of their programmes, and now the FSA has published
a strategy, so I think everyone is willing, wanting to move it
forward but we do not necessarily have that coordination and join-up
yet.
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