Examination of Witnesses (Questions 220-227)
MR MARK
LOVELL, MR
JON TRIGG
AND MR
STEVE HART
14 FEBRUARY 2006
Q220 Mr Love: I wanted to go back
to this issue about creating effective competition in the sub-prime
market for financially excluded households. I wonder if you could
give us just a little more detail. You have mentioned in your
briefing that it should be fostered "to move to better service
and lower pricing, organisations seeking to enter the market .
. . " There is a complaints review being carried out by the
OFT into the home credit market and they have suggested a need
for greater competition, but I think there is some scepticism
about how you create that greater competition. How would you try
to create that greater competition? Where are the organisations,
recognising the reputation problems that are associated with this
particular sector of the market, where are these organisations
going to come from?
Mr Lovell: I think that is again
a very good question. There is not a proliferation of organisations
that are immediately prepared to do it. I think this is why some
of our work, taking Jon's point about declaring an interest, is
looking at the way you can develop a commercial model to tackle
and move the market to being more competitive, with lower pricing,
more visibility and transparency. I think there are other organisations
who are interested in looking at it, but the entry costs are very
difficult. The model we looked at was using a joint venture with
an overseas bank which gives you back office opportunity and service
and then the critical issue is that front-line engagement. The
reason that many of the door-to-door lenders are very successful
is because they have local people who are knocking on doors whom
people trust and look in the eye and know. I think one way to
stimulate the competition, as we probably touched on, is ways
in which you can use the Social Fund as an entry point.
Q221 Mr Love: Let me come to that
in a second because I did want to move on to that. Before we do,
the one successful entrant that has provided some competition
to home credit is the new credit card lenders. If you look at
the context of the distribution of those credit cards, the rates
of interest that they are charging, according to the home credit
providers, are not that dissimilar to what they are charging,
so you can get competition but it is only competition by people
who charge similar amounts in terms of interest. How do we get
competition that is going to significantly reduce the charges
for that particular sector of the market?
Mr Trigg: I think that fundamentally
you need new players in the market place and not existing players
doing it through another subsid or a partner organisation. It
has to be new players and it has to be a new model.
Q222 Mr Love: Does it have to be
provided with some sort of support? Can it be done entirely through
the profit motive, if I can put it like that?
Mr Trigg: Mid to long-term yes,
it must be commercially sustainable and it must be able to stand
on its own two feet in terms of profitability. I think there is
a case for saying in its early stages and so on some seed-corn
funding would be very, very valuable, but I think there have to
be absolute criteria put in place on how long that is going to
last and what is going to come at the end of it, because otherwise
you get yourself into an open-ended financial commitment.
Mr Lovell: The financial modelling
that we have done on this, if you looking at the loan sharks and
some of the door-to-door lenders, what we think are reasonable
rates, in our view the entry point is here and it is going to
look high. It is then about how you over time reduce that, and
that is purely about the number of customers that you can get
quickly. This is where our view after the meeting we had with
DWP is if you were to blend something of the Social Fund into
that but also then topping up and reducing the amount put across
into the Social Fund that is creating and replenishing the fund
that brings it right down, so I think there is opportunity for
discussion there and I think it is feasible.
Q223 Mr Love: I am coming on to that
because that does seem to me to be an attractive model. There
is not anything like the amount of discretionary funding within
the Social Fund and a number of the organisations that have come
before us have suggested that it needs to be significantly increased
now. Recognising that there may be a limit to how far government
is prepared to go in increasing the amount that is delivered directly
through the Social Fund, is there a flexible relationship that
they can create where the private sector, or indeed any other
sector, can bring capital into that market place? Is there a relationship
that they can establish whereby if they decide that they cannot
provide a discretionary loan to one of their clients that they
can put them on to someone else who will be reassured that they
will assist in being able to pay off whatever loan at a reasonable
rate of interest? Is that a model that could be created? Are there
financial institutions out there that would be willing to enter
into that type of relationship with the Social Fund?
Mr Lovell: My experience to date
is reasonably slim on this one, but it would be that there are
financial institutions that are prepared to do it but they are
probably not based in the UK. I think that probably mirrors your
experience of the way that the US has responded to questions that
you put to them, so the answer is yes, I think there is a model
and I think it is probably doable. The next phase of that will
be as soon as someone has broken that mould and delivered in a
different way you will get some of the UK players coming into
the market to enhance competition, which would be appropriate,
but it is going to take a lot of joined-up thinking to make that
work. This is why the dialogue with the voluntary community sector,
credit unions and financial institutions is so critical because
we have to do it with their goodwill, their understanding, their
involvement and engagement because otherwise it is going to look
like a horrible commercial model sitting in the middle and it
will look very odd, so it forces the pace on the private, public
and voluntary community sector working in a more collaborative
manner in this field than they do at the moment. I would contrast
that with other areas of work where there is much more joined-up
working between those sectors and I think on the whole financial
inclusion agenda we just need to move it on a little bit.
Chairman: Jim, I think you have a final
question.
Q224 Jim Cousins: We have a certain
tendency in these discussions to talk about the financially excluded
as if we were rediscovering the Bushmen. Given that somebody on
the Jobseeker's Allowance is allowed to earn each week roughly
45 minutes' worth of work at the minimum wage and their savings
are capped at three grand, doing stuff cash in hand and keeping
it under the bed is an economically rational form of behaviour.
Do you ever raise with government the sort of long-term, rigid
eligibility features of our benefits system that produce rational
patterns of behaviour that in other contexts then become to seem
quite irrational?
Mr Lovell: Yes we do, but it is
a thorny topic of debate and you might also want to look at incapacity
benefit, for example. It is another very good example where you
have got people who are locked into it. If you look at areas of
industrial decline—and I have worked in some of those areas
since 1991—there are people who came out of the coal and
steel industries who are now locked into IB. They would be willing
to re-engage in a debate about how they can enter work and move
out of IB, however their fear in identifying themselves is that
the system is going to penalise them for previous behaviour, and
I think it is a very practical example where the rigidity that
you talk about lends an incentive to continue to behave in a certain
way which is not going to produce the type of long-term change
that we need. It is a very difficult one to address.
Mr Trigg: I think there is a problem
as well in that it becomes a self-fulfilling prophecy in terms
of a set of criteria established at first and then individuals
react to those criteria and change behaviour to take advantage
of the system and then the rules are further complicated to ban
those types of activities and individuals then change their behaviour
again leading to further action, and then it just becomes wholly
ridiculous. You have a situation, and the Social Fund is one of
the topics we are talking about here, where it pays to know the
system. If you know the system your chances of accessing that
type of thing in terms of the Social Fund is far greater as an
insider than if you do not. If you are genuinely in need and you
do not know the system then you are in real trouble.
Mr Lovell: There are examples
of government responding to that. The relaxation of some of the
test trading arrangements for people on incapacity benefit was
a good example, but in practical terms it is very difficult to
get all the advisers who are interacting with people who are on
incapacity benefit to know about those changes and support them.
It took quite a long while to even begin to bed in. We do need
to find different ways of addressing those issues.
Q225 Chairman: Talking about competition,
is there anyone else in the market place that is doing the same
as you are doing?
Mr Lovell: Not that we have seen
so far.
Q226 Chairman: So it is a monopolistic
situation?
Mr Lovell: Hopefully not.
Q227 Chairman: We will have to see how
that develops. Right, in answer to Jim's earlier questions I wonder
if you could send us examples of case studies of clients where
it has gone well and where it has not gone well. I think that
would be very helpful to us.
Mr Lovell: I would be happy to
do that. I would also like to explore the precise example that
Jim outlined and come back to you.
Chairman: We are very grateful to you
for your time this morning. It has been very helpful to us in
this inquiry.
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