Examination of Witnesses (Questions 300-319)
MS BERNIE
MORGAN, MS
SARAH MCGEEHAN,
MR ANDREW
BAKER AND
MR SIMON
FROST
28 FEBRUARY 2006
Q300 Angela Eagle: How do they typically
come about, though? Is it particular individuals who have the
drive and see the local need to set them up and therefore do it?
Ms Morgan: That has happened in
some cases, yes. In other cases it has been organisations such
as housing associations or local authorities, and in others it
has been some of the mainstream banks seconding someone over to
do something with a community group to grow CDFIs. So there are
different reasons.
Q301 Angela Eagle: The Government
is spending quite a lot of time and effort attempting to get everyone
who is unbanked banked in one form or another, some of that with
just basic bank accounts. Do you think that is good value for
money or do you think more of that kind of cash ought to be focused
on doing what your members do?
Ms Morgan: I think, like the last
respondent, ABCUL, talking about basic bank accounts, it is not
just the number of them but the use of them, and sometimes they
are not as easy to use as we might think, or they do not hold
as many facilities as could be useful for people. So moving them
into the banking system actually encourages support around that
and how they can be used best. Simon, I think you have a view
on that.
Mr Frost: Definitely. It was partially
answered in Andrew's submission to the Committee. We find the
main issue is not so much the difficulty in opening an account
but in terms of using the accounts, and it has been mentioned
before that most people will take out the money from their account
once they have the benefits or the wages and use that as cash.
We find probably only about 25% of our customers, or possibly
less, use their bank account in a proper way, as possibly we would
understand it. There is a lot of work with education on financial
literacy that needs to be undertaken to get people to use a bank
account, whether it be a credit union account or a mainstream
bank account in future.
Q302 Angela Eagle: So in a sense
the government target is too unsophisticated.
Mr Frost: Yes. A lot of the focus
has been on opening bank accounts, and I think probably nine out
of 10 people coming to us have some form of bank account, and
it is largely a basic bank account. That is not so much the issue.
We will help people set up a bank account if necessary, but it
is largely a minority.
Q303 Angela Eagle: If the Government
could, say, do one thing that you think would help in this area
the most, what would it be?
Ms Morgan: It would be encouraging
more CDFIs to grow, to have a retail presence, a presence in the
high street, which makes a very big difference, having a community
presence, and to encourage them to have a system that grows to
some sort of scale but without losing the mission, really. It
is that level of support that we need.[2]
17
Mr Baker: The issue of payments
from benefits is something we will probably come on to later.
Chairman: We will come to that later.
Q304 Mr Newmark: I think what you
do is great but how much do people effectively gain the system,
whereby they will go to you because you are suddenly there, getting
effectively cheaper credit than they do on the doorstep, and then
they also go and get the 400% lending just because they want whatever
cash they can get, so effectively they are double-dipping into
the system?
Mr Frost: I think it is very much
about making small achievements in different areas. We are obviously
dealing with individual people's lives and yes, there are lots
of people that will, as you say, double-dip, but it is about providing
the service and having the scale and coverage firstly, and secondly,
by helping those individuals starting to change behaviour, and
we do encourage people.
Q305 Mr Newmark: Do you find you
are doing that or are people in reality just gaining the system
and getting whatever cash they can?
Mr Frost: Most definitely. I am
not going to quote anecdotes, but at the end of the day, a community
is broken down into individuals—that is putting it in a
very simple sense—and if you can start to change a number
of people within those areas, you will over a period of time,
and with sustainability, influence. We represent a community of
Portsmouth, which is quite a large city but quite a compact one,
and one of the experiences we have had is that by working intensively
in that area you can start to make a real difference.
Mr Baker: Anecdotally, I take
great comfort from the fact that we now have a number of customers
for Derbyloans who are employed as collectors for doorstep collection
companies. Those people understand that there is an increasing
understanding that basically, 180% or 400% is a bad thing. People
have an alternative, and a lot of people a lot of the time will
come to us. There are people that double-dip, but whatever; you
cannot help all of the people all of the time.
Q306 Peter Viggers: The Government
is contemplating a system whereby debt repayment could be made
out of benefits, and this will be when the normal payment system
has broken down. Do you think this is a productive line of thought
and, if it is made available, it could be a weapon of choice rather
than something invoked as a last resort?
Ms Morgan: We certainly think
it is worth exploring. A number of our members want to look at
it, whether it is a case of making that decision up front or whether
it comes in by default.
Mr Baker: Let us be honest: this
is a very risky business that we have voluntarily gone into, and
we get a lot of customers that, either by accident or design,
are unable or unwilling to make repayments. So we have a significant
problem in not so much writing loans off but in managing customers.
At any point in time 25% of our loans are in some sort of default
or deviation from the originally agreed repayments. Consequently,
we spend an awful lot of time and energy in trying to contact
customers, to get them to reinstate direct debits, to understand
what the issues are, etc. Probably 40% of our overheads in 2005,
which is almost exactly £40,000, was spent on managing customers
in some sort of default. That could massively be reduced. If there
was a means whereby we could claim payments from benefits after
an agreed level of default, it would reduce the amount of time
we spent on non-productive time managing customer defaults, and
we could spend much more time doing the things we ought to be
doing. It takes risk out of the business and it would also mean
that we could attract other funding in, possibly through a CITR
scheme.
Q307 Peter Viggers: What about the
concept of it being a weapon of choice rather than default?
Mr Baker: I think there is some
truth in that. Clearly, when a customer signs their credit agreement,
if they are unwilling to sign that they would agree to payments
being stopped from benefits, that would send a fairly clear signal
that they were considering default. I think you would probably
need to make sure there was a standard condition for all credit
agreements and explain it to a customer, and then you could invoke
that or not. I think you would have to have it there.
Q308 Peter Viggers: How many CDFIs
provide secured lending for home improvement?
Ms McGeehan: Five CDFIs are doing
some level of home improvement loans, but it is a comparatively
new product for our CDFIs, and the 14 CDFIs that we have in our
membership that are doing personal lending are themselves comparatively
young. So when we are talking about home improvement loans, we
are probably talking about a section of the market, a product
that is very likely to grow. Simon is very involved in the development
of home improvement and equity products.
Mr Frost: We are launching a home
improvement product this month. It is not an equity release scheme
at this stage, although we are working with five local authorities
in South Hampshire and Sussex, and the two initial products will
be secure products but secured with a form of equitable charge
or mortgage that cannot be converted into a legal mortgage, so
it falls outside of the FSA regulatory regime. We have had discussions
with the FSA and they are content with the legalities of that.
This will meet some of the demand within the local communities.
The principal aim is to meet the Government's Decent Homes Standards.
That is what it is all about, particularly working with old people
and also younger age groups on very low, fixed incomes.
Q309 Peter Viggers: We would be interested
to know more about that. Would you say a little bit about financial
advice and education, and the link you have with Citizens' Advice
Bureaux? What does it cost and how much of your energies are devoted
to this?
Ms Morgan: Certainly, the feedback
from our members is that a significant amount of their time is
spent on budget management, financial advice, etc, to their clients,
and this is quite pricey. It does take a lot of time and it is
absolutely necessary to achieve our social mission.
Mr Baker: Clearly, if you are
sitting in your office with a customer, going through their income
and expenditure to understand whether a particular loan is viable
or not, you cannot help but get involved in giving them advice.
It must be said that the level of misunderstanding or lack of
understanding that we see with customers is really frightening,
where often they have no idea whatsoever what they spend their
money on. I quote an example in the submission where we had a
lady paying £100 plus a month on telephone top-up charges,
and did not know that until we explained to her: "Look at
your bank statements. Here they are. `Vodafone, Vodafone, Vodafone.'
This is how much you are spending." A lot of customers do
not have basic budgeting skills, so I think financial literacy
training is a huge problem but it has to be faced. To some extent,
just to make affordable credit available to people who do not
know how to manage basic finances is putting a plaster over the
cracks. It is not a solution in itself. The only way to really
fix it is to make sure that the average level of financial literacy
does improve and people can make the reasoned judgment and understand
more the effects of what they are deciding.
Mr Frost: Like with Derbyloans,
with the South Coast Money Line, interviewing is an integral and
essential part of what we do, because we find when you sit down
with a customer and go through their income and expenditure, you
unravel all sorts of issues which you need to be aware of in making
a loan assessment, and this is why it may be more costly in terms
of handling applications than other ways, but it is certainly
very important. We also get a feel for issues that are challenging
our customers, like energy bills, which is becoming a major issue
for our customers on very low fixed incomes. So that is something
that clearly the Government needs to be aware of.
Q310 Susan Kramer: To move on to
funding, in the United States the Community Re-investment Act
and the Bank Enterprise Award Scheme both have had the effect
of driving the mainstream banks to put very significant amounts
of investments into CDFIs. You mentioned a few moments ago what
sounded like the most token of sums from a couple of banks. First,
is there other broader investment that is coming from the mainstream
banks into CDFIs, and is there any programme or role you could
see for them to play a much bigger part in the funding profile?
Ms Morgan: There are some CDFIs
which are more mature than others. We are quite a new sector.
Some of our members are 10 years old or so, the majority five
years old or so, so the older ones are much more able to take
on investment, and we are seeing a move towards getting retail
investment from high street banks and also through the CITR, which
was mentioned earlier. In terms of seeing if there is more of
a role, if there is a greater role, I think there could be something
similar to CRA in this country but not necessarily the same, because
CRA is predicated on what was called red-lining and around asset
management, et cetera, but there could be something that
might make it compulsory for banks to work in this area. They
recognise it is not a skill that they have any more but they could
be funding the niche funders to do that and recognise that there
could be partnerships in the future. So I think there is a role,
but it needs to be looked at.
Ms McGeehan: I did some work on
this a few years ago. We have clearly recognised, from a CDFI
interest point of view, that the banking sector in the UK and
the banking sector in the US is really different, and the motivations
for bringing in the CRA legislation were responding to a different
environment but, having said that, as Bernie says, we recognise
that a structure which was around disclosure of engagement in
these markets, whether it be through CDFIs, credit unions or indeed
through direct provision, that could enable us to understand relatively
how different commercial banks were doing, but also be able to
show us where there were opportunities in the market place, because
I think that is the other big thing we have all learned from the
CRA in the US, that it has opened up niche markets for the commercial
banks, that are now very interested in maintaining their CRA departments
and take commercial approaches. We have a young sector here, the
credit union sector, perhaps not younger and not at the same scale
of the CDFI sector in the US, that needs to see further growth
to provide the same opportunities, but we would like to see a
structure that was around disclosure, perhaps rewarding the top
performers like BEA, and potentially there could be some efforts
to seek alternatives, because really it has been a stick situation
with the CRA, which has been able to block mergers and acquisitions,
and it might be more appropriate to have a carrot situation here,
which is something we have looked at.
Q311 Susan Kramer: In relation to
the Financial Inclusion Fund, you have mentioned the £36
million growth fund for third sector lenders but expressed some
concerns about its design. Could you talk to us a little bit more
about that and the direction you might like to see it go in, and
perhaps also any concerns you might have about how all the various
different pieces work together, whether it is the Fund or the
Small Business Service or the regional development agencies?
Ms Morgan: We did welcome £36
million and put that in our submission. The concerns we have,
or one of them, is the time constraints. By the time those contracts
are let, this summer, there are only 18 months to achieve the
objectives in the contract and, because of the design—and
we understand why it was designed like that—it is very delivery-focused,
and in a way, I think certainly our members are feeling that there
is a level of capacity building around that that needs to be done
first before you can do the level of delivery required by the
Fund. Given the timescale, I think there could be quite a disjuncture
there. That is our main concern. In terms of the broader Fund
and the way it has been disbursed by various different departments,
it would have been helpful perhaps to have had it in one place,
because I think it is very hard to get the relationships you need
across government to be able to make that Fund work as well as
it could.
Q312 Susan Kramer: Lastly, how successful
has the Community Investment Tax Relief scheme been in attracting
private sector investment into CDFIs and to what extent would
an extension to personal lending CDFIs encourage more capital
into that sector?
Ms McGeehan: I look after a lot
of our work on CITR. The Community Investment Tax Relief, as you
know, is an incentivised investment into CDFIs, so it is a capital
flow strategy, and you need to have capital demand to be able
to use it. To date our members have raised £38 million under
it. The majority of those who are credited are in our membership
and I think all of those who use CITR are. I have done with work
with members about how they think it will work going forward,
and we will probable see another £15-20 million go into CITR
under the present scheme by the end of 2007. Will it help in terms
of providing a useful tool for personal lending CDFIs to use?
Yes, I think it will, but we have been clear that it is an incentive
for levering additional capital and in that way it enhances return.
We need other strategies that can work against the risk of lending
in these very risky markets, and we also need strategies that
are going to be able to develop the delivery vehicles in order
for CITR to be effective. But broadly we have support for CITR
amongst our membership and we would be keen to see a response
from the Treasury on this.
Ms Morgan: We have a bit of a
frustration at the moment about how it is being supported at central
government level. Various of our members have queries in to the
DTI about it that have silted up somewhere, and we are not getting
the answers back, and we feel that if there is going to be an
expansion of it, there needs to be the proper resource to be able
to deal with that.
Chairman: We will try to help with that.
Q313 Mr Newmark: How appropriate
is the existing regulatory regime for CDFIs under the Industrial
and Provident Societies Act?
Ms Morgan: Not all of our members
are IPS's, but a number are, and they are registered with the
FSA, and we have worked with the FSA to get the rules for registration
to be quite robust around financial promotions, around governance
strategies, etc, etc, and we welcome that. They raised that as
an issue with us a couple of years ago, and we welcomed their
input on that. So we have a level of comfort there but we are
also producing a code of practice that goes across our membership
because, as I say, they are not all IPS's, and the FSA have mentored
that with us, and we would like to develop our relations with
the FSA further.
Q314 Mr Newmark: Can you just give
me one or two specific examples of what progress has been made
there?
Ms Morgan: Originally, the rules
for registration did not really look at a CDFI as a model, an
investment and loaning vehicle, but now the rules on registration
do do that, and that actually happened last year. We had one of
our members come through on the new rules, and we have talked
to the FSA about keeping those as new rules. In terms of the code
of practice, that is governance, financial promotions, systems
and procedures and that sort of thing, I think there is probably
scope for carrying on some of the work with the FSA around providing
even more comfort to investors than we have at the moment across
the sector.
Q315 Mr Gauke: You mentioned in your
submission that something like 30 or 40% of customers with basic
bank accounts would withdraw all their cash. Are they gaining
any benefit at all under those circumstances?
Mr Baker: To be honest, I cannot
see that they are. It seems to be just another hoop to jump through
to prevent them getting the cash in their pocket. They obviously
have lived in a cash economy, they want to continue to do so,
rightly or wrongly, and just having the basic bank account is
a hoop to jump through to get their hands on the money, it appears
to me, in a lot of cases. Obviously, other people are learning
to use them properly, but there is a lot that are not.
Q316 Mr Gauke: Is it simply because
they are used to living in a cash economy? Is there anything about
the features of a basic bank account that is causing people to
behave in this way?
Mr Baker: I think people are reluctant
to ask a bank and fully understand what the bank account can do
for them. People probably have a perception of a bank account.
For example, most customers, in fact all customers, continue to
pay for utilities on cards or whatever when they could pay by
direct debit. But having said that, the real concern I have about
basic bank accounts is the level of charging for failed direct
debits. Most of our loans are repaid by either weekly or monthly
direct debits, but if a bank does not pay because there is not
enough money in the account, they will charge anything between
£30 and £39—I think that is the highest I have
seen—for a failed direct debit, which is a huge impact for
somebody on £500 or £600 a month; it drives them away.
I cannot offer a solution to that, I am afraid, because I cannot
see how the banks can justify going on for £40 for a failed
direct debit.
Q317 Mr Gauke: Is this a shared experience?
Mr Frost: Definitely. One of the
frustrations we have is that the banking industry is very centralised
and, rightly or wrongly, the world is moving in that direction,
and trying to resolve some difficulties on behalf of our customers,
say, with a problem with a direct debit or a standing order, is
incredibly difficult going into a local branch. We are in the
centre of Portsmouth, we have banks all around us, yet it is very
difficult even to get a member of staff to go down with a customer
to try and resolve an issue on their behalf. The banking staff
are unable to resolve that issue. They say, "This is a head
office or sub-regional function." That is incredibly frustrating
and happens a fair amount. Maybe there is not a solution to that
but it is an example of some of the issues we deal with, day in,
day out.
Q318 Susan Kramer: I would like to
return to a subject I was pursuing before. You rather implied
that there is a real lack of information on who is being served,
who is not, what kinds of products are needed to meet the needs
of the general market, and if that work were done, that might
tempt the banks into being more active within the area, but the
description of basic bank accounts really suggests that this is
an industry that is being dragged with its arm up its back and
is consequently not doing a very good job at all. Has any work
been done to really look at trying to develop a comprehensive
alternative to the mainstream banks along the lines of the community
banking structure that we see in the United States to service
the needs of this particular community other than work that is
being done by the credit unions?
Ms Morgan: And ourselves and CDFI's.
Yes, absolutely. I do not think there are any other big programmes
going on.
Ms McGeehan: Just going back,
I think it is really clear that the basic bank account approach
across the commercial banking sector is something that is perhaps
slightly different to the individual relationships between some
of the commercial banks and both ourselves and our members, where
there has been a much more proactive approach and that is why,
when I was saying a carrot approach might help, it would enable
us to be able to draw out and recognise both those individual
banks and also the strategies they have pursued that are effective.
Really, I suppose the bottom line is a mixture of corporate social
responsibility efforts and a real recognition that what CDFI's
and credit unions do is reach markets that the banks are unable
to because they do not make commercial sense, but what we are
trying to do is rehabilitate those markets, so if you cannot bank
the market directly, bank the intermediary. For the future that
is a long-term relationship, so now we are going back to CITR,
we are seeing the commercial sector much more interested in quasi-commercial
and commercial deals with CDFI's because there are now capital
flows and there is recognition that there is a commercial opportunity,
and that is where longevity lies.
Q319 Susan Kramer: Do we know how
much the basic banking structure is costing the banks, because
that presumably is a sum of money that could be spent differently?
Ms Morgan: We do not have that
information.
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