Select Committee on Treasury Minutes of Evidence


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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