Examination of Witness (Questions 500-519)
MR BRIAN
POMEROY
9 MAY 2006
Q500 John Thurso: Turning to the
question of affordable credit, what features do providers of credit
need to offer to meet the needs of financially excluded customers?
Do you have any data on that yet?
Mr Pomeroy: We do. Similarly to
the answer I gave on banking, our work directly with financially
excluded people has told us what they want. The first requirement
is for small, short-term unsecured loans. We are talking about
£50, £100, £200 or £300, that sort of money,
for six months to a year—not larger amounts for consumer
durables but smaller amounts to get by, basically. That is the
kind of product or the shape of the lending. People want easy
procedures for getting the loan. They want it to be relatively
predictable; that is to say, that they know they have a reasonable
chance of success, that, given who they are and who the lender
is, there is a reasonable chance they will be successful. They
want affordable repayments, specifically repayments which fit
in with their own budgeting cycle—which is usually weekly,
because they receive their benefit or their wages, if they are
in work, weekly. They value something on a weekly cycle and which
can be reconciled with a weekly cycle. They would like sources
of credit without penalties or hidden charges. They are very suspicious
about penalties and hidden charges, so they would like a solution
where this is what you pay, it is very transparent, you can see
exactly what you have paid. Also, they would value borrowing from
a lender who, whilst maybe a commercial lender, will be understanding
and have some tolerance if there are temporary financial difficulties
and repayments are occasionally missed. Those are the main features
that financially excluded people tell us they would like to see.
Q501 John Thurso: You mentioned there
the question of unfair charges or whatever—and there is
a lot going on at the moment about an automatic £20 charge
for being £5 overdrawn and so on. Is that seen as a big barrier
to people, something that really puts them off?
Mr Pomeroy: That is in the banking
context, presumably.
Q502 John Thurso: Yes.
Mr Pomeroy: Yes, in the banking
context. That and direct debit charges—charges if you miss
a direct debit—in the banking context would be seen as a
penalty. In the credit context, which is where we were a moment
ago, it would be penalties for missing a payment or something
like that or even inadequate rebate for early payment. It would
be things like that which were hidden and only appeared as a surprise,
so to speak.
Q503 John Thurso: So transparency
is—
Mr Pomeroy: Transparency and predictability,
yes.
Q504 John Thurso: One more question,
if I may. Given the high costs of providing affordable credit
to low-income consumers, will some predictable stream of ongoing
subsidy always be required for third sector lenders?
Mr Pomeroy: This also is a key
question in relation to the current government policy. Clearly,
only time will tell. I think we have to give the third sector
lenders credit for the energy they have put into professionalising
themselves over the last few years and indeed trying to build
institutions; for example, the city-wide credit unions, which
have enough scale, which are not small, part-time organisations
but which are proper scaled professional full-time organisations.
I think you have to give them credit for that. Whether they will
be successful or not depends partly on whether they, if you like,
step up to the lending challenge; that is, to use the funds that
they have, whether they are from the Financial Inclusion Fund—because
some money is going to them from lending from there—or from
their depositors, and whether they are able to lend that money
to a wider group of people without suffering a large default.
That is about lending skills. The second side is that, in order
to expand and be self-sustaining, almost certainly they will need
to expand their basic deposits, which means they will have to
market themselves probably in a way that they have not in the
past. In principle, one does not see why that should not happen
but, at the end of the day, I do not think anyone, certainly on
the taskforce, can put their hands on their hearts and say, "We
definitely know it will happen." As I say, the one thing
we can say is that they are making a very big effort to professionalise
themselves and produce reasonable scale institutions which have
at least a chance of surviving in the way you have described.
Q505 Mr Love: Could I follow up on
that. The example of the Community Development Finance Institutions
which were funded by the Phoenix Fund, which is going out of operation,
caused them some considerable difficulty over the last year, but
if you take your example that you want to be giving small loans,
it is home credit via another means—presumably charging
very low interest rates, certainly compared to the home credit
sector. Is there any way financially that you could see a CDFI
in that marketplace being able to run it at a profit, charging
a low interest rate?
Mr Pomeroy: Clearly, you can make
a profit or if you are not-for-profit you can break even if you
charge enough, so it is a question of what you have to charge.
You have made a comparison between that and the home credit market
and you are absolutely right to say that the characteristics that
I gave you are very similar to what the home credit market offers.
But, of course, we have just had the provisional findings of the
Competition Commission on the home credit market. They are only
provisional but they suggest overcharging in that market. They
are only provisional and I do not know when they will finally
come out but certainly what we see at the moment suggests overcharging.
If that is right, then it suggests there is scope for someone
to come in and charge less for a similar product.
Q506 Jim Cousins: Your organisation
is apparently giving £10 million to support a scheme to allow
direct deduction of repayments from benefits. What exactly is
this money being spent on?
Mr Pomeroy: The scheme which was
part of the package of measures which the Treasury announced in
2004—at the time the taskforce was set up actually—enables
lenders to get a repayment made to them out of their borrower's
benefit when the normal repayment arrangements have broken down.
That is in essence the scheme.
Q507 Jim Cousins: Only when the normal
repayments have broken down.
Mr Pomeroy: That, indeed, is the
scheme. If you were going to ask me what the taskforce view of
that was, I should say we do have reservations about the scheme
and we have conveyed the reservations to the Treasury.
Q508 Jim Cousins: You have made it
pretty clear you are looking for market solutions. I have to say
I am pretty puzzled myself why the state should provide handouts
to rich institutions to assist their dealings with poor people
when your taskforce apparently is not willing to see subsidies
to poor people to enable them to get access to rich institutions.
You have said you have reservations about this system of state
handouts to rich institutions. What are your reservations?
Mr Pomeroy: The reservations are
not so much about the state handout but about the way the scheme
will work and whether actually it will be taken out.
Q509 Jim Cousins: It is a handout.
It is £10 million.
Mr Pomeroy: I accept that but
you asked for my reservations. My reservations are not so much
about that, my reservations are whether it will work.
Q510 Jim Cousins: So you are happy
with the handouts but you are not happy with the way it might
work.
Mr Pomeroy: Going back one stage
to the position with the—
Q511 Jim Cousins: I am sorry, Mr
Pomeroy, I will just explain this. Sometimes people are a bit
shocked when you talk about state handouts to the rich.
Mr Pomeroy: Yes.
Q512 Jim Cousins: It sometimes comes
as a new concept to people.
Mr Pomeroy: If I could take you
back one stage in the logic that has led to this. Providing credit
to people on low incomes is expensive. Even forgetting whether
there might be over charging in some institutions, it is expensive
because obviously there is a credit risk of this unsecured lending,
and, secondly, the cost of setting up a loan and administering
it has to be spread over quite a small amount. It is inherently
expensive. One of the lines of approach, which predated the taskforce,
is to look for ways of reducing the cost. One way of reducing
the cost—this is how the theory would go—is to reduce
the likelihood of default, and that means the lender will require
a lower interest rate. That is the logic behind this particular
measure. The taskforce does not have a particular philosophical
objection to the fact that the deduction might come out of benefits,
because, after all, if it is coming out of benefits it is still
coming out of the borrower's money. It is the borrower's money
that is being used, but it is just that the creditor has a first
charge on it. Our worry about the scheme hinges precisely on your
first question, which is that it only applies where repayment
arrangements have broken down. We think that is one of the reasons
why it may not be attractive to lenders. The evidence is that
the private sector is not particularly interested in the scheme,
although credit unions and CDFIs are. We will obviously have to
see how that pans out. Clearly, if we were designing the scheme—and
it was really designed before we got involved—we would say
it would be better if there were a direct deduction from benefit,
regardless of payment arrangements having broken down,. Because,
if it is only available when payments have broken down, clearly
you have to go through a procedure where they have broken down
and you have also got to show that you lent responsibly in the
first place. That is part of the rules. Our objection to the scheme—or
rather our reservation about it, it is not an objection—is
really about its practicality and whether in practice it will
work. It is that rather than the other things.
Q513 Jim Cousins: The Department
of Work and Pensions has just announced a very substantial expansion
of its social fund, which of course is the state's own method
of making unsecured loans to the not-very-well-off. Did they consult
you before they decided greatly to increase the amount of money
available through the social fund?
Mr Pomeroy: No, they did not.
Q514 Jim Cousins: Do you think it
would be useful for people on benefits to routinely be able, through
their benefit arrangements, to set up direct debits, loan repayment
schemes and so on as a matter of their own choice?
Mr Pomeroy: People can save money,
whether it is in interest payments or in utility payments, if
they can operate direct debits. Any method of operating direct
debits out of any source of income I think would be beneficial,
yes.
Q515 Jim Cousins: Do you think it
would be sensible, for example, to provide direct debit type arrangements
from benefit payments that could contribute to savings accounts?
Mr Pomeroy: If that was workable,
yes.
Q516 Jim Cousins: Have you raised
this as a possibility?
Mr Pomeroy: We have raised generally
the question of enlarging direct debit.
Q517 Jim Cousins: It would be an
approach, would it not? One problem about the whole concept of
financial exclusion is who excluded the excluded. There was a
joke on Tyneside in the 1930s, when people used to go around teaching
women how to make broth out of cods' heads, that the women used
to say, "Well, what happened to the rest of the fish?"
Do you not have the same approach here? Why not give the not-very-well-off
a wider range of choice?
Mr Pomeroy: You asked me why I
have not raised it and perhaps I may answer that. First of all,
you referred specifically to savings and I should say that savings
are outwith our terms of reference. But, on the question of whether
we have raised the use of direct debits out of benefit, in effect
what I said to you about the affordable credit scheme, that is
to say the £10 million—and by the way, we are told
it is nearer £5 million now but it was announced as £10
million—is that the scheme, if it were operated in the way
I have described (that is to say, repayments came out automatically
rather than only when arrangements had broken down), would be
close to what you have just described. We would probably be more
supportive of the scheme if it had been devised that way.
Q518 Jim Cousins: Have you raised
that with the Department?
Mr Pomeroy: Yes, the Treasury
is aware that that is one of the reservations we have with the
scheme.
Q519 Jim Cousins: Have you raised
with the Department of Work and Pensions the possible extension
and adaptation of the Social Fund arrangements, perhaps in partnership
with private sector providers, to offer to people on benefits,
at their choice, a wider range of financial possibilities?
Mr Pomeroy: No.
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