House of Commons - Treasury

Select Committee on Treasury Twelfth Report

3 Access to affordable credit

20. Although the vast majority of households are able to access some form of credit, for some households that credit may come at a high cost, or even from an illegal source. Credit may be accompanied by onerous terms or conditions, excessive penalties and even threats if repayment is not made. Too much access to credit and irresponsible lending and borrowing can lead to a spiral of over-indebtedness and wider problems. The Places for People Group told us that it is an

inescapable fact that the poorest people, living in the most disadvantaged communities are paying frighteningly high levels of interest when they need to borrow money and have to rely on the home-collected credit companies. Such high rates of interest commonly lead to unmanageable levels of debt and the attendant poor health, insecurity of accommodation and culling of aspiration.[43]

21. We gathered evidence about the high rates of interest that can be charged to low income consumers by particular types of lenders:

Home credit companies or doorstep lenders: these provide small, short-term unsecured cash loans with weekly repayments which are collected from the customer's home. The average value of a loan is £300 and 70% of home credit loans are for less than £500. Charges range from 140% up to 400% Annual Percentage Rate (APR).[44]
Payday loans: these loans are a form of short-term credit, whereby customers write a cheque to a lender and receive an amount in cash. The lender then waits for up to 30 days before presenting the cheque to the bank. Charges can reach around £75 for a £300 loan, leading to an extremely high APR.[45]
Pawnbrokers: these lenders offer credit secured against goods; monthly interest rates can range from 5% to 12%. This equates to an APR of between 70% and 200%.[46]
Illegal or unlicensed lenders: in the case of such lenders, it is difficult to observe the precise amounts charged, but APRs can reach over 1,000%.

22. The NCC suggested that 7.8 million people are excluded from the mainstream credit market. Ms Whyley told us that this figure was based on those who had applied for credit and been refused a number of times.[47] Research from the Personal Finance Research Centre (PFRC), supported by the Joseph Rowntree Foundation, indicates that "6.2 million people of working age could potentially benefit from the wider availability of affordable credit" and "3.3 million people lack ready access to mainstream credit market".[48] Citizens Advice believed the situation was more complex, telling us that they came across people who were on very low incomes and benefits who had an "astonishing amount" of mainstream credit borrowing which caused them problems.[49] This could indicate that the situation is dynamic, with borrowers moving in and out of work and able to access more mainstream sources of credit, but falling back on the non-mainstream market when they encounter financial difficulties or are out of work.

23. The PFRC research and other evidence[50] submitted to the Committee indicates that financially excluded individuals valued credit agreements that offered:

Loans that were small, short-term and available in cash;
Access to credit quickly and easily without lengthy or intrusive application procedures;
Affordable weekly payments that were compatible with their households budgeting cycle; the focus was often on the amount of the weekly repayment, not what the total cost of borrowing actually was; a combination of the discipline of weekly payments with occasional penalty-free "payment holidays" was sought;
Lenders that were familiar, were perceived to be trustworthy and understood the circumstances of low-income consumers.

24. It was recognised in evidence by both consumer groups and participants in the financial services industry that mainstream lenders would struggle to provide loans fitting such characteristics at affordable rates. HSBC told us that

provision of the short-term, very low value micro-credit typically required by these customers is simply not deliverable in a cost-effective manner. To cover our operating costs alone would require charging a disproportionately high APR relative to our other lending products and this is not a position we would wish to adopt.[51]

Action for Employment (A4e) told us that, amongst "those on lower incomes, the need is not for large lump sums—these are the loan amounts (in the thousands) that are profitable to the banks. In the main, households require relatively small amounts in the low hundreds for a variety of necessary or 'essential' items such as utility bill payments, replacement of critical household goods (such as a cooker) or getting the car fixed."[52] Mr Mick McAteer, Principal Policy Adviser at Which?, believed that an alternative solution, such as one offered by credit unions, might be more appropriate for this type of borrower because credit unions charged much lower rates of interest than alternative sources of credit.[53] Ms Whyley suggested that a series of stepping stones should be developed so that, if people wanted, they could move into the mainstream and out of it as they saw fit. She noted that the third sector had very minor coverage in the United Kingdom and thought that it was important "to be realistic about what they can deliver … It is crucial that the mainstream remains involved even if they are not the people directly offering products to people who are financially excluded."[54]

Tackling high cost credit

ILLEGAL LENDERS

25. Individuals who cannot obtain credit through the formal sector may turn to illegal or unlicensed lenders. This can lead to those individuals being charged extortionate rates of interest and, in the worst cases, being faced with threatening and anti-social behaviour. The DTI told us that they had put £2.6 million into funding pilot projects to tackle illegal money lenders in the West Midlands and Scotland. Ms Fiona Price, Director of Cross-Market Interventions in the DTI, thought that the regulatory powers available to trading standards departments were adequate, and that the main focus was now on "putting the resources into enforcement".[55]

26. Ms Teresa Perchard, Director of Policy at Citizens Advice, believed that it was important to examine whether consumer credit law could be enforced more effectively to look after those people who were being exploited in some of low-income communities.[56] Professor Elaine Kempson described the early results of a study she was conducting into illegal lending for the DTI as raising real cause for concern.[57] The Trading Standards Institute has encouraged the DTI to examine the impact the pilot projects have had, with a view to extending them to other parts of the country.[58]

27. We have received evidence suggesting that illegal and unlicensed lending represent real causes for concern. It is essential that measures we consider later to promote affordable credit are matched by effective action against the blight of illegal lending. We welcome the Government's emphasis on putting additional resources into enforcement, but we also expect the Government to galvanise enforcement action against illegal lenders by stressing the high priority which it attaches to this matter, by stronger enforcement action by the DTI against illegal lending, and by extending the DTI's pilot projects throughout the United Kingdom.

DOORSTEP LENDERS

28. Providers of home credit, or doorstep lenders, typically offer small value, short-term unsecured loans. These are generally repaid on a weekly basis from a customer's home to a representative or agent of the company. Provident Financial, a company that represents over 50% of the home credit market, indicated that

the cash price of a loan is important to customers, but the qualities of convenience, good service, flexibility and control are key elements in the product design. The agent's weekly home visit is central. It is the major factor in the cost of providing home credit, but it helps manage the risk of lending, assists the customer's budgeting and provides regular face-to-face communication.[59]

Provident Financial claimed that APR was a flawed measure for the effectiveness of such credit because the use of APR "distorts the apparent cost when loan terms are short and fails to include default charges and service fees often levied on products other than home credit".[60] Following a super-complaint from the NCC, the Office of Fair Trading (OFT) referred the supply of home credit to the Competition Commission for investigation. The Competition Commission has provisionally concluded that the

lack of competition, from other credit products, new entrants or among the home credit providers themselves, means that customers face higher prices for their loans than would be expected in a competitive market.[61]

The extent of overcharging was deemed to be substantial and of a value in the region of £100 million a year. [62]

29. The Competition Commission has published a notice of possible remedies and sought views on their effectiveness and practicability.[63] These possible remedies include:

Obliging lenders to share data on customers' payment records, which would allow customers to demonstrate information about their creditworthiness to other lenders and reduce the advantage enjoyed by existing lenders;
Obliging lenders to provide better price information and offer comparable products—to enable consumers to make comparisons between providers and increase price competition;
Strengthening the requirements to provide statements—to provide clear information to consumers and enable them to demonstrate creditworthiness to other potential lenders;
Reducing the restrictions on canvassing—to improve the ability of other companies to compete with existing lenders;
Increasing the early settlement rebate—which would reduce the price paid by customers when they repay their loans early.

30. The Competition Commission also noted that, "if it appears likely that remedies of the kind set out above might not prove immediately effective, the [Competition Commission] will consider imposing price caps—which would directly address high prices resulting from lack of competition for a limited period whilst other remedies take effect".[64] Promoting competition amongst providers of high cost credit can play an important role in reducing interest rate charges. We note the provisional findings of the Competition Commission that a lack of competition in the market means that home credit customers are being overcharged by up to £100 million a year. We expect due consideration of the full range of possible remedies followed by rapid implementation of measures to increase competition and benefit consumers.

TACKLING EXTORTIONATE CREDIT AND AN INTEREST RATE CAP

31. The Consumer Credit Act 2006 received Royal Assent on 30 March 2006. When it comes into effect, the Act will replace the current rules on extortionate credit with an "unfair credit relationships test". The amended provisions will enable a court to consider whether the relationship between the creditor and debtor arising out of a credit agreement is unfair to the debtor because of the terms of the agreement, the way in which the agreement was operated by the creditor or any other thing done or not done by or on behalf of the creditor before or after the agreement was made.[65] Section 38 of the new Consumer Credit Act will also give wide powers to the OFT to take action if it is dissatisfied with any matter in connection with any business being carried on by a holder of a consumer credit licence or any other conduct of such a person.[66] Citizens Advice welcomed these changes and considered it "vital" that the OFT would be "prepared to use its licensing and injunctive powers to both address persistent bad practices and to establish minimum standards of conduct for lenders".[67]

32. Some evidence we received proposed that an absolute interest rate cap for credit be introduced.[68] The DTI did not include proposals for an interest rate cap in the Consumer Credit Act 2006. Professor Kempson told us:

superficially [an absolute interest rate cap] is a very attractive idea. However, our research with people on low incomes suggests that it is premature while they have such poor access to low-cost credit and could well have an adverse effect on the people it would be intended to benefit. It would, undoubtedly, lead to a displacement of costs (with more additional charges) so that they would not have to be included in the APR quoted by lenders. This would result in a serious lack of transparency for people who need it most. It could also lead some of the larger lenders specialising in lending to people on low incomes to move 'up-market' and stop lending to the poorest and highest risk borrowers. This would not, of itself, be a concern if there were sufficient alternative provision for these people … However, this is currently not the case. Consequently more people would turn to unlicensed lenders.[69]

33. We welcome the provisions of the Consumer Credit Act 2006 covering the unfair credit relationship test and the introduction of additional powers for the OFT. It is vital that the OFT exercises these additional powers in order to address persistent bad practice and excessive or unfair charges in the consumer credit market. We note the possible drawbacks of introducing an interest rate ceiling for credit, including the possibility that it could lead to increasing charges that would not be included in the APR and that a lack of sufficient alternatives could lead to people turning to unlicensed lenders. At this stage, we believe the Government should continue to encourage the development of measures to promote alternatives to high cost credit and assess the suitability of the new powers in the Consumer Credit Act 2006 before considering whether to impose an interest rate ceiling.

DATA-SHARING

34. In part, loans to low-income consumers attract a high rate of interest because of the perceived risk of default. If lenders can obtain information about a borrower's good payment record, which could reassure them about the risk of default, they may be willing to extend credit at a lower interest rate. Data-sharing can improve the situation for some borrowers, although it may not improve access for those who have defaulted in the past. The Places for People Group called for a policy designed to enable individuals to develop portable credit histories, allowing them to move from third sector lenders to mainstream providers and to benefit from the competitive forces operating in the prime credit market.[70] The Finance and Leasing Association (FLA) noted that, if there was no information, or only negative information, available about an individual, then this could lead to exclusion because mainstream lenders might be reluctant to lend in view of the difficulty in evaluating the potential for default.[71] The FLA suggested that, for previously excluded households who lacked a track record of borrowing from mainstream providers, lenders could use data showing reliability of payment, such as information from housing associations and other third sector landlords.[72]

35. In the last Parliament the then Treasury Committee examined the problems in the credit card sector arising from incomplete data-sharing and argued that such failings had been instrumental in the level of cases of over-commitment by borrowers. The then Committee called for the credit card industry, relevant government departments and the Information Commissioner to work together on certain aspects of data-sharing.[73] Our current inquiry has demonstrated both the importance of effective data-sharing in enhancing access to affordable credit and the potential benefits of data-sharing beyond the traditional lending industries. We are disappointed that there is insufficient evidence as yet of concrete progress arising out of the proposals of our predecessors for increased data-sharing. We recommend that the DTI and the Financial Inclusion Taskforce investigate as a matter of urgency the benefits of wider data-sharing in increasing access to affordable credit and the barriers to such data-sharing. We further recommend that the DTI actively promote measures involving lenders and non-financial services organisations such as housing associations and local authorities to ensure the development of more comprehensive data-sharing.

Credit unions and CDFIs

THE ROLE OF THE THIRD SECTOR

36. One of the key measures taken to increase the availability of affordable credit in recent years has been to promote the development of third sector and not-for-profit lenders. The two main models for not-for profit lenders in the United Kingdom are credit unions and Community Development Finance Institutions (CDFIs). The Treasury told us that "The focus on third sector credit provision recognises that third sector lenders are uniquely placed to address the needs of excluded communities". The Treasury observed that third sector lenders

are often geographically targeted in nature and so can provide affordable credit in areas of high financial exclusion;

are often small in size and so can target those encountering exclusion and can develop more innovative and suitable methods of loan delivery;

often help clients obtain money advice in the course of providing a loan, and connect people to more mainstream financial opportunities; and

offer rates of interest well below those in the alternative credit market (typically between 12 and 30% per annum).[74]

CREDIT UNIONS

37. There are currently 549 credit unions in England, Scotland and Wales. The credit union is particularly associated with Northern England. As at June 2005, they had a loan portfolio of £286 million. Credit unions have four statutory objectives laid down by the Credit Unions Act 1979. These are:

a) the promotion of thrift among the members of the society by the accumulation of their savings;

b) the creation of sources of credit for the benefit of the members of the society at a fair and reasonable rate of interest;

c) the use and control of the members' savings for their mutual benefit; and

d) the training and education of the members in the wise use of money and in the management of their financial affairs.[75]

38. Credit unions have been growing strongly in recent years and now serve 500,000 adult members and 70,000 junior members, with membership having doubled since 2002.[76] The maximum amount a member can borrow is typically determined by the level of savings they have with the credit union, with many credit unions requiring a pattern of saving to be established before they will lend. This can be a barrier for people requiring instant access to loans, although some credit unions have begun to offer loans solely based on ability to repay rather than on an existing savings pattern. Such loan funds require close monitoring by the credit union concerned.[77]

39. There was a recognition in evidence that although the mutual status of credit unions was important, a key component in determining the success of an individual credit union was its ability to attract customers through the provision of high quality financial services.[78] It was also noted that, in order to attract customers, credit unions had to avoid becoming labelled as "poor people's banks".[79] The District of Canterbury credit union noted that, in order to be successful, "community-based credit unions require the active participation of all members of the community, not just the financially excluded". They had recruited founder members to provide the initial capital necessary to form the credit union.[80] It was suggested that, in order to make a significant difference in promoting financial inclusion, credit unions needed to enhance their continuing efforts to become more professional, particularly if they were to be able to maintain their recent rate of growth. The Association of British Credit Unions (ABCUL) told us that

many credit unions had been set up in the 1980s and 1990s solely as anti-poverty initiatives. Run solely by local volunteers, these credit unions were not built for expansion and growth, and although they had a real impact in the communities in which they were based, this impact was limited. In 1999 a significant piece of development research into credit union's in Britain was published called, 'Towards Sustainable Credit Union Development'. For the first time credit unions were encouraged to become more business focused and more professional. The employment of paid staff and professional high street premises, along with clear leadership and vision began to show real signs of growth in those credit unions that adopted the changes.[81]

40. Both community-based and employer-based credit unions are subject to a cap on the maximum interest rates they may charge, although the Government has recently increased this from 1% a month (12.7% APR) to 2% a month (26.8% APR). This move was welcomed by credit union representatives.[82]

CDFIS

41. CDFIs are not-for-profit organisations which provide lending and investment facilities at competitive rates in disadvantaged communities. CDFIs aim to provide finance to individuals and businesses which are unable to access finance from mainstream banks. The majority of CDFI activity has focused on providing loans to, and equity investments in, small businesses, including social enterprises. However, several CDFIs have now expanded into personal lending, offering personal loans at interest rates of between 15 and 30% per annum. In 2004, a total of around £1.1 million was lent by CDFIs engaged in personal lending, although the institutions involved have reported that the amount lent continues to grow.[83]

42. Derbyloans is a CDFI that operates in Derby and has been trading since May 2003. By early December 2005, it had made about 680 personal loans with a total value of about £440,000 and about 50 business loans worth about £180,000. Initial personal loans are charged at 25% APR and have an absolute maximum of £1,000. Subsequent loans are charged at 22% and are not allowed to exceed £2,500. Repayments are almost always by direct debit, either weekly or monthly; the exceptions are repayments by PayPoint card, an option which was only introduced recently. A typical loan of £250 over 26 weeks would be repayable at £10.18 a week. This would mean a total repaid of £264.68. This would be around £135 cheaper than a loan available from a doorstep lender. Mr Andrew Baker, Chief Executive of Derbyloans, told us that "not only does the customer have an additional £135 to spend locally over the life of the loan, but also the £265 that he/she does have to pay is retained in the local economy for relending".[84]

OTHER SERVICES

43. In addition to affordable credit, third sector lenders provide other financial services, such as the ability to build up savings or obtain financial advice. Mr Mark Lyonette, Chief Executive of ABCUL, noted that "it is only when people actually start to save a small amount of money when they have been paying high-cost credit, at that point that people break the cycle of taking more and more high cost loans".[85] CDFIs have begun to develop partnerships with banks to help people open basic bank accounts and savings accounts. Many CDFIs and credit unions either provide money advice and education in house or have links to external debt advice agencies such as Citizens Advice Bureaux.[86] Ms Susan Davenport, Chief Executive of Leeds City Credit Union, told us that quite a lot of people, who perhaps had not used a financial institution before and were used to working in the cash economy, did not know how to operate an account, and she explained that the credit union took the time to explain how to use the account.[87] Mr Baker noted the importance of education and advice and was clear that "to some extent, just to make affordable credit available to people who do not know how to manage their basic finances is putting a plaster over the cracks. It is not a solution in itself".[88] Ms Bernie Morgan, Chief Executive of the Community Development Finance Association (CDFA), observed that a significant amount of time could be spent on providing budget management and financial advice to clients and that this added to the operational costs of third sector lenders.[89] Some credit unions plan to begin offering a form of bank accounts, an issue which we shall discuss in our Report on financial inclusion and banking services.

GENERAL APPROACH

44. While recognising the encouraging progress made by third sector lenders, the Treasury stated that "the coverage of these types of organisation is at present limited and a number of barriers to further growth remain".[90] Third sector lenders—credit unions and Community Development Finance Institutions—have a vital role to play in increasing access to affordable credit and promoting financial inclusion. They also help by providing opportunities to save and to access money and budgeting advice. We welcome continued efforts to increase the professionalism of third sector lenders to enhance their sustainability. However, the coverage of third sector lenders remains limited, and the Government and the organisations themselves need to take continued action to improve their ability to grow and attract additional capital.

THE GROWTH FUND AND OTHER SOURCES OF ASSISTANCE

45. The Government has set aside £36 million from the Financial Inclusion Fund to support a growth fund for third sector lenders. The DWP told us that this growth fund "will be used to make affordable loans more available through local third sector lenders such as Credit Unions and Community Development Finance Institutions".[91] Mr Plaskitt told us that the DWP was "contracting with 90 providers to deliver the growth fund", and he was confident that this would result in "100,000 more affordable loans being made available".[92] He told us that he wanted the largest possible geographical spread of support and that he saw the money as a seed corn investment to start the programmes which would then become self-sustaining in the future. He said that the money from the growth fund was available right up to 2008, but that the Government would be prepared to support some of these networks in other ways beyond 2008. The DWP intends to ask for financial reports from these 90 organisations for up to ten years, indicating that they are seen as long-term programmes.[93]

46. ABCUL welcomed the growth fund because they saw the fund as target-driven and the guidelines for granting growth fund money to third sector lenders would require that applicants had a proven track record and could provide a robust business plan to support their application. ABCUL particularly applauded the fact that the funding regime would ensure that the money would go directly to the organisations involved in lending, rather than being funnelled through development agencies or consultants.[94] The CDFA, while welcoming the £36 million growth fund, noted that by the time the contracts were signed, there would only be 18 months to achieve the objectives before the funding ceased. Ms Morgan observed that "currently funding is in place and has been confirmed until 2008 for many [CDFIs], but we need longer visibility than that because, as investment vehicles, we are attracting investment, and we need our investors to be reassured we will be here for the longer term".[95] The CDFA also believed that funding was necessary to build the capacity of third sector lenders through training, legal support and help with expansion.[96] Mr Baker did not believe that

a CDFI that is just doing personal lending can ever be self-sustaining … My view, having run a CDFI for three years, is that you can probably get to cover about 60% of overhead costs by having a lean, mean, efficient organisation, but you are never going to get much past 60%.[97]

This could indicate that CDFIs conducting personal lending may need to attract funding for other services such as money advice, or to combine personal lending with larger loans to small businesses or for home improvement.

47. The United States has a long established fund for CDFIs, created under the Riegle Community Development and Regulatory Improvement Act 1994.[98] The US CDFI Fund uses Federal resources to invest in and build the capacity of CDFIs to provide capital and financial services to under-served people and communities. The fund is divided into two sections. The first is a financial assistance component which provides CDFIs with loans, equity investments or deposits. The fund is targeted at 'Economic Development Hot zones'—areas with a combination of high poverty, low median family incomes and high unemployment. The second, Technical Assistance component provides grants to CDFIs to enhance their capacity to serve their target market through the provision of staff training, IT improvements and developing loan monitoring procedures. The awards are generally used to form new CDFIs or to enable existing ones to reach critical mass.

48. We welcome support from the Government for third sector lenders in the form of the £36 million Growth Fund. We note that such support at present is only short-term in nature, and will only scratch the surface in terms of the overall need for affordable credit. We recommend that the Government consider how best to provide longer term funding for third sector lenders, and in particular how to maximise the ability of Government funding to act a lever to bring in private capital. The Government must also ensure that, as well as supporting established third sector lenders, additional money is provided to build capacity in financially excluded areas that currently lack established third sector lenders. To ensure value for money from the Growth Fund, we recommend that the Government consider providing technical support through programmes that enable third sector lenders to improve their lending practices and upgrade their IT infrastructure.

49. A further option for funding CDFIs and credit unions in the future might be to utilise some of the money in unclaimed assets held in retail banks and building societies. The Commission for Unclaimed Assets, which was established by the Chancellor of Exchequer to examine possible uses of such funds, recommended the establishment of a Social Investment Bank to disperse the money so as to maximise the beneficial impact. Such funds could be used to provide financial and advisory support to third sector organisations and other social enterprises, including CDFIs and credit unions. A Social Investment Bank could provide a mix of technical support for, and equity investment in, CDFIs and credit unions.[99] We note the consultation being undertaken by the Commission on Unclaimed Assets on the possible use of money from unclaimed assets in banks and building societies to establish a Social Investment Bank which in part could provide funding and technical support for CDFIs and credit unions. We expect to return to this issue as part of an inquiry into unclaimed financial assets early in 2007.

CREDIT UNIONS IN NORTHERN IRELAND

50. Across the United Kingdom less than 1% of the population are members of a credit union. In Northern Ireland credit unions are more prevalent, with over 26% of the population being members.[100] The greater success of credit unions in Northern Ireland has been attributed to the promotion of credit unions by organisations that are strongly established in local communities, most notably the Catholic Church and the Orange Order. The movement has also benefited from operating under bespoke legislation overseen by the Department of Enterprise, Trade and Investment Northern Ireland (DETI-NI).[101] Research conducted by the Joseph Rowntree Foundation concluded that the strength of the movement stemmed in part from the fact that, from "the outset,…their long-term viability requires that they attract a cross section of people from local communities, and not just those who are socially or financially excluded".[102]

51. The Irish League of Credit Unions told us that "Member credit unions in Northern Ireland currently play a vital role in promoting financial inclusion by providing a significant savings and loans network throughout Northern Ireland as a whole but often, in areas and to people that other providers choose not to serve. This is particularly significant in rural and disadvantaged communities".[103] The League told us that while they currently had an excellent working relationship with the DETI (NI), the ability of the DETI to regulate member credit unions in a manner that is conducive to the continued development of credit unions within the jurisdiction was significantly impeded by the legislative environment within which credit unions in Northern Ireland are currently expected to operate. In particular, they told us that

paragraph 23 of Schedule 3 to the Northern Ireland Act reserves the following powers for Westminster: financial services, including investment business, banking and deposit-taking, collective investment schemes and insurance; financial markets including listing and public offers of securities and investments, transfer of securities and insider dealing … Further the schedule states that this does not include the subject matter of the Credit Unions (Northern Ireland) Order 1985.[104]

52. The League told us that "in effect, this means that credit unions in Northern Ireland cannot seek to expand into the reserved areas such as deposit taking, insurance and mortgage activity of any type without concurrently seeking to be regulated by the FSA". The League concluded that "however great the burden of this legislative difficulty at this time, the League is even more concerned with its potentially detrimental effect into a future where credit unions will need to be in a position to offer services on a par with other providers in the sector in order to survive. That they would be prevented from doing so as a result of a legislative/regulatory impasse is invidious."[105] They raised the possibility of seeking an Exemption Order under section 38 of the Financial Services and Markets Act 2000. The League also told us of other legislative barriers, including Article 24 of the Credit Unions (Northern Ireland) Order 1985, which prevented them from carrying on 'the business of banking'. They suggested that "such prohibition could cause untold difficulties for credit unions in Northern Ireland as they strive to continue to meet the needs of their members" and suggested that "such a preventative measure has no place in the legislation of today's financial marketplace".[106] They also noted that credit unions in Northern Ireland have been denied authorisation to offer Child Trust Funds on the basis that the protection offered by the League's Savings Protection Scheme does not equal to that available under the Financial Services Compensation Scheme (FSCS), although it was not currently open to credit unions in Northern Ireland to participate in the FSCS.[107]

53. Regarding provision of support from the United Kingdom Government, the League welcomed the establishment of the Financial Inclusion Fund, but expressed disappointment that no money from the £36 million Growth Fund administered by the DWP had been made available to credit unions in Northern Ireland. They suggested a number of areas where Government funding might be appropriate, including support for loan guarantees, money advice and capital funding.[108]

54. Credit unions in Northern Ireland are well-developed and play an important role in promoting financial inclusion and access to affordable credit. The regulatory environment is currently preventing credit unions in Northern Ireland from expanding into areas such as insurance, mortgages and the provision of Child Trust Funds. We recommend that the Government take action to ensure that the regulatory regime supports the expansion of credit unions in Northern Ireland. We also note that credit unions in Northern Ireland have been unable to apply for Government support through the Growth Fund for third sector lenders. We recommend that the Government and the Northern Ireland Executive give consideration to the most appropriate ways to provide additional Government funding and support to credit unions in Northern Ireland.

ATTRACTING CAPITAL AND EXPERTISE FROM THE BANKS

55. Mainstream banks provided a range of professional support and funding to third sector lenders. Barclays has provided support for a management information system for credit unions—the so-called PEARLS system— which enables credit unions to monitor a series of financial ratios to ensure financial stability and aid strategic planning.[109] Credit unions adopting the system have seen reduced loan delinquency and operating expenses and increased growth in assets and membership.[110] ABCUL welcomed support from Barclays Bank for the introduction of the PEARLS system.[111] RBS told us that it was supporting a CDFI called Fair Finance in East London. They have provided £5,000 to capitalise a loan fund lending to African and Bangladeshi women who were unable to obtain a loan from a bank, an interest free loan of £20,000 for small business lending and have agreed to provide a further £20,000 for personal lending.[112]

56. Mr Lyonette believed that it was necessary to distinguish between the corporate social responsibility initiatives undertaken in this area in the United Kingdom and the quite significant amounts of money provided in the United States under the auspices of the Community Reinvestment Act—legislation which we will be exploring in greater detail in our Report on banking and financial inclusion—which had helped third sector lenders become successful.[113] We welcome support from the banks for third sector lenders through the provision of capital and expertise. However, the level of support remains far lower than that provided in the United States. We recommend that the Treasury and the banks collectively give consideration to common ways of measuring and reporting on the extent of the provision of capital and support to third sector lenders by individual banks.

COMMUNITY INVESTMENT TAX RELIEF

57. The introduction of Community Investment Tax Relief (CITR) was one of the recommendations made by the Social Investment Taskforce established by the Chancellor of the Exchequer and which reported in 2000.[114] The necessary legislation was enacted within the Finance Act 2002 and the first CDFIs began receiving investment under the scheme in March 2003. The tax relief is available for investments in accredited CDFIs where the investment is held for at least five years. The taxpayer, who can either be an individual or a company, receives relief to offset against Income Tax or Corporation Tax liability, the relief being set at 5% of the amount invested in the year the investment is made and a further 5% in each of the four subsequent years. The tax relief is therefore worth 25% of the initial investment[115] and is in addition to any return (in the form of dividends or interest) achieved by the CDFI over the five year term. The Social Investment Taskforce originally envisaged the tax relief attracting investment of up to £1 billion. Although the Government stated that it would be keen to see investment up to that level, it noted that some time would be needed to achieve this objective.[116] As of September 2005, investments totalling £38 million had been made in accredited CDFIs. The cost to the Exchequer of the tax relief is therefore around £2 million in 2005-06, with further payments of £2 million over the subsequent 4 years.

58. Currently CITR is only available to CDFIs investing in or providing loans to small businesses or associated business advice services. In June 2005, the Government published a consultation document seeking views on the case for, and practicalities of, extending a community investment tax relief scheme to the personal lending activities of CDFIs.[117] There was widespread support amongst witnesses for an extension of the CITR scheme to personal lending to help third sector lenders attract capital.[118]

59. The CDFA submitted evidence on a number of issues which were currently stifling greater use of CITR. These included confusion over whether an investor could continue to receive the benefits of CITR if they retained their investment in the CITR for a second five-year period. The CDFA also raised issues about the implementation of the scheme, including the limitations of the cap on the size of loans and how commitments to lend were treated in the accreditation process.[119] The two main banks, Charity Bank and Tridos, that had accounted for the majority of investment raised under CITR are no longer accepting deposits, in part due to the restrictions of the scheme.[120] The Economic Secretary to the Treasury told us that the operation of the scheme was an issue that the Government and the Financial Inclusion Taskforce "want to look at very closely in the months ahead".[121]

60. ABCUL argued that CITR should also be extended to credit unions seeking subordinated capital. They stated that there was strong demand for such an extension amongst credit unions and that a number of banks would be willing to lend to credit unions on these terms. They noted that the growth fund, to which we have already referred[122] would not completely meet the demand for capital that currently existed in the credit union movement.[123] The National Housing Federation observed that

around 70% of housing associations are charities, paying either limited or no corporation tax. Therefore, the Treasury's current tax relief proposal offers no financial incentive to the vast majority nor would it offset the expense and risk of investing in personal lending. One option would be to implement a subsidy system in place of the proposed tax relief to ensure that all investors—charities and non-charities—would benefit.[124]

61. We welcome the introduction of Community Investment Tax Relief, although we note that the additional investment secured is still a very long way from the original target for such a scheme set by the Social Investment Taskforce. To promote the availability of affordable credit, we support the extension of the tax relief to investments made in personal lending by CDFIs and to credit unions seeking subordinated capital. We recommend that the Government also consider the introduction of a matched funding scheme to provide incentives for housing associations and other charities to invest in CDFIs. More generally, there is a need for the Treasury to review the operation of the scheme to ensure that its potential for securing long-term investment is maximised. In particular, the Treasury should examine the treatment of commitments to lend and the overall cap on the size of loans. To promote long-term and sustainable investment, we further recommend that investors should be able to continue to receive the benefit of the tax relief if they retain their investment in the same CDFI for a second period of five years.

A NEW CREDIT UNIONS ACT?

62. ABCUL told us that, while section 5(1) of the Credit Unions Act 1979 provides that only individuals may be members of credit unions, "many credit unions have been approached by local community groups who wish to deposit their money with the credit union", but are "prevented from doing so by current legislation".[125] Mr Lyonnette told us that local community groups had been approaching credit unions and asking "Why can't we bank with you? Why can't we put our deposits with you?" and that this request had come from those at ground level who believed that such an approach would be important and would help regenerate local communities.[126] We talked to one CDFI in Washington DC which accepted deposits from individuals, businesses, community groups, so-called "non-profits"—organisations such as homeless shelters—churches and other religious organisations and charter schools. Deposits earned a competitive market rate of return and, just as importantly, depositors had the added satisfaction of knowing that their money was being used to support loans and other work to improve the local community. Large depositors also had access to a scheme called CDARS (Certificate of Deposit Account Registry Service), which meant that any large deposits were shared out between numerous other community banks through a central clearing house. This had the effect of providing Federal deposit insurance for amounts substantially above the current limit of $100,000 per person or organisation. Providing insurance in this way allows many CDFIs and other community banks to accept larger deposits of up to $5-20 million, while providing added reassurance that the full amount of the deposit was guaranteed if the institution were to fail. The Financial Services Compensation Scheme currently operating in the United Kingdom guarantees deposits from banks, building societies and credit unions up to a limit of £31,700.[127]

63. The Economic Secretary to the Treasury told us that "over the last few years, there have been quite a lot of ways in which [the Government] has legislated to support the growth of co-operatives and mutuals". He said that Treasury officials had engaged in "extensive discussions with representatives from the credit union movement" on the issue of organisational deposits.[128]

64. Credit unions are playing a significant if limited role in combating the problems of high cost credit. Credit unions have the potential to play a far greater role in the future. Although the Government has made some welcome steps in recent years, we have received evidence that credit unions are being limited in their capacity to grow and develop by an outdated legal framework that has not changed in its essentials for 27 years. It is time for the Government to act in order to release the potential of credit unions. New legislation is needed to enable credit unions to accept organisational deposits, to support their ability to raise capital and to reduce their costs of operation. We recommend that the Treasury consult credit unions and other interested parties on a new Credit Unions Act to enshrine such measures as a matter of priority with a view to introducing such legislation in the course of the current Parliament.

FSA REGULATION OF PROVIDERS OF THIRD SECTOR CREDIT

65. In July 2002, credit unions became regulated as deposit-takers by the FSA. This approach to regulation was a key recommendation of the credit union taskforce and allowed credit union members to become eligible for the Financial Services Compensation Scheme, should the credit union become insolvent.[129] The FSA told us that its "regulatory regime for Credit Unions is proportionate, requiring suitable standards while recognising their role in reducing financial exclusion". The FSA stated that it also provided assistance to credit unions through a dedicated section of their website and regular "surgeries" to enable credit unions to discuss regulatory issues with the FSA.[130] We asked credit unions about the impact of FSA regulation. Mr Lyonette told us that he sometimes found himself at financial services functions where he was practically the only person there who had a good word to say about the FSA. He told us that the FSA had set out to produce a proportionate regime for credit unions and had delivered. This had been a success story and had "produced very positive benefits for the [credit union] movement, not just in terms of financial discipline but also in terms of credibility" because deposits were now protected by the Financial Services Compensation Scheme.[131]

66. CDFIs that invite retail investment are registered with (but not regulated by) the FSA under the Industrial and Provident Societies Act 1965. The FSA was concerned that "regulation of those inviting retail investment would add unreasonable costs to the sector while it is still in an early stage of development". The FSA stated that it was working with the CDFA on proposals for the development of a Code of Practice for CDFIs as an alternative to regulation.[132] Ms Morgan welcomed the FSA's input and noted progress made in making the registration process robust while recognising the specific characteristics of the CDFI model.[133]

67. Evidence provided by credit unions and CDFIs indicates that the FSA has been successful in applying a risk-based and proportionate regulatory regime to third sector providers of affordable credit. FSA regulation of credit unions has delivered significant benefits in terms of increased professionalism and investor confidence. We welcome the approach of the FSA in this area and recommend that it continue to offer targeted support and guidance for credit unions and CDFIs to help them comply with regulatory requirements.

Direct deduction of repayment from benefits

68. The increased costs and risks of extending small value loans to the financially excluded can mean that such loans are expensive to provide and administer. In order to reduce the cost of credit to the financially excluded by reducing the risks associated with lending to this group, the Government is currently working towards "providing private and third sector lenders with the opportunity to be able to apply for repayment to be made by deduction from benefit where normal repayment arrangements have broken down". The rationale for the scheme is to "reduce the risk of debts being written off in the event of default and therefore the cost of lending to people in such circumstances (and thereby improve the viability of such loans/low cost lenders)".[134] The costs of implementing the scheme will be met by an allocation of £10 million from the Financial Inclusion Fund. The DWP told us that this facility will be made available only to lenders who meet criteria for responsible lending and make loans available at more affordable rates of interest. They also told us that deductions will be subject to constraints to avoid hardship to the benefit customer.[135]

69. The NCC pointed to research indicating that a system of direct deductions from income for credit repayment was attractive to many benefit recipients, but as an option of choice rather than a last resort. The NCC observed that direct deduction from benefits was

not set to be a pro-active payment option of choice for the consumer. This is a missed opportunity.[136]

One Parent Families believed that there might be some advantages to such a scheme because it would provide some certainty for borrowers as well as lenders, but believed that safeguards protecting claimants needed to be put in place.[137]

70. We sought views from third sector lenders on the advantages of allowing the deduction of debt repayments from benefits. Mr Lyonette told us that it was not clear what demand there would be from credit unions for such a scheme, and thought that it would have been prudent for the Government to have done more research before introducing the scheme.[138] CDFIs considered that such a scheme was worth exploring, although they also raised questions about whether it would be a choice for the borrower or an arrangement that was only activated on default.[139] Illustrating the potential advantages of such a scheme in terms of improving the sustainability of third sector lenders, Mr Baker told us that "probably 40% of our overheads in 2005 … was spent on managing customers in some sort of default". He went on to state:

if there was a means whereby we could claim payments from benefits after an agreed level of default, it would reduce the amount of non-productive time spent on managing customer defaults and we could spend much more time doing the things we ought to be doing. It takes the risk out of the business and it would also mean [the CDFI] could attract other funding.[140]

71. Citizens Advice had a number of concerns about the scheme; they questioned how the scheme would fit alongside the existing third-party deduction scheme for rent arrears, council tax and energy costs and were also worried that excessive deductions from benefits could leave recipients with inadequate income for essential expenses. Citizens Advice also voiced concern regarding the overall cost of the scheme.[141] For the Financial Inclusion Taskforce, Mr Pomeroy expressed reservations about whether the scheme would work in practice. He told us that it would probably be better if it was operated where repayments came out automatically rather than only when arrangements had broken down.[142] Mr Plaskitt told us that 20 lenders were in discussion with the DWP about joining such a scheme.[143]

72. Cutting the cost and risk associated with lending to the financially excluded can reduce the interest rate paid by the borrower and improve the sustainability of third sector lenders. The evidence we have received indicates that direct deduction of repayments from benefits could be attractive, but principally when it is an active choice by the borrower rather than a mechanism of enforcing debt collection. We believe that the Government should explore this issue further. Such exploration should accompany a review of the wider application of the third party deduction scheme. We are not convinced that the Government's current proposals represent value for money and include appropriate safeguards. We recommend that the Government, in its response to this Report, publish a full breakdown of the planned expenditure of £10 million on the scheme, alongside details of the safeguards that will be in place to protect borrowers and evidence that such investment will improve the availability of affordable credit and the sustainability of third sector lenders.

The Social Fund

73. The Social Fund was introduced in 1988 as a flexible means of assisting benefit claimants and people on low incomes with expenses that they could not meet from their regular income. Loans are interest-free and are generally repaid by deductions from benefits. There are seven types of Social Fund support available in the form of both grants and loans. The gross loans budget for 2005-06 is estimated to be around £610 million. That budget is made up of a combination of new funding (worth £39 million for 2005-06) plus forecast loan repayments.[144] Thus, in that financial year, over 93% of gross loans expenditure was planned to be funded by repayments. The Social Fund also provides grants to individuals. The wider application of these grants and the efficiency of their operation have been discussed in Reports by the Committee of Public Accounts and the Work and Pensions Committee.[145] We have restricted our considerations to the provision of loans through the Social Fund.

74. Budgeting loans are interest-free and available to people who have been in receipt of one of the main income-related benefits for at least six months. The DWP told us:

The loans budget is limited and has a number of complicated mechanisms to control supply and live within budget. Gross expenditure on Budgeting loans in 2004-05 was slightly under £500 million with 1.2 million loans and an average award of around £400. In 2004-05, around 1.6 million applications were made of which 377,000 were declined. Crisis loans are available to help meet expenses in an emergency or disaster to prevent serious risk to the applicant's or their families health and safety. The applicant does not have to be receiving any social security benefit or tax credit.[146]

75. We received evidence drawing attention to a variety of problems with the Social Fund. Professor Kempson considered that

there are many (especially elderly) eligible people who are completely unaware of the Social Fund. The funding for both Budgeting loans and Community Care Grants is inadequate to meet the needs that exist, so that eligible applicants generally only get some of the money they apply for, if they get any financial help at all. Constraints on the Budgeting Loan scheme budget also mean that repayment rates are generally much higher than in the commercial sector, which causes financial difficulties for some users and deters others from applying at all.[147]

The IPPR believed that, "when someone approaches the Social Fund, this is an instance in which the State comes into contact with the financially excluded and the hard-to-reach and each time [it] turns them away empty-handed or with no more than a short-term palliative". They called for a review to explore how this contact could be made more productive, in order to make a longer term difference to the capabilities and inclusion of users.[148]

76. Evidence from the NCC indicated that one in four people turned down by the Social Fund borrowed from high cost doorstep lenders or unlicensed loan sharks.[149] We obtained several letters of rejection submitted by Citizens Advice. These did not specify alternative sources of affordable credit which claimants could approach. We suggested to witnesses that there might be more scope to increase links between the Social Fund and other providers of affordable credit. Third sector lenders supported suggestions for there to be some mechanism of referral to credit unions or CDFIs.[150] Mr Lyonette told us that if there were people who did not qualify for Social Fund loans whom credit unions could help, then it would make some sense for there to be some kind of referral system.[151]

77. Eligibility for Social Fund loans takes into account the current level of household savings. For instance, in order to be eligible for a budgeting loan, a person of working age can have no more than £500 in savings and a pensioner no more than £1,000. Help the Aged believed that "this is far too low and prevents many older people on low fixed incomes from receiving any help".[152] In April 2006, the Government increased the savings limits for budgeting loan applications to £1,000 for people of working age and £2,000 for pensioners.[153]

78. The DWP told us that improvements to the Budgeting Loan scheme had come into effect in April 2006.[154] The aim was both to simplify and to expand the scheme. Some of the key changes were as follows:

Only actual budgeting loan debt would be taken into account when calculating entitlement to a further budgeting loan; previously, existing budgeting loan debt was counted twice (known as the 'double debt rule').
The calculation of budgeting loan maximum amounts would be based solely on family composition.
Maximum standard repayment rates would be reduced from 15% of a customer's qualifying benefit allowance plus any Child Tax Credit and Child benefit to 12%.
Maximum repayment rates would be reduced from 25% to 20%.
The maximum repayment period would be extended from 78 weeks to 104 weeks; or where a customer has particular difficulties, from 104 weeks to 130 weeks.
The overall debt limit for budgeting loans and crisis loans combined would be increased to £1,500.[155]

79. Citizens Advice welcomed the abolition of the 'double debt rule' and made a series of suggestions for further reform, including improvements to the quality of advice, widening access to recipients of tax credits and Incapacity benefit, a substantial increase in Social Fund budgets, particularly for Community Care Grants and Budgeting Loans—because "far too much time and money is spent in administering a complex system with high rates of refusal"—abolishing the qualifying period for Budgeting loans, more reasonable repayment rates, and a new fast track scheme to provide interim advance payments to people who appear to have made a valid claim for benefit.[156] One Parent Families raised the possibility of matched debt reduction payments when people who had borrowed from the Social Fund moved into work. One Parent Families were concerned that, under the current scheme, those who lost eligibility to income-related benefits when they were transferred to tax credits would also lose entitlement to the Social Fund, despite being on the same level of income.[157]

80. We put the concerns of witnesses and suggestions for reform to Mr Plaskitt. He was convinced that "the Social Fund does not punch its weight in terms of the financial resources the Government puts behind it" and considered that is was possible "to do a good deal more in terms of sustainable support for people and more in terms of affordable credit lines than it does at the moment". He believed that there was unmet need because the way in which the Social Fund offered support was "uneven and unpredictable". This pointed to "difficulty in the way the Social Fund is drawn up. It is very rule based. It is very complex in many areas." He told us that he was examining

how we can take that resource and use it in a more flexible way and, instead of just passively responding to a particular need that some one presents [it] with, how we can get longer term engagement with [applicants], steer them towards advice on financial management, perhaps towards saving, towards realistic and acceptable forms of affordable credit. [The Social Fund] could do an awful lot more than it does at the moment.[158]

81. The Social Fund plays a vital role in helping those on low incomes to access affordable loans to meet one-off items of expenditure. However, we note the comments of the relevant Minister in evidence to us that the "Social Fund does not punch its weight in terms of the financial resources the Government puts behind it". The funding for the Social Fund should more clearly match the needs of those on low incomes. We have received evidence to suggest that the Social Fund is failing in its mission to assist those most in need of credit. It is essential that the Social Fund becomes more fully integrated with other provision of affordable credit for people on low incomes. Given that many people rejected by the Social Fund turn to unlicensed lenders, we recommend that the Government instigate arrangements to refer unsuccessful applicants to local credit unions and CDFIs where appropriate or other providers of affordable credit. We note calls for eligibility for the Social Fund to be expanded and believe that the Government should keep the funding of Social Fund lending activities under review, in particular if the intention to transfer some recipients of income support and jobseeker's allowance to the tax credit system goes ahead. The DWP needs to instigate an open debate on reform of the Social Fund to ensure that the Social Fund can make a better contribution to improving access to affordable credit and become a more positive source of assistance for people on low incomes. We recommend that the DWP conduct a review to explore how the Social Fund's contact with the financially excluded could be made more productive in order to make a longer term difference to the capabilities and inclusion of users.

Secured lending

82. The problems of financial exclusion, including access to affordable credit, are generally associated with those who do not own their own homes. However, we received evidence of problems in this area affecting low-income homeowners. Citizens Advice told us:

Problems with secured credit must be addressed in any strategy to tackle financial exclusion. While homeowners have seen their wealth hugely increase with rising house prices, people in receipt of low incomes or with impaired credit histories can only realise this asset by taking out expensive secured loans. With CAB advisers now reporting increased numbers of arrears cases and possession actions relating to secured lending (much of which is sub-prime or near prime), we believe that access to affordable secured credit is also a key issue for a financial inclusion strategy to consider.[159]

We raised this issue with Mr Pomeroy who told us that "secured lending of the sort that I think you are describing has not been something which has been high on [the Financial Inclusion Taskforce's] agenda, simply because the majority of people on low incomes do not have security".[160] He pledged to examine this issue, and subsequently submitted a note indicating that relevant data

shows some home ownership, in particular outright ownership, amongst those with no [bank] account of any kind. Further analysis of this group suggests that, of the outright home owners with no bank account of any kind, 38% have a household income of less than £10,000 a year, 27% between £10,000 and £20,000 and 35% over £20,000 … The Taskforce will explore what further information can be collected about this group from the [Family Resource Survey] and other sources to identify the characteristics of these households. In particular, it will wish to know the extent to which such households have a need to borrow and, if they do, whether they make use of their homes as security to minimise the cost of borrowing.[161]

83. The Council of Mortgage Lenders (CML) provided further evidence of the lack of ability of low-income homeowners to access secured lending. They noted:

Local housing authorities now have a broad power to provide financial and other assistance for home repair and improvement. This has meant that grants are only rarely available and people are being encouraged to take out loans to carry out home improvements. The CML has helped where it can. However it should be noted that many lenders are often reluctant to get involved as these are often small loans to people who have limited ability to pay, with a disproportionate amount of administration involved. Some non-profit organisations including housing associations and other special purpose vehicles are developing to provide assistance to these people. However, progress is slow as highlighted by a recent Joseph Rowntree Foundation report for the [Department for Communities and Local Government] (DCLG) 'Implementing new powers for private sector renewal'. The report concluded that unless private finance can be more effectively levered in to private sector renewal programmes it is difficult to see how local authorities can meet their obligations. Given that areas of poor housing are often linked to low incomes, this is an area where there is a risk of financial exclusion.[162]

84. The Economic Secretary to the Treasury admitted that issues could arise

where you have a row of houses where a lot of money is being spent to [install] new roofs and there is one house in the middle where you might have somebody who bought the house under right-to-buy but then for whatever reason just does not have the access to financial support to make their contribution … We need to think innovatively in this area. I think this is really a matter for the Housing Minister rather than myself in the first instance but it is something which from a financial inclusion point of view we need to address because it is not clear that it is simply going to be resolved by asking people to take on substantial amounts of extra debt.[163]

85. Increasing levels of home ownership mean that improving access to secured lending needs to be addressed as part of the Government's financial inclusion strategy. There are cases where low-income homeowners face real financial difficulty. We note that progress has so far been slow in attracting lenders to provide home improvement loans to low-income owner-occupiers to help meet the Government's Decent Home standards. The provision of such lending could be an important role for CDFIs and other third sector lenders. We recommend accordingly that the Government consult on ways to expand the ability of such organisations to provide secured loans.

Right to Buy lending

86. Citizens Advice highlighted a number of problems faced by former tenants of social landlords who had exercised their right to buy their homes. These problems included tenants entering into mortgage agreements where the borrowers income was insufficient to maintain repayments from the outset and borrowers finding themselves surprised by clauses in their mortgage agreement to increase payments significantly within months or years of the loan commencing.[164] Section 156 of the Housing Act 1985 provides a mechanism for the Secretary of State to specify by order Approved Lending Institutions (ALI) for the purpose of the right to buy scheme.[165] Citizens Advice told us that, when a lender applies for approved status, the lender is required to provide certain company information, details of the business they intend to engage in and details of any complaints made to the company and the complaints handling process. The Department for Communities and Local Government (DCLG) also requires information relating to the lending itself, such as the terms of loans to be offered, use of brokers, promotion materials and awareness of relevant industry code. Citizens Advice believed that

the ALI scheme provides right-to-buy borrowers with a safeguard of sorts by establishing a partial (though not mandatory) perimeter through which lenders can only pass if they demonstrate certain basic requirements. We presume [DCLG] have some selection criteria based on the information they request but we have no information as to how this operates. Equally it is not clear if a lender's performance against these criteria is monitored over time in any way.[166]

87. Mr John Tiner, the Chief Executive of the FSA, told us that "if there is an organisation which has FSA authorisation, then that would meet [the criteria of the ALI scheme] automatically. So I think that is consistent between the [FSA and DCLG]."[167] Mr Clive Briault, Managing Director, Retail Markets, in the FSA, informed us that the FSA had examined whether right-to-buy ought to be one of the priority themes for further examination during their first year of mortgage regulation, but had decided that it was a lower priority than the areas they chose to look at such as equity release, mortgage documentation and action to deter unauthorised brokers operating outside the regulatory regime.[168] Citizens Advice has presented evidence of abuses in the Right to Buy market. We recommend that the FSA view this as a priority area for examination as part of its enforcement of mortgage regulation. We further recommend that the Government clarify, in its response to this Report, what additional consumer protection stems from the system of specifying Approved Lending Institutions for the purpose of the right to buy scheme and whether the Department for Communities and Local Government is undertaking any monitoring of the record of these lenders or the number of complaints made. Finally, we recommend that the Government explore the possibility of transferring responsibility for approving and monitoring Approved Lending Institutions from the Department for Communities and Local Government to the FSA.

43 Ev 432 Back

44 S Collard and E Kempson (2005) Back

45 www.paydayuk.co.uk Back

46 S Collard and E Kempson (2005) Back

47 Ev 398 Back

48 S Collard and E Kempson (2005) Back

49 Q 46; Ev 242-243 Back

50 S Collard and E Kempson (2005); Ev 398 Back

51 Ev 353 Back

52 Ev 167 Back

53 Q 51 Back

54 Ibid Back