Conclusions and recommendations
The challenges of financial inclusion
1. Poor
people end up paying proportionally more for their money. Promoting
financial inclusion is crucial to the fight against poverty. An
effective Government strategy to combat financial exclusion has
a crucial role to play in enabling those on low incomes and others
who are financially excluded to take their own steps away from
poverty. (Paragraph 19)
Access to affordable credit
Tackling high cost credit
2. 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. (Paragraph
27)
3. 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. (Paragraph
30)
4. 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. (Paragraph 33)
5. 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.
(Paragraph 35)
Credit unions and CDFIs
6. 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. (Paragraph 44)
7. 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. (Paragraph 48)
8. 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. (Paragraph 49)
9. 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. (Paragraph 54)
10. 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. (Paragraph 56)
11. 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. (Paragraph 61)
12. 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.
(Paragraph 64)
13. 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. (Paragraph 67)
Direct deduction of repayment from benefits
14. 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.
(Paragraph 72)
The Social Fund
15. 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. (Paragraph 81)
Secured lending
16. 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. (Paragraph 85)
Right to Buy lending
17. 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. (Paragraph 87)
Saving for all
The basic advice regime
18. The
restricted range of products available under the basic advice
regime, combined with the perception that the scheme has not been
as light touch as expected, has led to a low number of major providers
introducing the basic advice regime. We recommend that the FSA
conduct a full review of the basic advice regime to examine what
factors have led to such a low take-up of the scheme by the financial
services industry and how the regime can be reformed to increase
take-up. In making this recommendation, we do not wish to imply
that the problems lie solely with the design of the regime. Problems
with basic advice are inseparable from issues relating to the
structure of the industry itself. (Paragraph 96)
A market-led solution?
19. We
are not concerned in the current Report with the general viability
of the long-term savings industry, although this is a matter to
which we may well return. We are concerned with the narrower question
of whether it is fit for purpose in terms of providing appropriate
savings opportunities for the less well-off. Our inescapable conclusion
is that it is not fit for purpose. The market may change in the
future, but until it does, it is likely that non-market-led solutions
will also be necessary to solve the problems of savings incentives
and opportunities for the less well-off. (Paragraph 102)
The Saving Gateway
20. There
is evidence from abroad and from the emerging findings of the
Saving Gateway pilots that matched savings accounts such as those
piloted as part of the Saving Gateway provide a clear and understandable
framework of support for savers. They also provide clear incentives
for those on low incomes who often cannot benefit from tax relief.
The first pilot phase of the Saving Gateway showed that matching
can encourage genuinely new savers and increased savings. We are
concerned that the valuable lessons from the first pilot phase
of the Saving Gateway must not be overlooked and that the Gateway
must be promoted nationwide at an early stage as a framework for
savings for all, although we recognise that in any national roll-out
the Government will need to consider the overall match rate, which
income levels the scheme should be focused on and the overall
cost of the scheme. We recommend that the Government examine ways
to encourage the development of matched savings accounts with
contributions from the private and charitable sectors. (Paragraph
111)
Capital limits for benefits
21. We
welcome the increase in the capital allowances for benefits. We
recommend that the Government review the rules on tariff income
to ensure that the withdrawal rates for additional saving above
capital allowances continue to encourage households on benefits
to accrue additional saving. (Paragraph 113)
Housing associations savings with rent accounts
22. We
recommend that the Government consult on the case for an exemption
for Registered Social Landlords from the FSMA requirements to
register as a deposit-taker. The Government should consider whether
the appropriate degree of regulation could be accomplished through
other bodies such as the Housing Corporation. (Paragraph 114)
Conclusions
23. Saving
is not accorded the same priority in the Government's strategy
for promoting financial inclusion as credit, advice and banking.
The evidence we have received suggests that savings, and the problems
of making saving worthwhile and beneficial for those on lower
incomes, are integral to any effective strategy on financial inclusion.
In our subsequent Report on the roles of the Government and the
Financial Inclusion Taskforce and the overall strategy, we will
consider further whether the terms of reference of the Taskforce
ought to be amended to include access to savings and the role
of savings clubs. In the present Report, we have set out a series
of recommendations designed to ensure that saving is accorded
a higher priority in the context of financial inclusion and that
the particular needs of savers and potential savers are at the
heart of Government actions to combat poverty and financial exclusion.
(Paragraph 118)
Access to financial advice
Debt advice
24. We
commend the work of the Consumer Credit Counselling Service, Money
Advice Trust, AdviceUK and Citizens Advice Bureaux in providing
debt advice. We welcome the additional £45 million of funding
up to 2007-08 for debt advice allocated as part of the Financial
Inclusion Fund, which will allow the recruitment of over 450 debt
advisers and provide help for over 100,000 people. However, the
short-term nature of the funding offered so far places those debt
advisers at risk of redundancy almost as soon as they have developed
their expertise. We understand the constraints placed upon long-term
commitments by the nature of the spending cycle. However, the
Government could go a considerable way to assuaging concerns about
funding by demonstrating its belief in the fundamental importance
of, and necessity for, debt advice and by committing to assuming
a leadership role in securing funding from its own resources and
from the financial services industry to ensure that the necessary
increase in debt advice is sustained. (Paragraph 123)
Generic financial advice
25. A
key facet of promoting financial inclusion lies in ensuring that
consumers have access to appropriate financial advice. We note
evidence suggesting that 8 million consumers who earn between
£10,000 and £22,000 find it difficult to access generic
financial advice, separate from the sales process. It is clear
that improving access to financial advice would have benefits
for individuals, the Government and the financial services industry.
All too often in pronouncements from Government and regulators,
consumers are told to seek advice, but with little consideration
as to where they should turn. The implementation of a National
Pension Savings Scheme and moves to make individuals more responsible
for their retirement planning will increase the need for many
consumers to access generic advice and support in order to plan
for their retirement. (Paragraph 127)
26. Citizens Advice
Bureaux and other advice centres will have a valuable role to
play in any national network of financial advice centres. We welcome
their willingness to expand their role into the provision of generic
financial advice, but note that for them to take up additional
roles in this area will require additional investment and funding.
We recommend that the pilot project of Citizens Advice working
with IFAs on a pro bono basis to deliver generic financial advice
is expanded. In the short term, this could be accomplished by
additional money from the industry, combined with any remaining
resources from the Financial Inclusion Fund. (Paragraph 137)
27. We recommend that
the Treasury assumes lead responsibility for taking forward discussions
on the provision of generic financial advice and brokering an
agreement between the FSA, the financial services industry and
other interested parties on the way forward in terms of the most
appropriate organisational framework to deliver and coordinate
a national financial advice network and the issues of funding
and charges that we consider next. We further recommend that this
network target especially generic financial advice for people
on lower incomes. (Paragraph 139)
28. The desirability
of developing generic financial advice services is not in doubt.
The major issue that needs to be resolved is how such services
might be funded. Increased provision of generic advice will lead
to benefits not only for the financial services industry, through
a better informed and more engaged customer base, but also for
the public sector, if consumers increase provision for retirement
or reduce their reliance on the State benefit system. We therefore
believe that increased provision could be funded through a partnership
between the public and private sectors, although the proportion
of funding provided would need to be discussed. As a first step,
we would expect the Government to take forward discussions with
the private sector on possible funding options and, as part of
those discussions, to indicate the extent to which Government
funding might be available for such services. (Paragraph 142)
29. Charges for using
any service for generic financial advice would increase the available
funding, but would decrease consumer confidence in the network,
could be complex to administer and could make consumers more reluctant
to seek advice. There are strong arguments for any resources targeted
at those groups that are currently excluded remaining free at
the point of use. Those consumers who were willing to pay a fee
for financial advice could continue to do so through Independent
Financial Advisers. (Paragraph 143)
30. We expect the
FSA to accord a high priority to its work on developing a clear
definition of generic financial advice and how it differs from
product-related advice. In particular, the point at which advice
ceases to be generic and becomes part of regulated, sales advice
needs further consideration. Particularly careful consideration
needs to be given to the extent to which information gathered
during the generic advice process can be relied upon by the regulated
adviser. We would welcome accredited courses for generic financial
advisers, combined with a set of quality assurance standards.
These should be developed by the FSA, in partnership with the
Financial Services Skills Council. (Paragraph 144)
Access to Insurance
31. Lowering
the cost of insurance is substantially based on lowering risk.
We recommend that the insurance industry and the Government examine
the potential for pilot schemes focused on risk reduction. (Paragraph
148)
32. Insurance with
rent schemes can reduce the cost of insurance and ensure easier
access for low-income households. We recommend that the Government
establish a stretching target to ensure that such schemes are
available in more local authorities and housing associations.
We further recommend that local authorities take action to promote
the take-up of these schemes amongst uninsured households. (Paragraph
149)
33. The Government
must ensure that transfers of local authority housing to Arms
Length Management Organisations (ALMOs) or to a housing association
do not disrupt the administration of successful insurance with
rent schemes. (Paragraph 150)
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