Memorandum submitted by Centrepoint
Centrepoint is the UK's leading youth homelessness
charity with the experience of working with 1,600 young people
a year.
The growing concern about rising debt levels
prompted Centrepoint to examine in more detail the scale and extent
of debt amongst homeless young people, one of the most vulnerable
and socially excluded groups in society. Over 100 young people
were consulted, the result of which was a detailed report [Too
much to young: problem debt amongst homeless young people, published
2005] reflecting their views and experiences, and those of
the staff who work closely with them. This has given us a detailed
knowledge of the issues causing financial exclusion and its consequences.
Terms of Reference: We note the inquiry's explicit
reference to "households" in the UK (Issues for consideration
1 and 2), and the significant number who do not have bank accounts
or access to affordable credit. We urge the Committee to commit
to broaden the scope of the inquiry to homeless people including
those living in homeless hostels and those in shared accommodation.
It is estimated that there are approximately
50,000 homeless young people in the UK, the majority of which
suffer from some degree of financial exclusion. Indeed, research
carried out by Centrepoint in 2003 found that 24% of the homeless
young people surveyed had no bank account, compared to an estimated
12% of the population. Therefore, in order for the inquiry to
adequately address the issue of financial inclusion in the UK,
we believe that this demographic group should not be overlooked.
In respect of the specific issues you are intending
to consider, our views are outlined in more detail overleaf.
ISSUE 1: ACCESS
TO BANKING
SERVICES
— Access to banking services is beneficial
for homeless young people in terms of: security, improved financial
management and the ability to save and secure credit (see below
regarding affordable credit).
— In addition, access to banking services
can often also be a prerequisite for receiving benefits (for example,
tax credit, benefit payments direct to your bank account) and
bank accounts are frequently the preferred method through which
employers pay salaries. Further details of the importance of financial
inclusion are listed under Issue 6.
— There are three immediately perceptible
implications for access to banking services that result from being
homeless:
— Not having a fixed address often
makes obtaining a bank account impossible.
— Using a hostel address can prejudice
the offer of a bank account.
— Basic bank accounts are often
denied because of a young person's credit rating.
ISSUE 2: ACCESS
TO AFFORDABLE
CREDIT
The importance of access to credit
— The Government has recognised that
credit is crucial to modern living and young people have always
been among the heaviest users of credit due to low or unstable
incomes and transitional lifestyles. Using credit as a form of
borrowing (a loan to be repaid with interest) is helpful for most
young people as it creates a manageable debt (sum to be repaid).
— However, credit is particularly important
to homeless young people because they often live on low incomes
and incur more expenses than young people living with their parents.
For example, they must be able to afford rent deposits and buy
essentials to set up home.
— In addition, credit is an important
tool for the young in their long-term development and borrowing
is a recognised mechanism for funding periods of study.
— A third of the homeless young people
questioned in Too much too young had difficulties in accessing
credit.
Affordable credit
— Notwithstanding the above, in order
for the benefits of credit use—both for the individual and
the wider economy—to be realised, credit must be affordable.
Indeed, it is worth noting the distinction between those people
who will not pay back their debts, those who genuinely cannot
pay and those who could pay given the right help and support.
Too much too young found that homeless young people overwhelmingly
fall into the latter two categories, with the majority potentially
able to repay debts, but only at an appropriate level and with
the right support.
— Young homeless people do tend to
take on higher burdens of debt than the general population, and
this is increasingly the case. Levels of debt amongst young people
are growing faster than those of the general population.
— Unmanageable debt causes stress and
depression and can work against homeless young people's attempts
to build a positive future and escape homelessness. Once in debt
it is very hard for them to get out: they may lack the skills
and confidence to negotiate with debt collectors, and feel very
intimidated by them. Young people also find it very difficult
to repair their credit rating without borrowing more; and without
access to any credit they cannot move into their own home and
live independently or go to university.
— Because of a lack of assets and a
sporadic income many homeless young people are caught up in a
spiral of debt repayments and borrowing. This has significant
ramifications for the overall operation of the benefits system,
as benefits are the main source of income for the young people
Centrepoint works with.
— Inaccessibility can force homeless
young people to use more expensive credit, with some young people
using mail order catalogues with typically higher prices than
on the high street or resorting to store cards with a very high
APR. These forms of credit significantly reduce the possibility
of ultimately escaping from debt. Others seek out less formal
sources of borrowing, which can, in the worst cases, incur intimidation
and fear, and lead to violence.
— A substantial number of the young
people who took part in Too much too young owe money to
friends or relatives—37%, compared to 6% of the total population.
Borrowing money from relatives and friends can place strain on
relationships, or at the most extreme it can destroy them. Many
homeless young people spend long periods of time sleeping on friends'
floors because they have nowhere else to go. Having to borrow
from friends and being unable to repay the money can prove to
be the end of those friendships.
Social responsibility and the banking sector
— Centrepoint believes that any opening
up of the availability of affordable credit must operate in tandem
with measures to ensure a socially responsible credit market in
the UK, in order that financial inclusion policy goals are achieved.
Put simply, the positive implications of affordable credit will
not be felt if the take-up of it is significantly low.
— Centrepoint believes that, like all
organisations, lenders have a social responsibility towards their
clients, the community and the wider economy.
— Affordable credit coupled with a
socially responsible credit market will ultimately help the young
homeless to realise their potential and make a positive contribution
to their communities and the UK economy.
— Centrepoint also notes the important
role of financial education in this area and makes further comments
on this below (see Issue 3).
— As such, Centrepoint recognises the
potential of the Consumer Credit Bill passing through Parliament
and of this inquiry to influence the wider debate.
— Centrepoint also recognises the value
of the various codes governing financial behaviour but would welcome
a tightening of the various provisions in key areas, including:
(1) Promotional Material
— Young people are very susceptible
to promotional literature advertising financial products.
— While many homeless young people
have over come significant adversity precisely because of their
maturity, experience and attitude, there are some young people
who are more likely than older adults to lack the knowledge, experience,
maturity, confidence and consequential thinking to prevent and
deal with debt.
— The Government has indicated that
age should be taken into account when decisions are taken about
lending money and the Financial Services Authority (FSA) code
states that care should be taken with young people. However, there
is at present no code to cover the marketing of products. It would
be beneficial if the DTI were to draw up specific guidelines for
lending to young people, that would cover the way these products
should be marketed to them. Given the FSA's expertise in this
area, they may be the most appropriate body to do this.
— Two thirds of the young people consulted
for Too much too young have been sent promotional literature
encouraging them to take out credit.
— Of greater concern is the significant
minority of young people consulted in Too much too young
have been sent promotional literature after becoming homeless.
A fifth of the young people in the report say they have received
letters inviting them to apply for credit since they became homeless
and moved into a hostel.
(2) Increasing credit limits without
prior consent
— Some lenders put up credit limits
without the young person requesting it. Homeless young people
may have moved several times and do not always receive letters
informing them, calling into question the transparency of the
process. Several young people interviewed had got into a spiral
of high interest repayments by using store cards or overdrafts
without realising their limit had gone up.
— This practice has consequences that
far outweigh the benefits. In reality the benefits for young people
and lenders are illusory, creating debt that is unmanageable for
the former and unrecoverable for the latter. Centrepoint's approach
to working with young people is to help them to have control over
all aspects of their lives. Giving young people higher credit
limits they have not asked for loosens their control over their
finances with serious consequences.
— The precise mechanism of seeking
consent for raising credit limits must be debated to strike a
balance between social responsibility and the need of lenders
to market their products.
— At the very least, Centrepoint believes
that credit limits should only be raised on request for vulnerable
young people aged 16-25.
— Young people with multiple needs,
such as mental ill health or drug addiction, whose lifestyles
may be chaotic, are particularly affected by penalty charges for
those who default. As a result of their chaotic lifestyles they
are not always capable of negotiating repayments or making those
payments on time without help and support.
— Centrepoint believes that penalties
should be proportionate and reflect the cost incurred by the lender.
Debt collection, credit rating and County Court
Judgements
— Young people who have been in debt
cannot repair their credit rating without borrowing more money,
encouraging a spiral of debt. This reinforces the arguments for
ensuring access to affordable credit.
— Young people who have a bad credit
rating can be prevented from moving into their own home. Some
of the young people Centrepoint supports have been turned down
for credit and are essentially stuck in the hostel system.
— A major cause of stress amongst those
in debt is the way debts are collected. Once debts are sold on
to one or more debt collection companies, young people find it
very difficult to know who to negotiate with. The young people
consulted for this research say there is a lack of understanding
about their sporadic incomes. They also find they lack the skills
to negotiate with debt collection companies.
— Debt collection companies do not
take into account the sporadic income of many homeless young people
and the difficulties they have negotiating in order to come to
a speedy resolution. Debt collection companies need to make more
distinction between those who will no pay and those who genuinely
cannot, and give the latter more flexibility in their repayment
schedules. Indications that someone cannot pay include a very
low income and attempts to contact the company to negotiate repayments.
— If the system were more regulated,
young people would be more likely to contact debt collection companies
to repay the money, whereas at present many are afraid to do so.
Credit unions and community development finance
institutions
— Current affordable credit options
like credit unions do not appear to be widely understood by the
young people consulted and are more difficult for them to access
because they often operate on the principle that you have to pay
in before you can borrow.
— In addition homeless young people
may be barred from accessing them because they do not belong to
a workplace or local community; common criteria for entry. It
may also be appropriate for organisations that work with homeless
people to explore the feasibility of setting up a credit union
to overcome these problems of access.
— Centrepoint believes that opening
up mainstream credit to homeless young people remains imperative.
The Social Fund and interest free loans
— The Social Fund, which provides discretionary
grants and loans to those in need, also appears to be fairly unknown
amongst the young people who took part in Too much too young
and uptake levels were extremely low.
— There are a number of reasons why
this group find it hard to access the Social Fund:
— It is cash limited so young people
cannot always access it because the money has run out.
— To be eligible people must have
been claiming Jobseeker's Allowance (JSA) for six months—this
particularly disadvantages homeless young people who may move
in and out of work and may act as a disincentive to finding work.
— The items it will cover are very
restricted.
— The level of repayment for loans
can be too high, undermining its crucial role as affordable emergency
credit.
— The Government announced reforms
to the Social Fund in December 2004 including measures to reduce
the highest levels of repayment for those on benefits.
— Centrepoint believes that the Government
must further review its operation to take into account the needs
of homeless young people.
ISSUE 3: FINANCIAL
EDUCATION AND
ACCESS TO
FINANCIAL ADVICE
— Poor financial literacy is one of
the key reasons why homeless young people get into debt, and levels
of financial awareness amongst young people is generally poor.
— There is a need for better training
for those who give advice to homeless young people, such as staff
in Jobcentre Plus, Connexions, Citizens Advice, etc. Training
needs to be focused on the particular issues facing homeless young
people.
— Some groups of young people, such
as those leaving care, have special needs in terms of financial
education. Refugees, for example, face particular problems due
to language barriers and unfamiliarity with terms.
— Importance of local services because
homeless young people do not necessarily have resources to travel
far.
— Poor literacy, numeracy and financial
literacy prevent young people from making informed decisions about
credit.
— The FSA must ensure that the advice
they publish addresses the particular needs of homeless young
people. It mush be made available to them in an appropriate format
and in accessible and often informal settings (not just through
the traditional education system). Many of the young consulted
by Centrepoint suggested a handbook with advice about budgeting,
claiming benefits, and managing debt should be made available.
ISSUE 4: INCENTIVES
AND BARRIERS
TO SAVING
FOR PEOPLE
ON BELOW
AVERAGE INCOMES
— There are many obvious barriers to
young people on below average incomes from saving.
— At the same time there are many temptations
to become indebted.
— This may partly due to the reality
that people on below average incomes have less income to save
and this can often be couples with poor financial awareness as
discussed above.
— In addition, there are limited incentives
to save. Many savings schemes exclude homeless young people because
they may have:
— High level of unemployment or
are still in education
— Lack of access to affordable credit
is one of the key barriers to saving for young people. See above
(Issue 2) on affordable credit.
— There is a significant lack of understanding
of the benefits of saving, discussed above (Issue 3).
ISSUE 5: THE
ROLE OF
GOVERNMENT, FSA AND
OTHER BODIES
IN THE
PROMOTION OF
FINANCIAL INCLUSION
— The Government has indicated that
age should be taken into account when decisions are taken about
lending money and the FSA code states that care should be taken
with young people. However, there is at present no code to cover
the marketing of products.
— It would be beneficial if the DTI
were to draw up specific guidelines for lending to young people,
which would cover the way these products should be marketed to
them.
— Given the FSA's expertise in this
area, they may be the most appropriate body to do this.
— Because they have less choice about
the credit they use, homeless young people are more vulnerable
to exploitation so legislative measures to reform extortionate
credit are crucial to them.
— Homeless young people most at risk
might benefit from a cap on the amount of interest that can be
charged, used in other European countries to protect the most
vulnerable.
— There are fears this would reduce
the amount of choice for consumers and so we recommend that the
DTI keeps this policy under review.
ISSUE 6: THE
BENEFITS OF
FINANCIAL INCLUSION
AND THE
EXTENT TO
WHICH FINANCIAL
INCLUSION MEASURES
CAN CONTRIBUTE
TO COMBATING
POVERTY AND
REDUCING BARRIERS
TO EMPLOYMENT
— Unmanageable debt causes stress and
depression and can work against homeless young people's attempts
to build a positive future and escape homelessness.
— Money is the most common worry amongst
homeless young people. Some of the young people who were interviewed
for Too much too young were being treated for depression
as a result of their debt. A third of the young people surveyed
said they were not coping with the level of debt they had.
— A significant proportion of young
people (15%) cite a change in circumstances as the main cause
of their debt, which tallies with previous research findings that
those on low incomes do not have enough of a safety net to survive
a change in circumstances, such as losing a job or having a child.
— Many young people are caught up in
a spiral of repayments and borrowing for five key reasons:
— Living on low income, repayments,
high charges for non-payment—research by Citizens Advice
has found that living for a long time on a low income is a major
cause of debt. Citizens Advice, In too Deep (2003).
— Poor benefits administration,
especially housing benefit but also jobseekers allowance, income
support, incapacity benefit and the working tax credit.
— Lack of information, education
and advice. The level of financial literacy and numeracy is a
major factor in whether young people get into debt and are able
to prevent debts from escalating.
— Lack of affordable credit options
and understanding of these options.
— Marketing and cold calling—the
amount of debt they are tempted with at a young age.
— All organisations, government and
agencies working with young people who are vulnerable to debt
problems have a responsibility to tackle poverty, in addition
to the young people themselves. Financial and welfare policies
must work together. Measures to contribute to poverty reduction
include:
— Increase access to affordable
credit.
— Prevent irresponsible lending
and promotion.
— Increase the level of education,
information and advice about managing finance and debt in both
formal and informal educational and youth related settings.
— Improve the accuracy, simplicity
and speed of the benefits system.
— The DWP should investigate whether
there is a demand for more support, training and guidance amongst
Jobcentre Plus staff regarding benefit entitlements for young
people.
Financial inclusion is critical to homeless
young people if they are to make a fresh start and live independently.
Some young people see their debt as evidence that they are a failure,
and this can prevent them from gaining confidence, building up
resilience, moving out of homelessness and contributing to society.
January 2006
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