House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Supplementary memorandum by Citizens Advice

FOLLOW-UP TO 24 JANUARY EVIDENCE SESSION

As part of the Treasury Select Committee's inquiry into financial inclusion, Citizens Advice gave oral evidence to the Committee on 24 January 2006.[84] During this evidence session the following supplementary information was requested.

1. OPENING POST OFFICE CARD ACCOUNTS

1.1 Responding on behalf of Citizens Advice to Q25[85] on the popularity of the Post Office Card Account, Teresa Perchard mentioned that the high levels of take-up had been achieved in spite of the difficulties in opening the Post Office card account.

1.2 When direct payment of benefits was introduced, Citizens Advice and other organisations criticised the numerous steps involved in opening a Post Office card account (POCA). The large number of steps were highlighted in the Trade and Industry Select Committee's report People, Pensions and Post Offices: The impact of "Direct Payment" on post offices and their customers. In particular, the National Federation of SubPostmasters (NFSP) noted that "this process involved eight steps, requiring the customer to make a telephone call to a DWP call centre, fill in two different forms and make two trips to a post office branch, and compared the process unfavourably with that involved in opening a bank account."[86]

1.3 Following criticism of the multitude of steps, some streamlining of the process was undertaken, including the provision of pre-populated forms for applicants. However, problems persist:

A CAB in Buckinghamshire reported that a client came for help completing the application form for a POCA. All her previous attempts had been rejected by the Post Office.

A CAB in Warwickshire reported that their client was awarded disability living allowance (DLA) and industrial injuries benefit due to mental health and physical difficulties. She arranged to have these benefits paid into a Post Office card account rather than a bank account as the Post Office is more convenient. The client had to complete four application forms for a POCA before she was successful in having her benefits paid into her account. Without the support of her MIND advocate she would have given up and opened an account with her local bank despite the Post Office being her preferred choice.

1.4 The current DWP claim forms, for example the Pension Credit claim form, do make reference to the ability of applicants to open a POCA to have their benefits paid into. However, the section in the accompanying Notes about the POCA is, somewhat confusingly, immediately followed by the statement "Any bank or building society will help you open an account. If you want to get your money at the Post Office, check that the account allows you to do this." Anecdotal evidence from CABx also suggests that new benefit applicants can be steered towards opening a bank account rather than a POCA to receive payment.

A CAB in Merseyside reported that their client was receiving his benefit via Girocheques but wanted to open some form of account to receive his benefits electronically. An official from the DWP recommended that he open a bank account rather than a Post Office card account (POCA) as some Post Offices were closing.

1.5 The fact that large numbers of people went through the lengthy application process, with approximately 40% of benefit claimants invited to convert to direct payment choosing to open POCAs for the receipt of benefits, pensions and tax credits, demonstrates the popularity of the POCA, and many people's desire to continue to receive their benefit payments via the Post Office.

2. RIGHT TO BUY LENDERS

Introduction

2.1 Responding to Q75[87] on right to buy lenders we pledged to report back to the committee on CAB evidence on the issue. CAB evidence shows how some former tenants of social landlords who have exercised their right to buy their home have fallen into financial difficulties that threaten their status as owner-occupiers. A number of broad themes can be taken from this evidence including the following problems:

— Tenants entering into mortgage agreements following promotions by lenders where the borrower's income was insufficient to maintain repayments from the outset.

— Borrowers finding themselves surprised by clauses in their mortgages agreement ramping up payments significantly within months or years of the loan commencing.

— Paying higher interest rates from their mortgage than mainstream lending rates without having had the opportunity to shop around before taking out a loan.

— Borrowers being asked to pay hefty fees to brokers.

— Unreasonable and aggressive arrears management practices by lenders who refuse to negotiate forbearance arrangements and who take court action seemingly as a first rather than a last resort.

— Changes in the circumstances of borrowers that are inadequately protected through current benefit and insurance safety nets.

Right to Buy Lending: Approved Lending Institutions

2.2 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. We understand that approved status gives the security held by the lender priority over the borrower's covenant to repay the right to buy discount to the local authority if the borrower should sell the property within a specified period after the purchase is made. A lender without this status risks losing a proportion of their security should anything go wrong in the early part of the loan, and so approved status has a clear advantage for lenders.

2.3 However, it is possible for non-approved lenders to lend to right to buy borrowers for house purchase although we have been told that many local authorities will only sell where the lender is approved. In addition, there is a growing market of secondary lenders who grant secured loans against the equity in a property. The (ALI) scheme does not seem to apply to this type of lending.

2.4 When a lender makes an application to ODPM for approved status they are required to provide certain company information including the memorandum and articles, most recent accounts and details of any parent company. In addition they must give ODPM details of the business they intend to engage in, any regulator they are subject to (including an instruction to include a consumer credit licence where the lender holds one) and details of any complaints made to the company and the complaints handling procedure. ODPM also require 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 codes of practice.

2.5 So, 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 that ODPM 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. Likewise the ALI does not seem to be designed to set standards or monitor the quality of either lending decisions or arrears management practices, both key arrears in the problems reported by people seeking help from the CAB service. Therefore it is hard to see how the API scheme can provide comprehensive regulation of right to buy lenders. However right to buy loans will be outside the scope of regulation by the Consumer Credit Act and we believe that only those loans taken out after 31 October 2004 will be regulated by the Financial Services Authority.

2.6 CAB evidence continues to highlight problems faced by right to buy borrowers and Citizens Advice believes that better protection for such people is urgently needed.

CAB evidence of problems with right to buy

2.7 A number of CABx have reported cases of borrowers exercising their right to buy where their income and other circumstances suggest that the loan would be unaffordable from the outset.

A CAB in Yorkshire advised a single woman with two dependant children. She was receiving income support, tax credits and child benefit totaling £180 per week. She also received disability living allowance middle rate care component. She was a council tenant and bought her house through the right to buy scheme with a £42,000 mortgage. However she was never able to afford the full amount of the mortgage.

2.8 In some cases, the problems of affordability caused by a low or variable income are compounded by an interest rate on the loan that is some way above those available from mainstream lenders. For those right to buy borrowers whose income or credit history would make it difficult to get a loan from the high street there are often brokers fees to contend with as well.

A CAB in Lancashire saw a couple, both aged 60, both with health problems and who were in receipt of benefits. They had been council tenants and recently exercised their right to buy with a mortgage charged at over 10%. The mortgage company also charged them around £2,500 for arranging the mortgage. The mortgage was also sold on an interest only basis with no other vehicle to pay of the debt at the end of the loan period. The family had no means to repay the loan other than to sell the house. The mortgage lender took court action against the borrowers who were due to be evicted as a result. When the CAB tried to negotiate the lender told them it was not their problem.

A CAB in Northern Ireland advised a couple who had missed several mortgage payments. A financial adviser had previously told them that only one mortgage lender would give them a loan to buy their housing executive house due to unpaid catalogue bills in the past. They were persuaded to take out a mortgage of £28,000 for the property with a further £12,000 for home improvements. They believed that the mortgage would cost £290 per month but it rose to £360 within a year and a half of taking out the mortgage. They later discovered that the financial adviser received £1,500 in commission on the loan.

A client of a CAB in Staffordshire was a housing association tenant who bought his home. He had received a leaflet from a lender and had no experience of home ownership so didn't think about shopping around even though he had an unimpaired credit history and both he and his wife were in work. A year later he decided that his payments seemed a lot, and so he approached a broker for a better deal. The broker arranged a mortgage with another lender that was cheaper, but for one month only. The broker earned £1,250 in commission for this arrangement.

2.9 Surprise at sudden increases in the size of loan instalments or unexpected additional fees is a feature of right to buy problems reported by CAB clients. The consequences can undermine sustainable home ownership as the following cases show.

A man who visited a CAB in Dorset had bought his council house with a mortgage that was manageable when he took it out. However, three years later the monthly payment had increased to £1,150 per month and he fell into arrears. He contacted the lender offering to pay £100 per month off the arrears but the lender was not interested. Instead they took court action for repossession.

A woman visited a CAB in Wiltshire for advice after exercising her right to buy. The mortgage company had told her that the monthly payment would be £820 with an initial payment of £1,250. However, shortly after taking out the loan the woman received a letter stating that the first payment would be £1,750. She asked for time to pay but the lender would not agree to this. Because of her low income from part time work, arrears on the loan continued to build leading to repossession and homelessness.

2.10 CAB clients also report problems with firms who offer to assist them to exercise their right to buy, but who then provide little or no service but charge a hefty fee.

A CAB in Lincolnshire saw a woman who was called by a company assisting people with right to buy. She expressed an interest in the value of her house but not in buying as she was in receipt of income support. She later received a bill from this company for administrative charges and was threatened with debt recovery action. She said that she did not sign any agreement and the company did not respond to letters from the CAB.

A CAB in Herefordshire advised a disabled man whom a company had visited about right to buy. He told them that he might be interested in six months. The company continued to send him various forms including a client agreement that would have meant the man paying £3,000 in fees.

Conclusion

2.11 CAB evidence shows how people seeking to exercise their right to buy are often in receipt of low or variable incomes, may have limited or no experience of financial products and often find themselves exposed to higher interest rates, large fees and the threat of court action by lenders. In many cases it seems clear that borrowers have found loans difficult to afford from the outset and in some of these cases the lender should have been aware of this. In other cases lenders have taken aggressive recovery action where borrowers have fallen into arrears, refusing to negotiate or otherwise help borrowers in financial difficulties.

2.12 Citizens Advice believes that this evidence shows how the right to buy sector needs robust and pro-active regulation to protect borrowers, many of whom are quite vulnerable to the shocks associated with home ownership. However, we are concerned that evidence from CAB clients shows how this protection does not seem to be in place.

2.13 Equally while the government has made efforts to ensure low income borrowers have access to affordable unsecured loans, little has been said about the higher charges that such borrowers often face when taking out secured loans compared to other borrowers.

2.14 Finally, in too many of the cases reported to CABx, people who fall into financial difficulties after exercising their right to buy find themselves facing possession action as a result. This questions whether the current safety nets for people in receipt of low and variable incomes are sufficient to keep people in their homes following what could be a fairly small income shock. Citizens Advice believes that if financially excluded people are to share in the promise of sustainable home ownership these problems will need to be addressed.

3. SOCIAL FUND

3.1 The Committee Chairman asked Citizens Advice to provide further information to the Committee on the potential relevance of the social fund to promoting financial inclusion. (Q86)[88].

3.2 The Social Fund, established in 1988 provides a range of grants and loans to people for particular purposes and if they meet certain eligibility criteria. The Government has described the social fund as playing an important role in the Government's agenda for tackling poverty and social exclusion, providing support to millions of people on low incomes who need help to pay for a variety of intermittent expenses, see for example Annual report on the Social Fund (CM5238, July 2002).

3.3 Improving access to affordable borrowing is a key plank of the Government's financial inclusion strategy. The social fund provides, for certain individuals, a source of interest free borrowing. A number of important changes have been made recently to the loans element of the Social Fund—changes which were announced as part of the Government's strategy on financial inclusion. The changes made include a reduction in the maximum standard repayment rate for loans, an extension to the maximum repayment period, and other changes which may make it easier for people to qualify for loans. The DWP have said that over the next three years the changes they are making involve £210 million additional funding into the scheme. Although it should be remembered that so far as loans are concerned these are repaid, over time, by recipients.

3.4 In principle, therefore, the Social Fund and especially the scheme of budgeting loans and also crisis loans is part of the general picture of "affordable" borrowing that is available for certain people on low incomes.

3.5 The question then arises of whether the Social Fund in its present form is making a sufficient contribution to the Financial Inclusion strategy, even after the recent changes in policy are taken into account.

3.6 There is considerable evidence pointing to the need for wider reform of the Social Fund if it is to make a more effective contribution to tackling financial inclusion. As a source of borrowing, access to it is highly restricted, for example there is a 26 week qualifying period and access is means and merits tested—people on low incomes who rely on tax credits to support them in work cannot apply for example. Using the social fund is not popular with benefit recipients because of the inflexible nature of repayment rates and collection methods. Hence people on low incomes who budget on a weekly basis may prefer higher cost credit sources which are seen as more "affordable" on a weekly payment level basis, and more flexible because they can skip payments easily and are more in control of their financial outgoings on a week by week basis.

3.7 Wider reform of the social fund loans would need to address two main areas:

— Unmet need.

— Access and delivery.

Unmet Need

3.8 The Joseph Rowntree Foundation report, "Affordable credit: The way forward" suggests that although the discretionary Social Fund budget was being increased by £90 million over the three years to 2005-06, "this amount would have to be more than doubled to fully meet the non-discretionary borrowing needs of people in the poorest households". Similarly our report, Unfair and Underfunded, showed that in 2001-02, 259,200 applications (20%) were turned down because they were deemed to have too much outstanding debt to be able to afford a loan under these rules. This figure represents a huge pool of unmet need. This "outstanding loan" rule resulted in widespread hardship, such as in the following examples.

In Essex a lone parent had two children, one of whom was ill and needed medication kept in a fridge. The client applied for a loan for the fridge but was turned down as she was already paying off a £530 loan at £13 per week.

A South East London lone mother with one child had an outstanding Loan of £565. Her cooker no longer worked and she applied for a loan for a replacement. This was refused while the other loan was outstanding.

A Lancashire bureau reported a married client with one child who received Income Support. He had an outstanding loan of £590. He applied for a further loan of £395. This was refused because the sum of twice the existing and proposed loan would take him over the maximum allowable to him.

3.9 It is welcome that the "outstanding loan" or double debt rule is being substantially altered. Citizens Advice has made a series of key recommendations for reforms to the grant and loans scheme, in our report, Unfair and Underfunded. The main changes we have suggested include:

— Improving the quality of advice, and staff training: there should be a stronger requirement upon Social Fund staff to ensure that applicants are considered for the most appropriate type of payment most helpful to them. Our evidence shows that Department for Work and Pensions (DWP) staff need to be better informed and more sympathetic when they deal with potential applicants to the Social Fund. Applicants are usually extremely poor, and they often face other problems such as long-term ill health, poor housing or family break-up (including domestic violence). Our evidence shows that there are far too many cases in which people have, instead, received misleading or unhelpful advice and are often directed to seek a loan when a grant is available. Access problems have recently been exacerbated by the introduction of new customer managements systems in JobCentre Plus which limit the opportunities for face to face access.

— The Social Fund budget is too low and would need to be substantially increased to adequately meet needs particularly to Community Care Grant and Budgeting Loan budgets. Far too much time and money is spent in administering a complex system with high rates of refusal. Additional resources, over and above amounts already committed, would greatly assist the Government in ensuring that the poorest people in society have the basic necessities, such as beds, cookers, fridges, furniture and warm clothing.

— The DWP should actively seek information and evidence about decisions from users of the Social Fund and organisations that advise and represent them. Rates of refusal of Social Fund applications are very high—60% in the case of Community Care Grants. The Independent Review Service also overturns a high proportion of the cases referred to it.

— Access to the social fund should be widened. People who qualify for the maximum child credit and/or qualify for Working Tax Credit should be eligible to apply for help from the both the discretionary and the regulated Social Fund. People whose sole income is a contributory benefit such as Incapacity Benefit or Contribution Based Jobseekers Allowance should also be eligible. The current eligibility rules for Social Fund loans and grants leave many vulnerable people without recourse to the Social Fund. The Government has introduced new tax credits as part of its programme to tackle poverty, and we believe there is a clear case for extending eligibility to people who qualify for tax credits.

— The amount available for funeral costs should be increased (so as to reduce the need for people to borrow to cover the shortfall in costs). There should also be improved guidance and training for social fund staff administering funeral payments. We recommend a review of the operation of the rules that require the liability of family members not on a qualifying benefit to be considered. Funeral grants are frequently much lower than the actual cost of the funeral.

- Social Fund loans should continue to be available, and should be extended to a wider group of people on low incomes than at present. This has increased the need for a grants system. There are also large numbers of people whose incomes are at, or only fractionally above, the levels of income-related benefits, who have no access at all to Social Fund loans. People on low incomes do not have the same access to mainstream credit as others, and people on benefits normally have no access.

— The qualification period for Budgeting Loans should be abolished. Budgeting Loans have provided simpler and quicker decisions and more loans, but there are significant disadvantages to the scheme introduced in April 1999. Budgeting Loans are restricted to people who have been in receipt of specified income-related benefits for at least 26 weeks. This is unreasonable and causes substantial hardship.

— Budgeting loans should be repayable at a more reasonable rate, and clients should receive regular statements showing outstanding balances on loans. The Government has taken some steps towards addressing the problem of high repayment rates for Budgeting Loans, however the rules still require loans to be repaid at a high rate relative to weekly benefit—up 20% per week in some cases.

— There should be a new fast-track scheme to provide interim advance payments to people who appear to have made a valid claim for benefit. The Crisis Loan scheme should not be used to support delays in making decisions on applications for Income Support and other benefits. The Public Accounts Committee reported in November 2005 that 40% of current spending goes on "alignment payments" to people without money who have made a claim for benefit. This money is therefore not available for other people in need of an emergency loan. This has been exacerbated by problems encountered by Jobcentre Plus as a result of their efficiency programme. CAB clients have experienced long delays, caused by a severe lack of capacity in call centres, a lack of alternatives for people unable to apply over the phone for jobseekers allowance, income support or incapacity benefit, and multiple problems with the roll out of the Customer Management System.

Access and delivery

3.10 There is considerable evidence from research with people who experience financial exclusion that they find the social fund unattractive and carrying stigma as a source of borrowing—this is for a variety of reasons. Overall, for many people whom the fund is intended to benefit, the inflexibility, stigma and methods of delivery outweigh the advantages from a source of interest free borrowing.

3.11 We would like to see the DWP instigate an open debate about reform of the social fund which enables the fund to become a more positive source of assistance for people on low incomes. The debate should include whether and how the social fund, particularly the loan scheme elements, could be delivered in a different way to people in need of more affordable borrowing, for example could funds be distributed, and repayments collected via financial institutions or third sector lenders.

3.12 Of necessity such a shift would involve a different approach to decision making than the one that persists today. Delivery of the social fund outside the DWP could be a means of extending access to a wider group of individuals on low incomes. Delivering the Social Fund outside the DWP would raise a number of important issues which would need to be resolved:

— the amount of responsibility that would be devolved to any agency; and

— how potential conflicts of interest might be managed between the fundamental roles of independent organisations, and any suggestion that they administer and manage an element of the benefits system. Different questions might arise for loans (where a simple judgement on ability to repay could be applied) as opposed to grants where other qualification criteria would need to be considered.

4. FINANCIAL ADVICE/CAPABILITY

4.1 Further to our responses to Qs113-7[89] at the oral evidence session we would like to clarify the level of financial crisis advice provided by CABx and to look at the potential role of the financial inclusion fund to address more preventative needs and improve financial capability.

4.2 Successfully achieving financial inclusion requires enabling people to become genuinely confident consumers of financial and related services. Citizens Advice is not alone in seeing a real need. In 2000, the FSA reported that two out of three consumers considered financial matters were too complicated for them. Our own survey the following year indicated that consumers had lost over £10 billion as a result of signing up to poor credit deals; inappropriate debt consolidation; or unclaimed income from means tested benefits. Citizens Advice Bureaux continue to deal with the symptoms. Last year over 3,000 outlets dealt with over 1.1 million debt enquiries and nearly 1.6 million on benefits issues.

4.3 For Citizens Advice, financial inclusion involves providing money advice and information, and improving the underlying financial capability of consumers. Our particular, but not exclusive, focus is on meeting the needs of socially excluded adults.

4.4 All our bureaux handle debt issues, with over 80% able to offer specialist money advice. This service is increasingly over subscribed with evidence of significant unmet need. Waiting times for specialist appointments now often run to several weeks.

4.5 The Government's £45 million Financial Inclusion Fund for increasing debt advice capacity in 2006-08, announced by the Chancellor in the 2004 PBR, is a very positive initiative. Citizens Advice was pleased to secure £33 million in funding from the Financial Inclusion Fund this month. This represents help for over 88,000 people who need money advice, delivered by 370 new money advice caseworkers and involving approximately 180 bureaux, and allows Citizens Advice, with its partners, to increase its capacity throughout England and Wales to meet demand, especially in areas of particular social deprivation and financial exclusion.

4.6 We share the DTI's concern that this additional funding should create additional resources, and not displace the present income from other, mainly public sector, funders. No less importantly, we are concerned that there should be greater certainty about funding beyond 2007-08. As things stand, there seems to be a real risk that the potential for a step change in provision will not be fully achieved, and be abruptly reversed, without a clear and early indication of longer term funding.

4.7 Our recent small-scale pilot of Bureaux working with Independent Financial Advisers to provide generic advice on financial products has been a success. Evaluation shows that 79% of clients took action; and that positive partnerships were developed with pro-bono IFAs. The types of enquiry underlined the importance of companies genuinely "financial literacy proofing" all their materials to make them much more readily understood. This initial pilot was supported by Barclays Bank, the Personal Finance Society and the Tudor Trust. We now hope to secure further funding to allow us to test this concept of providing generic advice more widely.

4.8 We are also running a successful partnership with three other charities, funded by Barclaycard, to work with lone parents on money management and debt. This project combines education about financial capability with help on debt issues as well as providing lone parents with opportunities to learn parenting skills, and to spend time in the workplace to gain new skills and confidence.

4.9 During 2004-05 21 CAB projects worked on an initiative to help people not only to open basic bank accounts but also gave them the skills to manage them where they had no experience of banking before. This was part of the DWP work to move people away from benefit books. The work we did helped over 5,200 people become financially included.

4.10 In contrast to our debt advice work, only some 15% of Citizens Advice Bureaux feel able to offer a proactive financial capability service to their local communities. More would like to undertake such "debt preventative" activity, but "debt emergency" work is inevitably a priority demand on limited resources. Citizens Advice's vision over the next five years is to substantially increase Bureaux' capacity to provide financial capability services.

4.11 Citizens Advice welcomes the FSA's work in developing a national financial capability strategy and has, from Chief Executive down, been closely involved in its work. The FSA Baseline Survey published on 28 March underlines the continuing need, and the strategic initiatives simultaneously announced are significant steps towards addressing that need. We intend to continue to play a full role in this important public, private and voluntary sector partnership.

4.12 Citizens Advice has made significant progress in its financial capability work through its Financial Skills for Life ("FSfL") programme. This began in 2002-03 thanks to a substantial and relatively long term and continuing commitment by Prudential plc. This has been augmented by projects funded by others, including the FSA. This has allowed us to pilot work with a range of clients in both urban and rural settings. The groups have included schools, socially excluded young adults, pre-release prisoners and the elderly.

4.13 We are most successful when working in partnership with existing organisations working with such groups. Evaluation of our FSfL work to date is just being completed. It is expected to show that bureaux' direct experience of debt problems together with their independence helps carry messages with real credibility to difficult-to-reach groups. Assessing outcomes of financial capability work has proved difficult for all those involved in this area; the impact is relatively long term and maintaining client contact is not easy. But the FSfL evaluation does appear to offer evidence of some improved personal decision-making and economic well-being by those who have benefited from bureaux' work.

4.14 The outcomes of our work over recent years, together with the number of debt problems being faced by bureau clients, underpins Citizens Advice's determination to help Bureaux develop their capacity to deliver financial capability services in their communities. Bureaux will need significant additional training and funding resources to expand our present capacity. But, working with partners, increased financial capability should achieve the objective of reducing the debt crisis work. And, most importantly, the personal and family stress that comes from unmanageable debt.

5. TARIFF INCOME

5.1 Further to our response to Q129[90] we were requested to clarify the interest rate assumed on tariff incomes.

5.2 Tariff income is the value given to capital between a lower limit of £3,000 (for people of working age) and a higher limit of £16,000. Between these limits, capital attracts a tariff income of £1 for every £250. It represents a rate of return that is much higher than people actually get on their savings. Tax credits use the actual income people receive from savings or capital, which is a much fairer system.

*Value of capital **Weekly tariff income £ Assumed rate
of return %

Between £ And £

0.00 3,000.00 0 0

3,750.01 4000.00 4 5.2

5,750.01 6,000.00 12 10.4

8, 750.00 9,000.00 24 13.86

11,750.00 12,000.00 36 15.6

14,750.00 15,000.00 48 16.64