Select Committee on Treasury Written Evidence


Memorandum submitted by the Department for Work and Pensions

1.  INTRODUCTION

  This memorandum is submitted by the Department for Work and Pensions (DWP). As the Committee recognise the Treasury is the lead department on financial inclusion. However, DWP plays a very important part and sees financial inclusion as of key significance for DWP's 80% employment aspiration.

  For example, Jobcentre Plus helps people improve their financial position through:

    —  helping people to find/return to work;

    —  helping to open bank accounts, including identity issues and referral for debt advice where appropriate; and

    —  providing social fund loans (to be simplified from April 2006).

  The Pension Service provides information and support to working people in making confident choices about their retirement.

  Whilst DWP has an important role to play in tackling social and financial exclusion through the measures it takes to provide support and tackle worklessness, its main contribution to financial inclusion is focused on improved access to banking and affordable credit.

2.  ACCESS TO BANKING SERVICES

Direct Payment

  The move to Direct Payment and the introduction of universal banking services, which started in April 2003 and was completed in March 2005, has resulted in increased customer choice, is helping to improve financial inclusion and has brought banking services into many rural/urban deprived areas for the first time. It has significantly improved access to banking services to groups who have traditionally been financially excluded such as the long-term unemployed and Muslim women.

  In April 2003, 15 million of the Department's customers were paid by order book or giro. Now around 16 million customers have payments made directly into an account and fewer than 0.4 million are being paid only by cheque. Within the Department, the proportion of customer's benefits paid by Direct Payment has increased from 43% in April 2003 to around 98%.

  Millions more pensioners, mothers, disabled people, carers and jobseekers are enjoying the greater choice, safety and savings Direct Payment brings. The results of independent research show that there are very high levels of satisfaction amongst customers who have transferred to Direct Payment; 93% stated they were happy to receive their benefits in this way.

  In 2003, Citizens Advice published a booklet on financial inclusion called "Beyond Bank Accounts: full financial inclusion", which said:

    "The government, the banking industry and the Post Office should be commended for the progress they have made in establishing Universal Banking Services. The ambition to enable all people to own the most basic of financial services—a bank account—is one we share."[97]

    "Getting people onto the ladder of financial inclusion is vital and Universal Banking Services should be heralded in this regard."[98]

  Financial exclusion is one of the key factors in wider social exclusion. In 2002-03 1.9 million households (which equates to around 2.8 million adults) in the United Kingdom were without a bank account of any kind. Encouraging benefit recipients and pensioners to make greater use of existing bank accounts or open new ones is a key element of the Department's strategy to improve financial inclusion and will, for example, give people on low incomes access to savings on their fuel bills through making payments by direct debits, the ability to cash cheques free of charge and access to cheaper credit.

  The banking industry worked with the Government to introduce the basic bank account which was specifically designed to address the needs of the financially excluded. Figures published by the British Bankers' Association on 24 November 2005 show the continued growth of basic bank accounts, which enable direct receipt of benefits, pensions and credits from Government. Since the start of universal banking in April 2003, a net total of around 1.52 million accounts have been opened. The third quarter of this financial year saw 138,000 accounts opened and 4,300 existing accounts have been upgraded to more full-featured accounts.

  The DWP has also successfully facilitated arrangements whereby benefit can be paid directly into credit union accounts. Nationally the scheme is in its relative infancy but has already proved popular with both credit unions and customers and has the advantage of making it easier to collect cash and at the same time access the saving and borrowing services the credit union provides.

Local Housing Allowance

  The Local Housing Allowance (LHA) is a new form of Housing Benefit (HB) for tenants in the private rented sector (PRS). Currently only 40% of PRS tenants in receipt of HB are paid their rent direct, with 60% of payments being made to the landlord. This does not encourage tenants to take any interest in the rent payable or to budget their income to meet their rental liability. With the introduction of LHA, the majority of tenants in the PRS will receive their benefit direct and will have to make the necessary arrangements to pay the rent to their landlord, thus encouraging tenants to move to a position similar to those in work thereby making the transition into work easier.

  LHA is currently being tested in 18 local authorities prior to national rollout and these local authorities encourage tenants to have their LHA paid into bank accounts, and where a tenant does not have one, they provide support and guidance to help them through the process of opening such an account.

3.  ACCESS TO AFFORDABLE CREDIT

  People on low income are often excluded from mainstream credit and have to rely on high cost options. The Government wants to ensure that they have access to low cost credit in a way that does not encourage vulnerable consumers into unsustainable debt. DWP makes an important contribution on a number of fronts.

Growth Fund

  The "Promoting Financial Inclusion" report announced, as part of a package of measures designed to tackle financial inclusion, the establishment of a Financial Inclusion Fund of £120 million to tackle the social and economic problems of financial exclusion—in particular to support the Government's aims of increasing access to forms of affordable credit and free face-to-face money advice.[99]

  An important element within this fund is the Growth Fund of £36 million. It will be used to make affordable loans more available through local third sector lenders such as Credit Unions and Community Development Financial Institutions. The loans will be available to the financially excluded who cannot get affordable credit from reputable "high street lenders" and are therefore prey to loans at exorbitant interest rates.

  Making low value loans to people on low incomes carries a disproportionately high administrative cost for lenders, which will need to be reflected in "affordable interest rates" charged by institutions contracted to deliver the Growth Fund. But there is a huge difference between the typical 175% to 300% plus range of interest rates charged by legitimate commercial doorstep lenders, and the rates to be charged by Growth Fund lenders which are likely to range from about 13% to 35%.

  DWP is delivering the Growth Fund on behalf of HM Treasury. Work has already progressed to the formal procurement stage with relevant financial institutions preparing to bid to deliver the service, and the Fund ready to issue payments from late June 2006. Final payments from the Fund will be made by March 2008.

  The objectives of the Fund are simple and practical. Increasing the awareness and accessibility of affordable loans when financially excluded people need them most, it will decrease the number of loans taken out with high cost lenders and substantially reduce the cost of borrowing for those people. It is intended that the Fund will therefore free up more disposable income for financially excluded borrowers to spend in the socially deprived areas in which they live.

  The Fund will also have a practical impact on the reduction of benefit dependency. By reducing the amount of debt that benefit recipients have to manage, it will help to remove a barrier to employment for those people. At present reliance on high cost lenders leads to higher levels of debt, as the high interest rates mean that debts accumulate. People with high debts see taking up employment as an invitation to their creditors to pursue repayments via attachments of earnings. This fear becomes a disincentive to finding work. And by providing access to free financial advice and support for opening simple accounts, it will help to increase:

    —  levels of financial inclusion and readiness for work;

    —  the future credit rating of borrowers;

    —  the payment of benefit/wages into accounts; and

    —  the savings that people can make on payments to utilities companies by setting up direct payment arrangements.

  It is intended that the Fund will increase the capacity of third sector financial institutions to provide services to financially excluded people, as well as generate sustainable loan capital for the benefit of excluded communities over time. And whilst the Fund cannot be said to have the capacity to address the entire problem of exclusion from affordable credit, it does represent a substantial test of the local third financial sector's ability to meet the needs of the consumer group and provide valuable pointers for future action.

  The Growth Fund will be complemented by the introduction of the Affordable Credit deductions (Scheme), which DWP is also working to set up as part of the Financial Inclusion Fund.

Affordable credit deduction

  This is to provide a practical measure to support responsible low cost lenders, in the not-for-profit and private sector. It complements other measures to increase the supply of affordable credit. Arrangements will be introduced whereby in certain circumstances, lenders will be able to apply to DWP for the repayment of loan arrears through deductions from benefit.

  Detailed arrangements are not yet finalised but the intention is that this facility will be made available only to lenders who meet criteria for responsible lending and who make loans available at a more affordable rate of interest than is commonly charged in the alternative credit sector, on which many people on low income rely. The facility will apply as a last resort to cases which have fallen into arrears and where acceptable alternative repayment arrangements cannot be made whilst on benefit. It will also be subject to constraints to avoid hardship to the benefit customer eg the deduction rates will be limited and will take into account deductions for other debts which will take priority.

  The rationale for offering access to benefit deductions in certain circumstances 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).

  Initial discussion with a small number of credit unions and Community Development Finance Institutions indicated that lenders would generally welcome a facility for benefit deductions and that there would be sufficient numbers of lenders wishing to participate in the scheme. Discussions are being planned with interested lenders in order to refine the operational and policy detail of the scheme. Plans are being made to ensure details of the final arrangements are widely publicised among lenders. Processes will also be put in place to obtain formal expressions of interest for participation in the scheme, and to manage the working relationship with these lenders

Social Fund Loans

  Since they were introduced in 1988, social fund loans have been a valuable source of interest-free credit to people on income-related benefits. Loans are made in circumstances and on terms that the mainstream financial sector would not countenance. People on low income need credit to tide them over lumpy expenditure in the same way as those who are better-off, but who when relying on the market, have to pay more for their credit (because of the higher costs associated with higher risk and small loan amounts). The gross loans budget for 2005-06 is estimated to be around £610 million. It is made up of a combination of new funding (worth £39 million for 2005-06) plus forecast loan repayments.

Budgeting Loans

  People who have been in receipt of one of the main income-related benefits for at least six months can apply for an interest free Budgeting Loan. The loans budget is cash 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.

  The application process is not intrusive—applicants complete an application form on which they tick a box indicating the general category of item they plan to use the loan to buy, for example: furniture or household items; clothing, and footwear; help with looking for or starting work and travelling expenses; rent in advance or removal expenses; home improvements and maintenance or security. The decision on whether or not to make a loan is based on whether the applicant has been on benefit for the qualifying period and the amount of any outstanding loan. Any applicant who has been on benefit for the qualifying period and has no outstanding Social Fund debt is guaranteed a Budgeting Loan though the amount will depend upon the baseline at the time (which reflects the state of the loans budget).

  Repayments are mostly made by direct deduction from benefit. Repayment levels are influenced by the extent of existing indebtedness. The normal repayment level is currently set at 15% of the applicant's benefit (this will reduce to 12% from April 2006—see below) but lower levels apply where the applicant has other deductions or commitments.

  Improvements to the Budgeting Loan scheme are due to come into effect from April 2006. The aim is both to simplify and to expand the scheme. The key changes are:

    —  only actual budgeting loan debt will be taken into account when calculating entitlement to a further budgeting loan—currently existing budgeting loan debt is counted twice (the "double debt" rule);

    —  the calculation of budgeting loan maximum amounts will be based solely on family composition. There will be three maximum rates, for single people, couples and families with children (previously time on benefit was also taken into account and there were family variables to reflect all possible combinations of family make-up);

    —  savings limits for budgeting loan applicants will increase to £1,000 for people of working age and £2,000 for pensioners (savings in excess of the limits reduce the amount of loan available);

    —  minimum loan available will increase from £30 to £100;

    —  maximum standard repayment rate will be reduced from 15% of a customer's qualifying benefit allowance plus any Child Tax Credit and Child Benefit, to 12%;

    —  maximum repayment rate will be reduced from 25% of a customer's qualifying benefit allowance plus any Child Tax Credit plus Child Benefit, to 20%;

    —  the maximum repayment period will be extended from 78 weeks to 104 weeks; or, where a customer has particular difficulties, from 104 weeks to 130 weeks; and

    —  the overall debt limit for budgeting loans and crisis loans combined will be increased to £1,500

  These improvements will be supported by £210 million in additional funding over the three years from April 2006. This means that by April 2008 the annual gross loans budget could increase to something of the order of £700-£800 million.

Crisis Loans

  The crisis loan scheme makes interest free loans to people who are suffering an emergency or disaster. Recipients do not have to be in receipt of Income support, Income-based Jobseeker's Allowance or Pension Credit to qualify but must demonstrate that there is no other means of preventing a serious risk to the health or safety of the customer or a member of their family. All available resources are taken into account. The focus on emergency need means that crisis loan applications will always be given high priority for payment. Gross expenditure on crisis loans in 2004-05 was slightly over £80 million with around one million loans and an average award of around £78.

  Some of the improvements described above for the Budgeting Loan scheme will also apply to crisis loans, for example, the new maximum repayment rate, the new maximum repayment period and the overall debt limit of £1,500.

Looking ahead

  The Government has long made clear its ongoing commitment to reform to improve the performance of the Social Fund scheme. Ministers have recently commissioned a thorough look at the whole scheme. The aim of this work is to explore the scope for affordable further measures to improve the contribution the scheme makes to wider Government aims for tackling worklessness, poverty and exclusion.

  In the meantime the improvements to come into effect in April 2006 will make a significant contribution to improving the supply of low cost credit and making budgeting loans more accessible to vulnerable customers.

4.  ENCOURAGING SAVINGS

  DWP supports wider Government aims of promoting savings and asset ownership. The Department has taken action to ensure benefit arrangements strike a sensible balance between providing targeted state support and not unfairly penalising those who have acted responsibly by saving.

  From April 2006 the capital threshold in Income support (IS), income-based Jobseeker's Allowance (JSA(IB)), Housing Benefit (HB) and Council Tax Benefit (CTB) will increase from £3,000 to £6,000 and the upper capital limit in IS and JSA(IB) will increase from £8,000 to £16,000. For IS/JSA(IB), capital up to the threshold is ignored but a deduction from benefit is made of £1 a week for each £250, or part of £250, held above this up to the upper capital limit. Similar rules apply in HB and CTB, for people of working age except that the relevant deduction is tapered. People with capital in excess of the appropriate upper capital limit are not entitled to benefit.

  In addition, to ensure that Budgeting Loan recipients are not penalised for having small amounts of savings, Pre-Budget Report 2005 announced that the capital allowances available to Budgeting Loan applicants would be increased from April 2006. The current rules mean that capital of up to £500 (for people of working age) or up to £1,000 (for pensioners) is ignored when deciding whether a budgeting loan should be awarded and the amount of the loan. Capital in excess of £500/£1,000 will be offset against the amount of loan sought. From April 2006 the allowances will increase to £1,000 (people of working age) and £2,000 (pensioners).

5.  TACKLING OVER-INDEBTEDNESS

  A small but significant minority of the population is severely affected by problem debt, which can take the form of difficulty in meeting credit commitments or inability to pay household bills. Over-indebtedness is strongly associated with social and financial exclusion and poverty and is often exacerbated by events such as redundancy, unemployment and ill health.

  DWP plays a significant role in the Government's strategy to combat the causes of over-indebtedness and assist those affected by it. It jointly chairs the ministerial group on over-indebtedness with the Department of Trade and Industry and the Department for Constitutional Affairs. As explained above, it also directly contributes to current key measures to foster expansion of affordable credit for people on low incomes.

  DWP plays a major role through its policies of making work pay. Jobcentre Plus provides everyone of working age with advice and guidance on the full range of support available to help them move into work with more help provided to those facing the greatest barriers to work. It also administers the third party deduction scheme which helps benefit recipients avoid disconnection from essential services where they fall into arrears with bills.

February 2006






97   Regan S and Paxton W Beyond Bank Accounts: Full Financial Inclusion (IPPR & Citizens Advice; 2003) Foreword. Back

98   Ibid, page 7. Back

99   Promoting Financial Inclusion (HMT: December 2004). Back


 
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