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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