Memorandum submitted by Anne Belsey, District
of Canterbury Credit Union
1. The District of Canterbury Credit Union
has only been operating since February 2005. However, it has a
unique arrangement which possibly gives it a better opportunity
than most other credit unions to tackle head-on some of the problems
that real people have with financial matters. This unique arrangement
consists of "well-to-do" residents of the district joining
the DCCU as "Founder Members", each investing a sum
of £1,000.
2. Within a week of opening the DCCU had
over 60 Founder Members and a savings fund of over £60,000.
This meant that from its very beginning, the DCCU was in a position
to offer loans to those "ordinary" members who were
in such financial difficulty that they could not undertake the
normal arrangement within most credit unions, that of saving for
a few months before obtaining a modest loan based on the size
of their savings. The DCCU has thus had people joining in order
that they might take out a loan at a modest 12.68% (the maximum
allowed credit unions by law) in order to pay off existing loans
charging much higher rates of interest, such as the 177% of one
leading doorstep lender.
3. In many instances the DCCU has been able
to help its members out of their financial difficulties, but some
are so heavily indebted, that they are beyond the help of a credit
union, which has a duty to safeguard its members' savings.
4. Those members of society for whom financial
inclusion is an issue include, almost by definition, those individuals
whose knowledge and understanding of financial matters is at variance
even to the limited grasp enjoyed by most other people. Given
this inherent eccentricity, it is pertinent to consider some actual
examples. Only when confronted with actual examples can credence
be given to patterns of behaviour or understanding that might
otherwise be dismissed as unlikely if not patently absurd. As
a market within the financial services sector, they are often
referred to as the "sub-prime" market.
5. The following three examples are taken
from three individuals who joined the DCCU. In all three cases
they joined in order to secure a loan from the DCCU, to which
end some were successful. In each case, neither the member nor
the particular bank, building society, doorstep lender or debt
management company has been identified. The reason for this is
that almost invariably, the practice of any one company is broadly
followed by its fellows in the same business.
Mrs A
6. Mrs A joined the DCCU and applied for
a loan for £800. This money was in order to pay off three
existing loans that she had taken out from two different doorstep
lenders. A typical pattern of such a loan was that £300 was
borrowed, and total of £495 would be paid back at £10
per week over a period of 55 weeks. This involved Mrs A paying
interest of over 120% APR (according to my own rough calculations);
no rate of interest was shown on any document, although one of
the lenders is known to charge 177% APR.
7. When I asked why she had borrowed from
such lenders, Mrs A replied that they came around knocking on
people's doors offering the money. It was all too easy to get
a loan, but she had no idea of the rate of interest that she was
being charged. The very concept of interest seemed beyond her.
She only dimly understood that the 12.68% APR offered by the DCCU
(a legal maximum) was a better deal than 120% APR.
8. A most extraordinary feature showed up
on one of Mrs A's pay-books. Here the loan in question had been
reduced to about £150 and then it jumped back up again to
£350. Asked about this, Mrs A replied that she had been given
a further loan, part of which was "to pay off the existing
loan". Given the nature of the charging on these loans, this
would effectively have meant that for this part of her loan, Mrs
A was paying the very high rate of interest twice over. Although
it was immediately apparent to me that this was so, Mrs A was
not aware of the evident peculiarity of the arrangement.
9. I later checked the website for Debt
On Our Doorstep. I came across the concept of "flipping",
wherein customers of a doorstep lender were encouraged to borrow
further money from them in order to pay off an existing loan from
them. I would not have believed that such a practice could have
existed; I could not have believed that anyone would be so foolish
as to fall for such an absurd suggestion had I not just met Mrs
A.
10. Mrs A received a loan from the DCCU
to pay off her debts, but because the original charges were seemingly
quite arbitrary, the amount of discount that she received for
early repayment did not accord with the amount of the interest
that had been levied for the full term of the loan. Nowhere within
the documents that Mrs A received from the loans companies in
question was a rate of interest given or were charges itemised.
Mr B
11. Mr B joined the DCCU and applied for
a loan of £4,000 in order to do some home improvements. As
is standard practice with the DCCU, we requested that he provide
us with recent bank or building society statements and any other
documents showing his financial state of affairs. Two remarkable
features were revealed within Mr B's finances.
12. The first of these concerned his building
society current account. Mr B was living on benefits (Income Support
and Disability Living Allowance) which were both paid into his
current account. After these payments were paid in, almost the
full amount (to the nearest £10) was then taken out in cash.
Mr B also paid for certain bills with a direct debit from this
current account. When these fell due, however, there was usually
insufficient funds to cover their payment. As Mr B had no overdraft
allowance, the attempted direct debit payment incurred a penalty
of £20, with the direct debit returned to his account unpaid.
When I asked why he withdrew all his benefit in cash as soon as
he received it, Mr B quite seriously explained that he did not
trust the building society as they kept deducting £20 from
his account!
13. The second noteworthy feature of Mr
B's finances concerned two outstanding loans that he had totalling
some £4,000. When I asked him about these, he revealed that
he was not at all sure exactly with whom he had the debt. He produced
statements from a debt management company which showed that he
was paying them £100 per month. Of this £100, £70
went to one creditor and £5 to the other. This seemed to
suggest that Mr B was paying £25 to the debt management company
every month just to send off two cheques to his actual creditors.
When I asked him whether this was so, Mr B simply remarked that
it was cheaper than the monthly amount that the previous debt
management company had charged him. When I asked him about documents
showing the actual state of his account with his creditors, or
the contract that he had with his first or second debt managers,
he replied that he had none. All the arrangements had been done
over the phone, after seeing advertisements on the television.
14. Most financial management companies
advertise the fact that they can sometimes reduce the amount of
debts for which their customer is liable. I asked him whether
this was so in his case, Mr B was quite unaware of what arrangements
had been made. He was blithely content to pay them the £25
monthly service charge indefinitely for little apparent benefit.
(Incidentally, the debt management company in this case was one
that was mentioned in an unfavourable light during a debate on
"Low Income, Debt and Poverty" held in Westminster Hall
on 12 February 2003.)
15. It seemed clear to the DCCU Loans Committee
that Mr B could not afford to take out a further loan whilst he
already had these large and disorderly commitments. With Mr B's
financial well-being in mind, we refused him the loan that he
had requested and referred him to a debt counselling service.
Mrs C
16. Mrs C joined the DCCU in order to secure
a loan for some fencing to go around her house, which she shared
with her partner and their children. Whilst visiting her home
to complete the arrangements, I noticed that she had another visitor,
who was an agent from a well-known doorstep lender.
17. After the agent had departed and the
DCCU business was transacted, Mrs C explained that they were seeking
another loan in order to redecorate. The relative of costs of
the two loans were compared and Mrs C and her partner agreed that
they would be better borrowing all the money that they needed
from the DCCU, as our interest rate was less than one tenth of
that of the doorstep lender. This incident illustrates the extent
to which many people have little awareness of the cost of borrowing,
until it is brought unequivocally to their attention, which many
lenders do not do, and the less financially astute often take
out numerous small loans, from different or sometimes the same
lenders, often with different rates of APR, rather than securing
one large loan from the cheapest lender.
18. Mrs C set up a standing order from her
"basic" bank account to repay the loan from the DCCU.
Unfortunately her standing order could only be paid monthly, whereas
the benefits that she received came in fortnightly or four-weekly
(as is the case with most benefits). At first this was no trouble,
her main four-weekly benefit was received just before the standing
order was paid, but after a few months, the gap between her receiving
her benefit and paying the standing order opened so much that
her budgeting skills were unable to retain sufficient money in
her account when the standing order became due.
19. So it was agreed that the standing order
would be cancelled and the money would be paid in cash to a DCCU
volunteer visiting her home once a fortnight. Unfortunately, this
arrangement was made on the Friday before the following Tuesday
(1 November 2005) when the standing order would be paid. From
Friday to Tuesday proved to be insufficient time for the bank
to change the instructions on Mrs C's account. The standing order
was duly paid, removing from her account the money that Mrs C
depended upon for that week. When the DCCU office next opened,
Mrs C appeared in a state of some distress. She had children to
feed; she had a cash payment to make; she had no money, and she
had no overdraft facility, even of the most modest size, upon
which to draw.
20. The DCCU does not normally give cash
withdrawals on demand, as it does not run "current accounts".
It is in the business of long-term savings and borrowing. As I
was the volunteer on duty, I withdrew some money from my own account
from the ATM along the street (going slightly overdrawn as a consequence)
to pay sufficient to Mrs C to tide her over her immediate crisis.
The sum in question was very small, only £40, but the High
Street banking system had failed Mrs C even over this modest amount.
EXECUTIVE SUMMARY
21. People on low incomes or benefits are
easy targets to "sub-prime" businesses, whose services
and costs are very high and are not readily explained to or documented
for their customers who often lack numeracy skills and are overawed
by documentation.
22. People living on benefits have been
required to have "basic" bank accounts in order to receive
their benefits. In many instances they did not choose to have
such accounts, having lived within a "cash-culture"
previously, which, with all its faults, was the "devil they
knew". They have been forced into using a mysterious and
opaque money system.
23. These "basic" bank accounts
as established by "reputable" High Street banks and
building societies restrict the facilities available to their
holders. They limit access to credit and have delays within their
own systems, yet do not prevent account holders from falling foul
of the large and arbitrary penalties that are imposed for "misuse".
Often imposing charges for an unauthorised overdraft that exceed
the size of the overdraft!
24. The simple business of running direct
debts and standing orders is made difficult for "basic"
bank account users in that the monthly payments to which they
are limited do not tie in with their own usual fortnightly or
four-weekly receipt of benefits.
25. The manner in which bank and society
accounts operate is a mystery for most people. For example, the
length of time required to clear funds and the time required for
a standing order instruction to take effect is extraordinary long
in this age of computers. For those on large salaries and mortgages,
allowed generous and cheap overdrafts, such delays are usually
not a problem. For those who have been, perhaps unwillingly, required
to open bank accounts, denied authorised overdrafts, levied high
charges for minor errors, and are living on very narrow margins
to begin with, the system must seem to be entirely punitive.
26. The arbitrary, restricting and penalising
nature of these "basic" bank accounts is likely to make
their holders fearful of High Street businesses and make them
vulnerable to expensive and unscrupulous "sub-prime"
businesses, from whom the DCCU, at least, is attempting to liberate
them.
January 2006
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