Memorandum submitted by energywatch
1. energywatch is the independent watchdog
for gas and electricity consumers in Great Britain. We provide
free, impartial advice on a range of energy issues. We also take
up complaints on behalf of consumers who are experiencing difficulty
in resolving problems directly with their energy companies. In
the last financial year, we dealt with 70,000 complaints and 137,000
enquiries on behalf of energy consumers across Britain.
2. energywatch welcomes this inquiry and
the opportunity to outline the experience of energy consumers
in this area. In particular we will focus on the role of the government
in promoting financial inclusion and the extent to which financial
inclusion measures can contribute to the mitigation of poverty.
In particular this submission will focus on the Third Party Deduction
Scheme operated by the Department of Work and Pensions, and look
at how the modification and expansion of this scheme could benefit
thousands of consumers on benefits and low incomes who struggle,
and sometimes fail, to cope with rising utility bills, a situation
further compounded by the dramatic rises in energy prices seen
over the past two years.
INTRODUCTION
3. The Government is aware that many people,
particularly those living on low incomes, cannot access mainstream
financial products such as bank accounts and low cost loans. The
Government is concerned that this financial exclusion imposes
real costs on individuals and their families—often the most
vulnerable people in our society—pointing out that households
operating solely on a cash budget are for example unable to make
savings via direct debits on utility bills.
4. The main elements of the Government's
financial inclusion strategy are access to banking, access to
affordable credit, and access to free face to-face money advice.
5. But the main pillars of this strategy
have significant limitations.
6. Research by the National Consumer Council
(NCC) on meeting basic financial needs as part of its work on
consumer disadvantage has shown that low income consumers, in
particular those on benefits, have a preference for weekly cash-based
money management because it gives them certainty and control.
This preference is so strong that half of basic bank account holders
still prefer to manage their money in cash.[100]
7. This would appear to make good financial
sense too because the NCC's findings show that use of a bank account
for money management can seriously undermine previously successful
cash-based money management. Low-income consumers with bank accounts
have higher levels of borrowing and arrears than those without
bank accounts. The fact that direct debits on utility bills can
result in money being withdrawn without sufficient funds in the
account and fees incurred as a result plays an important part
in this.
8. To achieve financial inclusion low-income
consumers need a means of weekly electronic bill payment that
does not permit payments unless money has come into the account
and leaves enough for other essentials.
9. Mainstream financial service providers
do not offer this facility, although it would be possible. Their
failure to offer this facility means that the achievement of current
financial inclusion measures is limited.
10. The Department of Work and Pensions
(DWP) do however provide such a system—or the greatest potential
for such a system- by way of third party direct deductions from
benefits.
THIRD PARTY
DEDUCTION SCHEME
11. Mainstream financial services—including
basic bank accounts—are not achieving financial inclusion
for many because they do not offer an appropriate service. Financial
inclusion is about choice. Offering monthly direct debits as the
only option is not choice.
12. The solution to low-income consumers
struggling to afford essential bills is not to force them onto
unmanageable, potentially debt-creating direct debits simply because
they offer a cheaper tariff. The solution is to ensure that tariffs
are affordable for low-income consumers and that payment systems
support alternative means of money management.
13. The financial inclusion agenda needs
to ensure the provision of weekly payments that cannot result
in consumers going overdrawn. The TPDS model offers the quickest
foundation for achieving this. TPDS allows consumers to pay debts
accrued on council tax, court fines, rent arrears and some utility
bills through their benefits. It is available to recipients of
Pension Credit, Income Support and income based Jobseekers Allowance
only. Recipients of these benefits wishing to pay off debt owed
to their energy suppliers—on a part of the TPDS called Fuel
Direct—must be facing disconnection for non-payment in order
to qualify.
14. Because the DWP do not view the TPDS
as a debt prevention method, recipients of the qualifying benefits
are not eligible for the scheme until they are in debt to their
suppliers. Payments can also cover ongoing consumption at the
same time as debt is being repaid, but total payments cannot exceed
a maximum of £2.85 per debt, per week, and total debt payment
from benefits can usually not exceed three lots of £2.85.
15. The DWP opposes reform because the decreasing
numbers of people on TPDS is interpreted to mean there is a decreasing
demand for the scheme.
16. A recent report by the Trade and Industry
Select Committee presents the opposite view, attributing the decline
in usage to failings in the current scheme, such as low awareness,
failure to adhere to eligibility guidelines, changes in the structure
of the benefits offices and the set up of Jobcentre Plus.
17. Patterns of usage of TPDS also provide
evidence of demand. Once people are no longer in arrears they
are invariably removed from the scheme. Many end up back in debt
again when being able to stay in the scheme may have kept them
out of debt. In this way the current scheme can act as both a
perverse incentive to fall into debt (to enable entry onto the
scheme) and a disincentive for better money management.
FUEL POVERTY
18. Fuel direct, the TPD scheme for energy
payments, can provide a lifeline for low-income consumers who
might otherwise be faced with the possibility of disconnection.
Gas and electricity bills have risen by 30-40% during the last
two years and are set to rise further still in 2006. Price rises
of this magnitude have (along with other contributory factors)
prompted the Government to concede that the total number of vulnerable
households in fuel poverty is likely to rise by between 200,000
and 800,000 households in England between 2003 and 2006. There
is a strong expectation that these price rises will be reflected
in an increased demand for Fuel Direct/TPD amongst low-income
consumers.
19. A consumer contacted energywatch in
August 2005 advising that he had been having great difficulty
in setting a payment plan up with his energy supplier as they
were failing to issue bills, reminders and payment books. The
customer advised us that he was registered disabled with Spina
Bifida and arthritis of the spine and legs and was also the main
carer for his father who had chronic respiratory problems.
20. energywatch contacted his supplier who
provided a full breakdown of all bills, reminders, follow-up letters
they had issued from 2004 to date. They confirmed that the outstanding
balances on the accounts had accrued £316.46 for gas and
£379.77 for electricity. The supplier advised that to set
up a new payment system they required 50% of the total balance
up front. energywatch wrote to the consumer to confirm this but
asked the consumer to provide details of any benefits they were
receiving to see if it would be possible to negotiate a Fuel Direct
arrangement on his behalf, which is the lowest debt recovery level.
21. The consumer advised energywatch that
he was in receipt of state benefit (carers allowance, Income Support
and Disability Living Allowance). Following this, energywatch
managed to get his supplier and local benefits agency to accept
the consumer on the Fuel Direct Scheme, with deductions from his
benefits of £2.85 towards his gas bill arrears and £2.85
towards his electricity bill arrears.
22. energywatch was uniquely placed to help
this consumer manage his debt, liaising on his behalf with his
energy supplier and benefits agency to get him onto Fuel Direct,
which allows him to repay his debt in a manageable way—directly
from his benefits.
CHANGED TO
THE SCHEME
23. Resistance to the extension of TPDS
appears to focus on the grounds that reform of the scheme to allow
people to use the scheme as a budgeting tool would not sit with
the Government's financial inclusion agenda. energywatch would
challenge this view and contends that TPDS could act as a stepping-stone
to bank accounts and monthly direct debits by building confidence
in those consumers who at the moment prefer operating in cash.
24. energywatch and several other organisations
acting as a coalition have been calling for reform of the scheme
and believe that access to the TPDS is essential for some of the
poorest and most vulnerable individuals, as it provides a real
and manageable alternative to eviction, imprisonment or disconnection
for non-payment of important commitments.
25. Restrictions on those who can take advantage
of TPDS means individuals on lower incomes and benefits having
to pay for their utilities through pre payment meters, a system
which has been recognised by the Public Accounts Committee earlier
this year to be the most expensive way to pay utility bills. This
is a perverse and unacceptable anomaly for the poorest in society.
26. For TPDS to be developed to its full
potential, allowing benefit claimants to repay their debts affordably,
energywatch believes that there are a number of problems with
the current scheme that should be addressed:
— The lack of publicity and public
information about the availability of the scheme.
— The apparent unwillingness of DWP
staff to agree to deductions being implemented or continued where
the borrower is not in arrears.
— The limited number of benefits from
which deductions can be made, which can act as a disincentive
to move into work.
— The restrictive rules for qualifying
for the scheme.
27. Keeping the scheme as it stands, would
miss a real opportunity to help many people manage their bills
and their financial situations more effectively. It would also
lose the potential for the scheme to achieve greater levels of
financial capability and inclusion. At present, people can only
join the scheme as a last resort option, meaning they are only
offered help once they fall into debt. We believe the scheme would
be more effective if people could opt in and choose to manage
their finances this way, and to remain on the scheme, if they
wish, after debts have been cleared.
28. We believe that an improved TPDS could
help deliver financial inclusion by aiding budgeting and providing
experience of electronic bill payment, tackling over-indebtedness,
moving people from welfare to work, eliminating fuel poverty and
alleviating water affordability problems for the very poorest.
29. We believe that our arguments are consistent
with the Government's policy on financial inclusion. This scheme
has the potential to put people in control of their individual
financial situations helping them budget effectively and avoid
long term debt.
January 2006
100 National Consumer Council-"Why do the poor
pay more... or get less"? September 2004. National Consumer
Council, Everyday essentials: meeting basic financial needs. Consumer
perspectives on the Government's universal banking services and
the Saving Gateway, March 2003. Back
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