Memorandum submitted by the Finance and
Leasing Association (FLA)
1. FLA (Finance and Leasing Association)
is the main representative organisation for the UK consumer credit,
motor finance and asset finance sectors. Our members comprise
banks, subsidiaries of banks and building societies, the finance
arms of leading retailers and manufacturing companies, and a range
of independent firms.
2. The facilities provided by FLA members
include finance leasing, operating leasing, hire purchase, conditional
sale, personal contract purchase plans, personal lease plans,
secured and unsecured personal loans, credit cards and store cards.
3. FLA members provided £64.5 billion
to the consumer sector in 2004 and FLA members represented 27.8%
of all unsecured lending in the UK. This includes £18.7 billion
of finance provided to the motor sector by FLA members or at least
50% of all new car registrations in the UK in 2004.
4. FLA members include a number of major
providers of "sub-prime" finance in the consumer credit
sector. They are a useful source of credit facilities for those
consumers who would otherwise be financially excluded.
5. We strongly urge the Committee also to
consider exclusion in the business sector, which can clearly have
a major impact on the ability of individuals to start up businesses.
Asset finance and credit provided by FLA members makes a vital
contribution to funding sole traders, small partnerships and SME
investment.
6. FLA actively participates in the Government's
Over-indebtedness Advisory Group, FSA's Financial Capability Trade
Associations Round Table and the OFT's Consumer Education Planning
Group, as well as other consumer education initiatives. The FLA
is a strong supporter of free and impartial money advice, has
campaigned and supported the work of "National Debtline"
and recently backed greater standardisation and efficiency in
debt repayment proposals via the "Common Financial Statement"
(CFS) initiative. FLA members providing consumer credit now use
the CFS, and FLA participates in work to keep CFS up to date.
7. In responding, we focus on two areas
identified by the Committee: the role of Government, FSA and other
bodies and organisations in promoting financial inclusion (issue
5); and financial education and access to financial advice (issue
3).
A "JOINED UP
" APPROACH
8. It has become a cliche to argue for "joined
up Government". But in the context of this inquiry there
is a very strong linkage between the range of separate policy
initiatives in the area of financial inclusion/exclusion and financial
education. In our view this nexus of issues requires a strong
co-ordinating lead within Government, which we believe should
be HM Treasury.
9. In FLA's view the only viable way for
Government to tackle financial inclusion is in partnership with
commercial providers. In tackling financial exclusion there should
be a balanced approach between encouraging niche or social solutions
and actively encouraging the development of commercial provision.
10. Various barriers to financial inclusion
can arise, for example, through actual impediments in the marketplace
or due to the operation of processes and institutions that can
result in exclusion.
11. Institutional barriers may arise in
the context of credit and financial services, for a variety of
reasons. From a company's perspective, it may be due to a lack
of access to or knowledge of a particular group or groups of individuals
which makes it difficult to assess or understand that group. In
turn, this can lead to difficulties in developing business models,
products and assessing risk.
12. From a consumer's perspective financial
exclusion can result from insufficient understanding or confidence
in relation to the products available or simply a lack of products
which suit their needs. Often the lack of flexibility in the products
available or fears associated with managing financial commitments
can lead to exclusion.
13. In FLA's view, financial inclusion must
therefore be tackled on a variety of fronts, including:
— working to build both consumer and
business confidence;
— creative business models;
— open, transparent and competitive
marketplace; and
— flexible and straightforward products.
14. FLA supports a joined up approach to
promote a wide access to financial products both between Government
and other key stakeholders.
15. We very much welcome cross-Government
action on reducing financial exclusion, particularly initiatives
such as the Financial Inclusion Fund to improve access to affordable
credit and to advice. We would, however, re-emphasise paragraph
8 above. A high level strategic approach is essential.
ACCESS TO
CREDIT
16. Access to credit and asset finance products
such as HP and leasing is in our view essential to promote economic
prosperity. It can allow for a much greater degree of flexibility
for that individual, encourage individuals to engage with their
finances, create opportunities, access to employment and greatly
support new or developing businesses. Credit is an essential element
of a growing and healthy economy.
17. In moving the debate forward, there
should be a better understanding, and empirical evidence on how
financially excluded areas or groups develop. This would assist
in targeting resources and also form the basis of measurement
which could be used to identify improvements and encourage change.
18. Those who are financially excluded may
currently find it difficult to obtain credit from mainstream lenders.
This may be due to a lack of information about financially excluded
groups and their needs and also a specific lack of information
about individuals (or SMEs) in order to assess their ability to
repay.
THE NEED
FOR INFORMATION
SHARING
19. Mainstream lenders rely, and base their
business models, on the information held publicly about an individual
and the information they themselves share. If there is no, or
only negative, information about an individual then this can lead
to exclusion. At present much of the information is too general,
anecdotal or qualitative.
20. To this end, lenders need to access
more about the full range of financial commitments. FLA has led
the calls for greater sharing of relevant data for many years
and consequently welcomed moves late in 2005 by a number of credit
card issuers to share customers' data on a more detailed basis.
We are convinced that sharing this additional data will aid responsible
lending and help prevent over-indebtedness.
21. For some time we have been working with
Government and other trade associations to discharge the outstanding
action tasking the Over-indebtedness Task Force to "[examine]
the options for removing legislative barriers on `historic' accounts
opened without a fair processing notice".
22. We were disappointed that the Government
was unable to commit to an amendment to the Consumer Credit Bill
to enable relevant "historic" data (ie data on accounts
opened before fair processing notices mentioned data sharing)
to be shared, though we look forward to its forthcoming consultation
paper. However, we remain concerned that whatever the result of
the consultation the lack of a primary legislative vehicle for
a change may prevent progress.
23. Discussions continue with trade associations
represented on the Steering Committee on Reciprocity (SCOR), on
the future governance of data sharing with a view to greater transparency.
The credit industry is well aware of the need to demonstrate the
relevance and value of data-sharing, given the implications it
has for personal privacy.
STUDENTS AND
YOUNG PEOPLE
24. One obvious gap in current shared data
concerns the "hidden" debt of a student loan. At present
the Student Loans Company (SLC), which has been lending to students
for 15 years, is not allowed to share data on student loans with
other lenders via credit reference agencies. The fuller the picture
a potential commercial lender can piece together of a young person's
credit record and outstanding commitments, the easier it is to
take a responsible lending decision. This may mean refusing further
credit, or offering less than the borrower would like, or seeking
further details before taking a decision to lend. But in many
cases student loan data would provide valuable evidence of a good
repayment record, and would be a big help to graduates seeking
to establish a good credit record and be seen as the responsible
borrowers they are.
25. Other "missing" data includes
that held by other commercial organisations such as home lending
and small-scale niche lending. In addition, if data on, for example,
gas and electricity payments and local authority housing rental
payments were shared the financially excluded could be helped
to build up a good credit history. In some cases there are statutory
barriers to data sharing. In addition, of course, we believe greater
data sharing also helps to prevent over-indebtedness and fraud.
26. A co-ordinated approach is required
between a variety of Government departments and commercial and
non-commercial organisations to remove these potential causes
of exclusion.
CONFIDENCE
27. Improved knowledge about excluded groups
is not, however, enough of itself to secure their inclusion.
28. Confidence must be built on both sides.
Commercial providers must be actively encouraged to engage with
financially excluded groups and helped to access the tools such
as better information to enable them to do so. At present, lack
of information and the perceived credit risks or real reputational
risks which can be associated with trading in a particular marketplace,
can prevent access.
29. From a consumer's perspective, greater
confidence should be fostered by making consumers more aware of
different products and their functions. We are concerned that
the emphasis or the messages to consumers from regulators, media
and consumer bodies can be a major disincentive for individuals
to engage with providers. Whilst it is important to protect and
educate consumers, there must be a balance and perspective.
30. Campaigns focussed on "warning"
consumers, highlighting problems or making sweeping statements
about a marketplace as a whole can be unduly damaging to consumer
confidence. This can lead to consumers not engaging in a marketplace
at all or being very reluctant to try new suppliers or products.
31. FLA sees its role as encouraging transparent
information to consumers, promoting best practice and targeting
areas where we feel we have a specific mandate. We have campaigned
to promote awareness of the credit granting process to build confidence
and understanding amongst consumers. In the US consumers have
a much greater understanding and "ownership" of their
credit record which we believe is beneficial to a competitive
marketplace. FLA has published a number of consumer-oriented leaflets
[copies enclosed] (not printed), written in plain English, including
"Your Credit Decision Explained", "Money
Advice" and "Repaying Your Loan Early".
32. We continue to work with members to
ensure that the information available to consumers about what
they sign up to is clear and more transparent. For example, since
March 2004 consumers now have upfront information about key features
of store cards through the FLA's Summary Box.
33. There are also many other provisions
within FLA's Lending Code which aim to ensure that the information
provided to customers is clear and transparent. We continue to
update and strengthen the consumer protection available under
the Lending Code that all our members must sign up to as a condition
of membership.
34. Confidence can also be built by ensuring
that there is appropriate access to redress if things go wrong.
FLA operates a complaints and arbitration service which is free
to consumers and easily accessible. Our scheme seeks to assist
where customers of our members are experiencing difficulties.
MENTAL HEALTH
VIDEO
35. It is important to target particular
areas of financial exclusion brought about by vulnerability. There
is no "one size fits all" panacea. FLA sees a role for
itself to promote the interests of vulnerable groups. We recently
produced a film aimed at improving the advice and support offered
by finance providers to those with mental health difficulties
and debt problems. In partnership with Citizens Advice we produced
a package of information, including a DVD (copies of which have
been sent to all Members of the Treasury Committee), to highlight
what lenders can do to ensure they respond sensitively, appropriately
and fairly to those in financial difficulty and how best to raise
awareness with front-line staff and those engaged in debt collection.
MONEY ADVICE
36. As a body, FLA works closely with money
advice organisations. We also actively encourage our members to
support and contribute to providing free and independent money
advice.
37. This is an area of continuing work and
improvement. The face of money advice is changing and the nature
of the advice they give is also changing. Traditionally seen as
tackling serious debt problems some money advice and other organisations
now see their role in much more broad terms. This is a challenge
to the advice sector but it is also an important for commercial
providers to actively engage with advisers to ensure that they
can develop better products and respond to concerns. A dialogue
is essential and FLA has had a long-standing good relationship
with the advice sector. We are members of the Money Advice Liaison
Group (MALG) and its Steering Group as well as its Working Party
on Mental Health. Furthermore, FLA's Director General, Martin
Hall, is Chairman of the Money Advice Trust.
38. We encourage government departments
and authorities to actively engage in these kinds of discussion
fora.
SUMMARY
39. FLA welcomes the Treasury Committee's
Inquiry and urges a more joined-up approach to financial inclusion
and related areas of policy. We would like to work closely with
the Committee and would be happy to give oral evidence if required.
January 2006
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