Memorandum submitted by the Places for
People Group
1. EXECUTIVE
SUMMARY
1.1 The Places for People Group is one of
the UK's leading housing and regeneration specialists with responsibility
for over 56,000 homes across 200 Local Authority areas in England,
Wales and Scotland. The Group includes five registered social
landlords and a number of specialist companies, enabling The Group
to adopt a "whole market approach" to housing and regeneration
and to be a model of public-private partnership.
1.2 We are committed to addressing the issue
of financial exclusion affecting our individual customers and
the communities we serve. The Group has recently established its
own financial services organisation which will provide mortgages
(including shared ownership mortgages), supported by the backroom
services of a mainstream financial services provider, to assist
in tenure diversification activity to both promote the regeneration
agenda and assist in wealth creation.
1.3 We welcome this opportunity to share
our views and experiences with the Treasury Committee. Our experience
to date in the field of financial inclusion work has informed
the following views:
— The Places for People Group advocates
the development of a sustainable source of affordable credit,
with geographical equality of access and a credit history pathway
into mainstream services.
— We would like to see the introduction
of such a solution in tandem with the phased introduction of an
interest rate ceiling.
— This phased introduction will allow
current credit providers time to adapt their business model to
an altered environment. We feel this will prevent the predicted
withdrawal from the market place of home collected credit companies.
— There is a need for an independent
and objective evaluation of current interventions such as CDFI's
to inform future policy direction with regards to the delivery
of affordable credit in a sustainable way.
— We view the functionality of a basic
bank account as an essential tool for individuals moving towards
financial inclusion. We have concerns however, that fee-charging
cash machines and high account charges are making the accounts
unattractive to potential users and may be exacerbating hardship.
We support the call to map provision of free cash machines and
recommend the introduction of standard account charges or a new
"probationary" basic bank account.
2. BACKGROUND
2.1 "Financial Exclusion" is a
concept that has gathered currency and the term describes both
the causes of poverty and the consequences. The Places for People
Group define the concept as:
2.2 A range of linked problems including:
— Limited access to mainstream financial
services such as bank accounts, insurance and competitively priced
credit
— Unmanageable levels of debt
— Poor financial literacy skills or
a simple lack of confidence and choice
— An immature or damaged credit history
causing reliance on extortionate doorstep lending
2.3 The Group has developed a national financial
inclusion strategy and appointed a specialist manager to oversee
the implementation of a structured Action Plan. This work began
a year ago and the capacity of the Financial Inclusion Manager
has allowed the Group to focus on both policy and area based initiatives
and improve our understanding of this issue.
2.4 In addition, the Group has recently
established its own financial services organisation which will
provide mortgages (including shared ownership mortgages), supported
by the backroom services of a mainstream financial services provider,
to assist in tenure diversification activity to both promote the
regeneration agenda and assist in wealth creation.
2.5 The new entity has already obtained
a Consumer Credit license to enable it to provide personal finance
directly to help marginalise doorstep lending in the Group's communities
and combat financial exclusion. Basic bank accounts and savings
products will also be available which will be co-branded in conjunction
with the Group's mainstream financial services partner. This new
entity will commence operation in April 2006.
2.6 We would like to comment on the four
topic areas listed below:
— Access to banking services
— Access to affordable credit
— Financial education and access to
financial advice
— The role of the Government, the Financial
Services Authority and other bodies and organisations in promoting
financial inclusion
3. ACCESS TO
BANKING SERVICES
3.1 Fee Charging Cash Machines
3.1.1 The increase in the number of cash
machines imposing charges for cash withdrawals is a major concern.
3.1.2 A recent Guardian article (Cash
Machine Operators to Take £250 million in Fees, November
12, 2005) indicated that there are now 24,000 of these machines,
compared to 32,355 free machines.
3.1.3 The prediction of free cash machines
eventually being available only at banks, building society branches
and main post offices would seem to indicate the likelihood of
many communities being unable to access free, automated cash withdrawals.
3.1.4 Anecdotal evidence, from our regeneration
staff working in disadvantaged areas, already suggests that many
people, particularly people with disabilities, the elderly and
those without access to private transport are already unable to
access free cash machines.
3.1.5 We support the recommendation of the
Nationwide Building Society and "Which? " that
a mapping exercise should be undertaken to examine provision and
to ensure all communities have access to free automated cash withdrawals.
3.2 Basic Bank Accounts/Bank Charges
3.2.1 The introduction of basic bank accounts
is an initiative that we welcome. However, it is disappointing
that there seems to be reluctance amongst providers to promote
these products, and knowledge of the products amongst banking
retail staff at branch level has been demonstrated by research
to be very poor.
3.2.2 Clearly, retail financial institutions
will be unwilling to encourage take-up of a product on which a
net loss may be experienced. The Government expectation that account
providers will seek new customers therefore seems unduly optimistic,
as this would conflict with their commercial imperatives.
3.2.3 There may be a case for Government
offering providers a subsidy to resource the promotion, opening
and management of these accounts if the stated policy objective,
of halving the number of individuals without an account, is to
be achieved.
3.2.4 Many of the currently available basic
bank accounts impose a charge on the account holder for an unpaid
direct debit. These charges vary from £15 (Barclays Cash
Card Account) to £39 (Bank of Scotland Easycash).
3.2.5 These sums become enormously significant
when considered alongside the knowledge that an individual could
be in receipt of weekly benefit totalling just £33.85 (under
18), £44.50 (18-24) or £56.20 (over 25).
3.2.6 The imposition of a £39 charge
would leave many people with insufficient resources for essential
living expenses, including food. It is our intention that the
bank accounts provided by our mainstream partner will not attract
such charges.
3.2.7 Without details of the actual administrative
expense bourn by the account providers in the instance of an unpaid
direct debit, it is difficult to see these charges as anything
other than punitive.
3.2.8 We have anecdotal evidence from Moneyline
Yorkshire that many recently-opened accounts are being effectively
frozen by these charges and quickly abandoned. This is clearly
a concern as the stated target of halving the number of individuals
without a bank account would become meaningless if the accounts
are subsequently left dormant as a result of these high charges.
3.2.9 We note that the Financial Inclusion
Taskforce have given a commitment to commissioning research into
this issue. We look forward to receiving the conclusions of this
research and using the findings to inform our corporate approach
to the promotion of basic bank accounts to our customers.
3.2.10 We suggest either the introduction
of a new "probationary" basic bank account, with a fair
charging system or a standardisation of the charges imposed by
account providers. A probationary account could be designed to
allow those with limited experience of account management to become
familiar with the system of transactions without the immediate
risk of incurring high charges. It may be feasible, for example,
to introduce charges only after a period of six months.
3.2.11 The Places for People Group has recently
gathered evidence concerning the rent payment methods used by
our customers. We collected data from a sample of nine Local Authority
areas and calculated the percentage of customers paying their
rent through a method that demonstrated use of a bank account
(cheque, standing order or direct debit). We found the percentages
of customers using these methods ranged from 10.18%-24.49% indicating
a strong preference for cash-based payment methods such as swipe
cards.
3.2.12 The next stage of our research was
to compare levels of arrears between those paying rent through
an account and those using the cash based system. Average arrears
for the former group are £50.72 compared to £235 for
members of the latter group. Use of a bank account for the payment
of rent seems to reduce the incidence of arrears, a priority debt,
and a cause of great anxiety for many of our customers.
3.2.13 The availability of basic bank accounts
would seem to be an opportunity for us to introduce a condition
of tenancy stating that rent must be paid by direct debit. The
imposition of the high charges for unpaid direct debits has caused
us to question whether this could expose some of our more vulnerable
customers to an increased risk of debt and hardship.
3.2.14 The data collected for the above
exercise indicates that during the last year, in those nine areas,
232 individuals, couples or families were evicted from their homes
as a consequence of non-payment of rent. The loss of a home is
one of the most devastating manifestations of financial exclusion
and we are committed to the development of evidence-based interventions
to reduce the number of people made homeless in this way. There
seems to be a very strong correlation between a reliance on cash-based
rent payment methods, the occurrence of rent arrears and subsequent
enforcement action including eviction.
3.2.15 This research demonstrates the key
role that access to an effective basic bank account could have
in supporting our drive for truly sustainable communities.
4. ACCESS TO
AFFORDABLE CREDIT
4.1 As the example below illustrates, it
is an inescapable fact that the poorest people, living in the
most disadvantaged communities are paying frighteningly high levels
of interest when they need to borrow money and have to rely on
the home-collected credit companies. Such high rates of interest
commonly lead to unmanageable levels of debt and the attendant
poor health, insecurity of accommodation and culling of aspiration.
The Cost of Borrowing £500 over 55 weeks
Largest UK home collected credit company—£325
interest (177% APR)
Credit Union—£32.94 interest (12.68%
APR)
4.2 It is a concern that the issue of incomplete
geographical coverage by third sector lenders will not be addressed
with resources from the Growth Fund. The intention to support
only existing organisations will leave many areas with no credit
union or CDFI coverage. This will cause geographically defined
inequality between individuals whose circumstances may be identical,
but their access to affordable credit will be dependent on their
location in the country coinciding with the existence of a third
sector lender.
4.3 The model selected for distribution
of the Growth Fund does not seem to accommodate capacity building
activity such as improving or expanding premises, investment in
information technology and staff recruitment and training. It
is possible that small projects may have difficulty coping with
the anticipated increase in lending activity.
4.4 It is disappointing that resources have
not been identified for the exploration of alternative models
for the provision of affordable credit to address issues of geographical
coverage and sustainability.
4.5 It is also a concern that engagement
of financially excluded individuals with a credit union or CDFI
seems to be an ultimate policy goal. Whilst we recognise the excellent
work undertaken by these lenders and their contribution to addressing
financial exclusion, we feel that the sector can currently offer
only a partial solution. In our view, financial inclusion describes
a situation where an individual is not only able to access one
source of affordable credit, but has a choice between products
offered by mainstream providers and the confidence to make an
informed decision. These views are based on our experience of
working in partnership with CDFIs in a range of locations such
as Preston, Sheffield and East Lancashire. The Group has contributed
financially to some of these projects and also contributes staff
capacity and expertise as Board Members.
4.6 In our view financially excluded individuals
should have the opportunity to move along a continuum from a point
where perhaps they are over-indebted and have limited financial
literacy skills and confidence, to a point where they can develop
a sound credit history, confidently exercise choice, plan financially
for their future, build savings and to take on responsibilities
such as a mortgage. This view informs our work on projects such
as the current Social Homebuy initiatives and is a key driver
in our decision to enter the market as a mortgage provider.
4.7 We would like to see emerging policy
designed to enable people to develop portable credit histories,
allowing them to move from third sector lenders to mainstream
providers and to benefit from the competitive forces operating
in the prime credit market.
4.8 We have followed the consultation and
debate on the issue of an interest rate cap with great interest.
Ceilings are currently in place in the majority of European countries
and in many US states and some states in Australia and Canada.
These tend to be around 40%-60% and any cap is set at a level
that allows sustainable operation of lenders in the market but
halts the exploitation of low income consumers. We are aware that
many practitioners support the imposition of a cap, whilst some
fear an interest rate ceiling would cause providers to withdraw
from the market creating a vacuum where illegal lending could
flourish. On balance, we feel that a phased imposition of an interest
rate cap, linked to a Government led upscaling of alternative
credit provision could be the best way forward. This alongside
the provision of appropriate information on the costs of the lending
options would provide a more balanced solution.
4.9 The Social Fund may represent an infrastructure
that could be used to make affordable credit more widely available.
The expansion of the eligibility criteria so that people on low
incomes (as well as means-tested benefits) could apply for loans.
The introduction of fairly-priced, interest bearing loans could
represent an attractive opportunity for private investment.
4.10 The sustainability of third sector
lenders is an issue that causes great concern. The few credit
unions that have demonstrated freedom from grant dependence are
a rare exception and it is now commonly accepted that CDFIs engaged
in personal lending are unlikely to ever achieve sustainability.
An individual CDFI is likely to have a loan fund approximately
equivalent to a single mainstream mortgage. Lending that sum of
money to a single customer represents a profitable opportunity
to a financial provider when coupled with automated credit scoring
and minimum staff intervention. However, attempting to lend the
same sum of money in small amounts, to hundreds of customers across
an entire city quickly demonstrates that staff and revenue costs
cannot be met from the interest charged.
4.11 It is disappointing that there has
been very little objective and evaluative assessment of the cost-effectiveness,
sustainability and impact of lenders such as CDFIs. Our involvement
with these projects has led us to conclude this potential solution
has been intensively promoted without a sound evidence base to
illustrate their success and therefore there is now a need for
an independent evaluation of the various models. We would like
to see some of the Financial Inclusion Fund resources directed
towards an exploration of alternative models for the delivery
of affordable credit.
4.12 The Places for People Group are committed
to the development of an alternative mechanism for the provision
of affordable credit to our customers. As stated earlier, the
Group has recently formed a financial services organisation with
some product and service backing from a mainstream financial services
provider which will commence trading in April 2006.
4.13 We will learn from the lessons arising
from the implementation of existing mechanisms and seek to develop
a sustainable entity which can tackle a number of the key elements
which underpin financial inclusion.
5. FINANCIAL
EDUCATION AND
ACCESS TO
FINANCIAL ADVICE
5.1 The Financial Services Authority has
been the lead agency for financial education for several years
but it is difficult to quantify the progress that has been made
with this brief to date.
5.2 The regulation around the provision
of financial advice limits the scope of financial information
that can be given by agencies or individuals without qualifications.
It would be helpful to see a clear distinction drawn between the
provision of advice (such as a choice between a range of financial
products) and generic information (such as the significance of
the APR charged by credit unions compared to the APR charged by
sub-prime lenders).
5.3 Historically, it has proved extremely
difficult to persuade community members to engage with financial
literacy initiatives. The DfES funded Community Finance and Learning
Initiative (CFLI) projects demonstrated the expectation that people
would welcome formal learning opportunities to publicly discuss
their private financial circumstances to be naive. This was the
certainly the case with the Gorton Gateway project which the Group
managed which combined a Community Finance and Learning Initiative
with a Saving Gateway pilot.
5.4 It is undoubtedly valuable to teach
young people in schools basic financial education as a part of
the National Curriculum. The delivery of comparable information
to adults presents a far greater challenge.
5.5 Extortionate lending, to those in the
most difficult financial circumstances, and the related over-indebtedness
cause enormous damage to individuals, families and communities.
There would seem to be a case for a Government led information
campaign to inform people both of the true cost of this borrowing
and the availability of alternatives.
5.6 It is our experience that financial
literacy education can be most successfully delivered through
existing agencies or community groups and in familiar community-based
venues. We have found that many people are reluctant to engage
for what they perceive to be formal learning opportunities as
this commonly raises anxieties about issues such as poor basic
skills and low confidence.
5.7 The Places for People Group has worked
with a range of local partners to disseminate basic financial
information (comparative interest rates) to our customers and
broader communities. We have, for example, sent out Christmas
cards and calculators from the local credit union to over 1200
customers in Nottingham. We also sponsored a community based outreach
project ("Does it Add Up?") across some of the most
deprived communities in Sheffield in partnership with Financial
Inclusion Services Yorkshire. This project involved a mobile exhibition
unit at various key community locations, a multi-agency staff
team and linked competitions, study days and events in 5 local
schools.
5.8 We feel that both these initiatives
have demonstrated success in raising awareness of the issue of
extortionate credit in communities and represent replicable models
of good practice.
6. THE ROLE
OF THE
GOVERNMENT, THE
FINANCIAL SERVICES
AUTHORITY AND
OTHER BODIES
AND ORGANISATIONS
IN PROMOTING
FINANCIAL INCLUSION
6.1 Given the disproportionate impact of
financial exclusion on tenants of social rented housing, and the
expertise and experience held within the sector, there would appear
to be a strong case for the social housing sector to be represented
on the Financial Inclusion Taskforce. This unfortunately has not
been the case to date.
6.2 We note with interest the recent comments
from Brian Pomeroy (Chair of the Financial Inclusion Taskforce)
in Inside Housing (25 November 2005) that housing associations
must be encouraged to bid for the £45 million element of
the Financial Inclusion Fund overseen by DTI to increase money
advice provision.
6.3 It remains the case however, that housing
associations are prohibited from bidding directly for this funding
as it is available only to existing Quality-Marked advice agencies.
The Places for People Group will be partnering with Citizens Advice
nationally to bid for a number of CAB-based money advice workers
to work with our customers in a range of locations. We are investigating
the potential to extend the scope of this proposed project by
working in partnership with other national housing organisations.
6.4 We believe that we can develop a service
that delivers quality-assured advice to some of the most vulnerable
members of society at key times, when the positive impact will
be greatest, such as at tenancy creation and when arrears occur.
We have very strong anecdotal evidence, from our own staff and
a range of external partners, that the occurrence of rent arrears
is almost always an indicator that a spectrum of other debts will
be present.
6.5 It is a commonly expressed expectation
that housing associations will be at the forefront of initiatives
to tackle financial exclusion, and this has historically been
the case. The lack of sector representation on the Taskforce,
and the subsequent realisation that associations will be unable
to directly access elements of the Financial Inclusion Fund have
caused us to question the role Government expects us to embrace.
6.6 It would therefore be helpful to receive
clearer indications on how housing and regeneration organisations
can best contribute to this agenda.
January 2006
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