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1.40 pm

Mark Lazarowicz (Edinburgh, North and Leith) (Lab/Co-op): I welcome not only today’s debate, which is timely in every sense of the word, but what the Government have done to promote financial inclusion and the availability of financial services to those on low incomes.

As the Economic Secretary knows, last night an event was organised by the all-party group on debt and personal finance, which I chair. Among the event’s themes was financial inclusion. The Economic Secretary was due to speak, but last night’s debate on Northern Rock detained her in the Chamber. If she had attended, she would have found a genuinely warm welcome and a positive recognition from across the sector—from, for example, the financial services industry and advice and information agencies—of what the Government have done in this field and what they plan to do in the future. She would also have found a recognition of the policy commitment and the personal commitment shown by her and her predecessors on this issue. It is important to put that on the record.

Having made those positive comments about the steps that the Government have taken, I want to refer to two issues on which the Government need to take further action and develop their policies. As the
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Economic Secretary said, there has been a lot of progress on rolling out basic bank accounts, although there has been a lot of cynicism about whether those make a difference. Like many Members, I was not so much cynical, but had certain reservations about how quickly the accounts were being rolled out. However, as the Economic Secretary has pointed out, more than 60 per cent. of those being targeted now have a basic bank account, and research shows that particularly good progress has been made among those worst affected by financial exclusion. That is good, and should also be recognised.

However, I should like to raise some issues about basic bank accounts, and I will be interested in what the Economic Secretary says today or later about them. The first issue is the Post Office card account, to which reference has already been made. Clearly, there will be an important relationship between that account and the basic bank account. What will happen to the various proposals when the successor to the Post Office card account is finally determined? It would be good to know the Government’s thinking on that as soon as possible.

The second issue is that concerns continue about the charging policy on some basic bank accounts, particularly when it comes to overdrafts. One of the organisations that has briefed us for this debate has drawn one example to our attention. Somebody might have just £9 in their basic bank account. If they want to draw out £10—the minimum that can be drawn from a cash machine—they would fall into an overdraft of £1 and incur substantial overdraft charges. For Members of this House, £9 or £10 is not much money, but for people on low incomes who live on a margin, such things can mean the difference between being able to manage their finances and falling into a cycle of charging that can undermine their finances for weeks, months or even a year.

More work needs to be done on the charging policies of some basic bank accounts. My final point about them is that although progress has certainly been made, that has partly been because of the pressure that the Government, the Select Committee and various other organisations have put on banks to deliver basic bank accounts. When the studies were carried out a couple of years ago, it was very noticeable that although some banks were doing their best to promote basic bank accounts, it was difficult to find out anything about others’ basic bank accounts, which were clearly not being marketed as they should have been. Progress has been made, but pressure must be maintained so that the basic bank account roll-out continues and reaches those who have not yet been reached.

The second issue is that of the availability of financial services in respect of the housing market for those on low incomes. I am sure that the Economic Secretary will have seen the important report, published yesterday by Citizens Advice, entitled “Set up to Fail”. It examines the difficulties faced by many on low incomes, who get into difficulty because they cannot meet their mortgage or secured loan arrears payments. The report is excellent and I am sure that the Economic Secretary will consider it if she has not done so already. I should like to highlight some of its findings, which deserve wide publicity.

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Citizens Advice points out that citizens advice bureau clients seeking advice on mortgage and secured loan arrears are disproportionately from lower-income households and that, not surprisingly, they tend to borrow from sub-prime lenders at higher rates of interest. Citizens Advice reports that its clients often rely heavily on recommendations made by brokers; unfortunately, that advice is sometimes entirely unsuitable for the circumstances of those concerned. A particular concern was raised about people buying their council homes. They sometimes receive very poor advice on the suitability of the loans that they take out. The report also states that in some cases lenders do not seem to check whether the borrower can afford the mortgage repayments from the outset, and it sets out some powerful case studies that show how people have been encouraged to get into arrangements that they could clearly never meet. Nevertheless, they were encouraged, entirely inappropriately, to take out the mortgages.

The report also points out that borrowers are frequently encouraged to take out additional secured loans for purposes such as debt consolidation or home improvement; again, people do not realise that they are liable to get into extreme difficulties if they remortgage when they are already in a shaky financial position. The Citizens Advice research shows that too many lenders still take court action for possession first, rather than attempting to negotiate with the borrower. Fortunately, we are not at the heights of repossession of 15 or 16 years ago, but repossession is increasing and those on low incomes are often most seriously affected.

Finally, the report also mentions the growth of “sale and rent back” schemes. Not surprisingly, those encouraged to take out such schemes are often in financially and emotionally vulnerable positions and sell their houses for much less than they are worth. Such people often end up with a tenancy that in practice offers little security of tenure.

Mr. Weir: The hon. Gentleman has made an interesting point. There is another problem with such “sale and rent back” schemes; some people have been persuaded to go into them on the basis that they can get housing benefit to pay the subsequent rent. Of course, they cannot do so under the regulations, and as a result, people are being made homeless.

Mark Lazarowicz: That very good point illustrates the need for a proactive approach, ensuring the right regulation and information for those who enter such arrangements.

The Citizens Advice report is excellent, and I commend it to the Economic Secretary. I will not go into all its recommendations, which are set out at some length, except to say that I heartily endorse its conclusion—that it is essential, particularly in the current climate, that Government strategies of financial inclusion and capability should take into account the needs of low-income home owners. I shall be interested in hearing what the Economic Secretary says about how the Government intend to do that.

As the Economic Secretary implied in her opening comments, people on low incomes frequently lose out twice as a result of financial exclusion: first, they have
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low incomes, and secondly, they have to pay more for financial services because of their low incomes. They lose out doubly as a result of their poor financial positions.

We are making major moves to improve the availability of financial services to many of those people, but it is in the nature of the financial services industry that there will always be new products, new companies and new lenders who try to find new ways of extracting that extra bit of cash from people at a time when they need money, are particularly vulnerable, and do not always give full consideration to the financial circumstances into which they enter as a result of listening to persuasive salesmen and women. The Government must therefore ensure that tackling financial exclusion continues to be at the core of the strategy in this area.

I welcome this debate and hope that the Government will respond to the points that I have made about, in particular, the issues facing home owners on low incomes. I would also welcome an indication of the Government’s thinking on how they intend to encourage the roll-out of basic bank accounts.

1.50 pm

Mr. Colin Breed (South-East Cornwall) (LD): I should first acknowledge that progress has been made on this issue in the past few months. A spotlight has been put on it by all sorts of organisations, not least the all-party group on debt and personal finance chaired by the hon. Member for Edinburgh, North and Leith (Mark Lazarowicz), which has raised several important matters. Moreover, the Government have responded well in several areas. Despite the progress being made, however, we must keep the pressure on because there are so many more things still to do.

Bank accounts are an absolute necessity nowadays, but in some banks the identity requirements even for opening an account are rather restrictive and difficult to fulfil. For instance, it is not helpful to require a utility bill from someone who does not own or rent the place that they are living in. There are also restrictive criteria for free bank accounts and the charging system. Some people simply lack the confidence to go and engage with a bank in the first place; they think that they are far too poor to have a bank account and are not encouraged to do so. A basic bank account is essential to managing one’s affairs, and not to have access to one is a major problem. We need to keep the pressure on so that anyone who needs or wants one can get it easily enough; otherwise they will turn to other methods, particularly to moneylenders and other such sources.

Credit unions have considerably increased in number. A great deal of work is going on, and as we know, there is to be a report. I hope that that will enable credit unions to expand their facilities and do other things such as taking deposits and giving interest, so that they can become community banks; I have been calling for that for some time. Once they can call themselves community banks they will be able to get the market profile that they need, and people will be able to go to them with much more understanding of what they can do to help. I hope that we can get to that stage, because community banks in other countries have really shown the way.

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Mr. David Drew (Stroud) (Lab/Co-op): Does the hon. Gentleman agree that the best place to have access to a community bank is the post office?

Mr. Breed: The hon. Gentleman is right. Had the Post Office not sold Girobank, I suppose that that would be a supreme example of the way in which a community bank might operate. While we are on that subject, I applaud what has been said about Christmas clubs. I hope that that idea will be well promoted, and that people will use their post office as much as they can, if only to preserve it for as long as possible. Of course, we have already spoken about the Post Office card account.

Let me say a few words about ATMs. Many months ago, I opened the sixth free-to-use ATM. I am grateful for that facility, but we must not forget that ATMs are extremely helpful to the banks, which originally put them in so that they did not have to have more premises, counters and staff. That saved them huge amounts of money, and the idea that they should then charge for them was, to me, anathema. Although we are grateful that there will be free ATMs, I believe that all ATMs should be free, because the banks have used them in order to reduce their costs significantly—although they would probably argue against that.

Let me briefly raise a few other issues, the first of which is trading standards departments. Significant numbers of my constituents who are vulnerable in all sorts of ways have had matters referred to trading standards departments, but these departments are inundated with work and do not have sufficient resources. Sometimes they can take up cases very appropriately, and if they had the resources, they could do that more often. I hope that the Government will consider how trading standards officers and departments can be more supportive of vulnerable low-income families when they are targeted by unscrupulous people.

Insurance, too, is becoming an important issue. We found out during the recent flooding the sheer number of people who do not have access to contents insurance. There are opportunities for selling such products through credit unions—which will in future, I hope, be called community banks—but there are also opportunities for involving councils. There is a good scheme in Scotland that a council has negotiated with an insurance company, whereby tenants pay a small amount extra on their rent and that goes towards their premium, giving them some basic contents cover. As for car insurance, even third-party insurance is extremely expensive for some people. There is a great deal of work to do on insurance.

The issues involved in Farepak and small savings schemes have been well aired. We need to protect alternative schemes such as that provided by post offices and those being considered by others. This is a big field in which, again, credit unions can assist. We need to encourage people to have a reasonable cushion against the kinds of things that they are going to experience.

On mortgage and secured loan arrears—the excellent Citizens Advice report has been mentioned—banks and other lenders need to treat their borrowers as fairly as they can, and I think that most of them do. Unfortunately, however, sometimes missing one
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payment can trigger all sorts of problems. Court action is a last resort, but it often seems to be reached rather quickly. Mortgage protection insurance has declined, partly because it got a bad press. That is terribly unfortunate, because I suspect that in the not-too-distant future many people will wish that they had it.

In the case of remortgaging, people are encouraged to take out second mortgages that add to their existing one, and eventually find themselves in an even bigger mess than they were originally. Cooling-off periods are provided for many other products, and that should be offered to anybody remortgaging, as well as independent advice before they sign up. Far too many people are being pressured into it on the doorstep, in the bank branch or in some other way, because they think that there is no other solution, whereas if they could stand back and be given advice on reorganising their finances instead of getting themselves into even deeper trouble, we might be able to help them far more.

Several hon. Members rose

Mr. Deputy Speaker (Sir Alan Haselhurst): Order. The Modernisation Committee has urged the Chair to use time limits to ensure that hon. Members have the maximum chance of taking part in the debate, but if hon. Members do not notify Mr. Speaker that they wish to speak in a debate, and only a few names are available when a decision is made, no time limit is put on. At least three hon. Members who are in the Chamber wishing to speak have not notified the Chair. There is no time limit, and I cannot impose one now; I would just ask hon. Members to remember that there are colleagues wishing to speak after them. If they could confine their remarks to seven minutes or so, we should be able to try to get everybody in.

1.58 pm

Dr. Alan Whitehead (Southampton, Test) (Lab): As my hon. Friend the Minister emphasised in her opening remarks, affordable credit is one of the highest priorities of financial inclusion for families on low incomes. The effort and work that the Government have put in over the past few years to approach and tackle the whole question of financial exclusion, to a large extent because of exclusion from affordable credit, has been an important priority. That is welcomed by everybody working in this field. It is a priority that has received virtually no recognition in terms of media attention. I suspect that that is because several people working in the media do not regard as significant the fact that someone cannot take £10 out of the cashpoint to get them through the week—yet, as has been emphasised, in many instances those small amounts are the difference between sinking or swimming financially, and having access to the credit that enables that to happen makes a vital difference to people on very low incomes.

Anne Snelgrove: My hon. Friend makes a very good point. This is not a sexy subject for the world’s media—our media, in particular. For example, it was two weeks before there was any coverage of Farepak. The media really missed a trick on that, and they were pretty sheepish about it. Of course, we have had many thousands of column inches and television programmes about it since, so what he said is absolutely right.

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Dr. Whitehead: I thank my hon. Friend for that point, which underlines how this debate turns on what can be very small amounts of money in some people’s eyes, but which mean life or death to other people. If someone has no bank account they have no credit rating, and they may well have to live in a cash economy. A surprisingly large proportion of the total population—certainly a large proportion of people with low incomes—simply have no assets to gain credit in the first place. Any upset in that person’s cash economy, which would often seem insignificant to those inside the credit economy, can put them in severe difficulty.

Indeed, a National Housing Federation publication of this summer, “Credit where credit’s due”, highlighted, among other things, exactly what that cash economy means, despite great efforts to ensure that the unbanked have at least basic bank accounts, and the progress made on that in recent years. About 24 per cent. of housing association tenants still have no bank account. More than 3 million people, of whom at least 70 per cent. are housed by social landlords, continue to borrow at punitive rates of interest—at least 164 per cent. APR. As the hon. Member for South-East Cornwall (Mr. Breed) mentioned, 75 per cent. of housing association tenants have no home contents insurance at all.

People in such a position are far more likely to be uninsured than those in households with credit access, but they are twice as likely to be burgled. They are much more likely to be using more expensive prepayment meters, and the cost, and the potential for catastrophe, is far greater than for those inside the credit economy. They are much more likely to resort to doorstep lenders, whom we have discussed today, for credit. Those lenders are, to a considerable extent, the source of the high rates of interest that the credit-excluded pay. Most of the loans to which many people resort are essentially to repair a short-term breach, and deal with short-term financial catastrophe. The requirement for such loans will perhaps have occurred because of a very short-term crisis, so most of them are for a very short term—perhaps 25 or 26 weeks at most.

However, the 164 per cent. APR figure I mentioned is not the ceiling figure. That is the figure charged by the most reputable of doorstep lenders. In fact, roughly 177 per cent. APR is charged by Provident Financial, which is the doorstep lender with something like 60 per cent. of the doorstep lending market. Many borrowers borrow at much higher rates than that—in some instances, up to 800 per cent—and that is where the spiral of indebtedness, almost akin to the days of indentured workers, cuts in. The additional cost of servicing the debt adds to the debt itself in a wholly unmanageable way, and a spiral of debt then ensues. It is quite impossible for people in such circumstances to extricate themselves from that spiral.

Clearly, we need to put a cap on the interest rates that doorstep lenders charge. I do not think that such a cap would undermine the availability of doorstep lending—and it is true that such lending often plays a substantial and positive role for low-income families. However, a cap based on the total cost of the loan over the known period—bearing in mind that such loans are usually for short terms—including all repayments, would not put reputable companies such as Provident Financial out of business, but would certainly attack firms that charge much higher rates of interest.

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