Examination of Witnesses (Questions 700
- 719)
TUESDAY 19 JUNE 2007
MR MIKE
DAILLY, MS
SUSAN MCPHEE,
MR JOHN
PATTON, MS
LORETTA GAFFNEY
AND MR
CHRIS MALLON
Q700 Mr Davidson:
Chairman, I think it would be helpful, because we have discussed
this before, if we get a note from you about that point specifically
in order that we can pursue that with the DWP in the context of
their stated policy as a general statement and also some worked
examples if possible.[28]
Can I clarify the second point of that, which was for those who
are out of work. Are you saying that it is just simply a question
of the level of benefits being inadequate?
Ms Gaffney: I think the level
of benefits is inadequate, I think the level of benefits could
be higher and that would be helpful for people, yes.
Ms McPhee: People will always
need to borrow. If you have got something that goes wrong, like
a cooker or something, you will need to have some kind of replacement
and crisis loans certainly have caused lots of problems recently.
A lot of it has to do with the administration of the DWP. People
cannot even get through to get crisis loans, so that is causing
lots of problems. They are not enough either, they do not give
enough money.
Mr Dailly: I was going to say
something about the sanctions which the DWP impose. I saw somebody
at Govan Law Centre yesterday who was living on £35 a week.
When I looked into the detail of it, I ascertained that the guy
was taken on as a janitor and his new manager basically told him
he was now a cleaner so he ended up leaving that job. Technically
he was constructively dismissed, so universally we need a sanction,
but the fact that somebody has to live on £35 a week I think
is incredible, because when the minimum benefit level was set
in the UK, it was based on the basket of goods test after the
war. If we are then saying people can be forced to live on £35
a week, then to me obviously we need some sort of sanction and
we need to encourage people back into work. But it seems to me
we need to think about what does this then result in in terms
of people living in poverty.
Q701 Mr MacNeil:
You have fairly well established an issue between debt and poverty
and I am wondering how debt exacerbates the pit of poverty? Are
resources being diverted away from the bank of poverty because
it seems that an awful lot of people, in effect, are paying for
white goods two or three times over with the sorts of horrendous
rates that they have? I think we really need to explore further
the relationship between debt and poverty. Is debt the biggest
cause of poverty that we are seeing? Is it debt?
Ms McPhee: It is certainly the
largest single issue brought to the Citizen Advice Bureau. Consumer
debt certainly is and, as I have said, consumer debt can mask
whether you are using it to pay for other debts. It is taking
up a great deal of the Citizen Advice Bureau resources in advising
people.
Q702 Mr MacNeil:
Of those who would be termed to be in poverty, what sort of percentage
would you roughly estimate are suffering debt problems?
Ms McPhee: One in five of the
clients coming to CAB are coming about a debt problem and, in
general, CAB clients are in the lower income spectrum.
Mr Dailly: Again, in terms of
the Law Centre, I cannot think of any client that I have ever
seen in the last eight, nine years in the Govan Law Centre who
has not had a debt or has not been in financial difficulty. Seriously,
I cannot think of one client. I think the answer must be it goes
hand-in-hand. The great difficulty is obviously we know that poverty
is a complicated thing, there are all different factors, but if
you end up being in debt, even if you are trying to get back to
work or you are working and you are getting a decent wage, if
you are then getting hit with high interest rates, you have got
PPI insurance to pay and you have got default charges, the difficulty
is it is like the life has been sucked out of you by the financial
services industry.
Ms McPhee: What can happen is
if you have lost your job some creditors will not apply interest
charges or anything and will wait until the circumstances change,
and then if you get a job it all comes back on again.
Q703 Mr MacNeil:
There is not much of an incentive for people to work. What are
the main reasons that people fall into debt these days? Is it
because people lose their jobs or is it because there is an emergency?
Mr Dailly: There has been research
done by the Deputy Prime Minister's Office into mortgage repossession
and it was very interesting research which was done because it
put that whole myth, which we often see in the press, that people
are feckless or they are reckless to an end, sure that happens
but that is in the minority of cases. The main reason people get
into debt—there is empirical evidence for this—is
because of a relationship breakdown, so two incomes become one
income, or sickness/illness and your income drops because of that.
Those are the vast reasons. I think it is fair to say that we
are all effectively one or two wage slips away from disaster in
society because the culture we now have in the UK is not like
the days gone by where people would save up and people would be
much more canny, we seem to have this kind of buy now, pay later
culture. The difficulty is your manageable debts while you have
got your two incomes coming in are okay, the moment somebody goes
off ill, then you can go right down into that slippery slope.
I think that is true for many people, probably including myself.
Q704 Mr Davidson:
What is the answer?
Mr Dailly: I think the answer
has got to be we need to do more work on the culture, as I say,
this whole idea that it is okay to have that level of personal
debt.
Q705 Mr Davidson:
That is irresponsible borrowing.
Mr Dailly: Yes, we need to do
more on irresponsible lending, and, I have to say, I am a huge
supporter of credit unions because I do think there is a case
for state intervention. I am not saying we should prevent the
free market from making money in this area, I am not saying that
at all, but when we then see that there are a lot of people who
end up in poverty because of the way things are set up, then surely
that is a good reason for state intervention and, again, that
could be through credit unions. Interestingly, just a couple of
years ago the Scottish Executive got permission from the European
Commission—because you have got to watch out for competition
law if suddenly you give money to a credit union—to give
several million pounds to credit unions to deliver insurance policies
which were very low cost.
Q706 Mr Davidson:
I do understand much of that about the supply side, but you did
say about the demand side in the sense of people being only a
couple of wage slips away and, perhaps, borrowing beyond their
means. I asked you about irresponsible borrowing and you neatly
sidestepped that. You spoke about changing the culture, I am not
quite sure what you are saying we should do about that.
Mr Dailly: Ultimately, there is
a responsibility on the citizen, there is no doubt about it, but
the difficulty is if you have a society where you have got much
more aggressive marketing, and that could be not just TV and radio
but also people being sent credit cards. Somebody in my office
said to me that their daughter was sent a credit card application
when she was 14, so making it okay for people to be able to access
unlimited credit, sure it falls to the citizens but, equally,
it is like putting a bottle of whisky in front of an alcoholic,
that is not responsible.
Q707 Chairman:
On the one side, we have experienced people who are in difficulty,
they are desperate for money, and when they go to borrow this
money they do not go through the nitty gritty and see what are
the terms and conditions applied to it, what kind of interest
they have to pay, if they default or how much in penalties they
have to pay. Obviously they are in a desperate situation and they
do not look into this. We need to have some kind of awareness
for people, when they borrow money they must find out about the
details of that borrowing. On the other side, legally financial
institutions are charging 100 per cent, 200 per cent, and do you
think there should be some cap when we have a base rate of five
and a quarter per cent, that these financial institutions should
not be allowed to exploit the most vulnerable, there should be
some cap on interest rates? What is your view on this?
Mr Patton: The Credit Union movement,
indeed the CAB campaigned two years ago, I think, Susan, when
the Consumer Credit Act was being rewritten for a cap on interest
rates.
Ms McPhee: It is not our policy.
We do not have a policy on a cap on interest rates but we supported
a review then.
Mr Patton: Okay, thanks. Certainly
the Credit Union movement did make a submission arguing that there
should be a cap on interest rates, and the response from Government
was that a cap on interest rates would mean that those in the
market would all charge up to the cap, which I thought in a competitive
market was sheer nonsense, people do not charge up to the cap.
The Royal Bank does not charge up to 175 per cent, for example,
it is a competitive market and it is driven by market forces.
I felt there was a missed opportunity to introduce a cap on interest
rates because, as Mike said in his opening statement, the fact
is the most vulnerable in society, the poorest in society, are
those who pay the highest interest rates. Most of us around this
table could probably go out tomorrow and borrow at seven per cent
or eight per cent. A sizeable minority of people in this city
and a huge majority in this area will be paying much higher interest
rates than that.
Ms McPhee: We would certainly
support that this needs to be controlled because we have seen
so many cases of people affected.
Mr Dailly: On the point which
John was making, I am sympathetic to a cap, but I am concerned
about the point that organisations will just increase to the maximum
cap and we have got some evidence for that. Just the other year,
the OFT said to credit card companies that if they charge more
than £12 for the default charge on a credit card they would
intervene and use their powers. What has happened? Very interestingly,
just about every credit card company in the UK, apart from maybe
three or four, have set their charges at £12. I think we
need to be careful about that.
Q708 Mr MacNeil:
We have the problems of 175 per cent interest rates, a cap would
be seen to be attractive in many ways. In the case of the credit
cards, they went up to £12, it would seem, but if you had,
say, a multiple or a national figure for an interest rate, the
other lenders or other loan packages would drift upwards as well,
and the whole of society would have higher interest rates.
Mr Dailly: It may have these consequences.
Q709 Chairman:
What is the solution?
Mr Dailly: I do have a possible
solution which is based upon giving the court the power to effectively
cap. In 2004, Chairman, you introduced the Prevention of Homelessness
Bill in the House of Commons. Now, unfortunately that Bill fell
because there was not enough time, but what that Bill had was
a provision in it so that if somebody was facing homelessness
from debts, the court was empowered across the UK to vary the
rate of interest, effectively to reduce the cap or waive that
and also waive charges. Certainly I would support giving some
safety net protection so when somebody gets taken to court or
either you can apply to a court to ask them to vary that if in
certain circumstances not doing so would result in a disaster
for a person or a family.
Q710 Mr MacNeil:
Is there not still a case for a cap on interest rates if it is
a multiplier of the base, five times base, six times base or whatever,
because at the moment the 175 per cent we have is 18, 19 times
or 20 times base rate?
Mr Dailly: You could have a cap,
but the difficulty is where do you set that cap, and the consequences
which that might have need to be thought about.
Ms McPhee: Although 175 per cent
is appalling, at least the person knows where they are, they know
what the payments are. It is what Mike has been talking about,
the hidden charges, which the mainstream financial institutions
charge that makes it sky high and people get completely confused
in terms of how much they owe. Like Loretta's case where someone
thought they were paying off a loan, £20 a month, when, in
fact, it was constantly accumulating at £22 a month. It is
these charges which make things much, much worse.
Ms Gaffney: To come back to what
we were saying earlier, debt is obviously an issue and credit,
but if I look at the clients who come into Easterhouse, which
is mostly your poorest section of society, it is probably on average
about four to five debts maximum, but two of those will be rent
and council tax. You will always have rent and council tax and
often maybe a utility. They will not have a number of credit cards,
they may have one or two, but it will mostly be personal loans,
which I think is what we said earlier, Provident and whatever.
In terms of people's awareness of interest rates and what I think
we said earlier, in terms of our clients, they are not interested,
they are interested in what it is going to cost them per week.
If they are told it is costing them £1.50 a week, it does
not matter if that is going to be for 100 years or what the interest
rate is, that is what they feel they can afford and that is what
they will go for.
Q711 Mr Davidson:
In those circumstances, council tax debts and rent debts are the
cheapest because by and large the council does not charge interest
on those, which is why, in a sense, the council often feels they
are always the last in the queue to get paid, which is why they
end up being quite tough in circumstances, because by and large
they do not charge huge interest on your council tax arrears.
I am not quite sure how people then have got into that sort of
situation. Part of the difficulty I find is that lots of people
in the area object to some folk not paying their council tax or
not paying their rent and then maybe having it written off when
they have been struggling to pay theirs. How do you think we ought
to deal with that?
Ms Gaffney: I have certainly never
ever had a client in where their rent or their council tax had
been written off. In my experience, what happens with people—and
I will go back to, perhaps, people going into work—is prior
to that they were getting all their council tax and their housing
benefit paid, so they may have been poor and they may have had
little money, but they had a roof over their head and their council
tax was getting paid, all but their water rates, when they move
into work and they have got to then start paying rent and if they
are having difficulty managing because they are not getting housing
benefit, then they will use that money and not pay the rent. That
is what will happen because they will need that money that week
for a pair of shoes for the wee one or whatever and the same with
the council tax.
Q712 Mr Davidson:
This comes back to the point about whether or not people are better
off in work than not, does it not?
Ms Gaffney: Yes, it comes back
to that point, and basically what you are then seeing are people
six months, maybe a year down the line where their rent has increased
considerably. I am saying that as a CAB, but I also talk to housing
associations and whatever and many of the staff are saying the
same thing. What they are saying is when people go into work that
is when they are having problems with collecting rent.
Ms McPhee: Only one in four of
our debt clients have council tax debts, so three in four do not,
which means they are paying it because it is a priority debt by
the CAB service. One of the other things we were talking about
before we came into this room was sometimes it is about councils'
processes for collecting debt which, again, masks the true debt.
For example, Glasgow Council and some of the other councils are
pushing sequestration proceedings against people, so people are
panicking and then taking out consumer loans to pay off the council
tax debts to avoid them.
Ms Gaffney: It is not just Glasgow
City Council, there are a number of councils and it is another
concern, particularly if they are homeowners because they are
immediately going for sequestration as opposed to any form of
diligence, and if the person is sequestrated they will lose their
home. That is increasing and increasing all the time. That is
another worry. What many of the people are doing is then trying
to get a loan to pay it off and it would be a considerable amount
of money, so that is pushing them further into debt. Yes, the
council tax will get paid off if they get that loan, but you can
be assured that the next year when they are trying to pay off
the loan they will not be paying their current council tax, so
it is a vicious circle, a pointless exercise. For some people
who cannot get the loan—and I had one of my staff along
yesterday morning at the court and five people in front of her
case were sequestrated, that is five people, a woman with three
children who could well lose their home—it does not work
anyway.
Q713 Mr MacNeil:
Up until now we have talked obviously a lot about debt and I want
to pursue that further. I would like ideas and suggestions from
you. Some of them might not be the most obvious to us, but it
might be that councils be less aggressive when it comes to debts
and not going for sequestration, it might be limits or capping
of interest rates. I would like from the five of you, your own
top three suggestions of steps which could be taken to reduce
indebtedness and other problems which, therefore, would put an
end to poverty. The reason I ask is you are working at the coalface
and you are seeing this more than we are. If you could change
the current set up, what would be your favourite three at the
moment?
Mr Dailly: The first thing is
we need to regulate default charges in the UK. When I say default
charges, I mean any sort of penalty type or a charge for a letter
or that type of thing because it is not just the banks that are
doing that, every company in the UK, more or less, has this policy
of squeezing extra money out of you by this default charge approach.
Q714 Mr MacNeil:
Could I write back to a bank that was doing that and charge them
for the letter I was sending them!
Mr Dailly: You could try it, but
I do not think they would pay because, again, the problem is they
have that written into your terms and conditions and, remember,
you are a consumer, so if you do not like that, then you could
go somewhere else, so goes the theory. You go to another bank
and they have got the same terms and conditions, that is the way
it works. I think we need legislation. I know the OFT is obviously
doing work here and there is a report due out at the end of this
year for banks but, as I say, it is not just banks, every company
is using default charges to rip people off. I think legislation
in the House of Commons would be one way to solve that. The second
thing is because about 70 per cent of all householders in the
UK are homeowners, I think we need to look at the exploitation
of homeowners. My concern is that when people get taken to court
in Scotland for mortgage arrears, typically if they have got arrears
of £600 to £1,400, there is a clause which is applied
into your mortgage by law which allows the bank to recover every
single legal expense. I typically see people getting hit with
£2,000 of legal bills but they have got a mortgage of just
£1,200. That is just incredible; I say that as a solicitor.
It is absolutely incredible that people are able to make that
kind of money because there are huge profits in that, so we need
to do something about that. Again, that would require the House
of Commons to do something about that. The third thing, if I may
say, is I think we need to roll out some sort of state sponsored
mortgage insurance scheme. I am the UK legal adviser to SHOP,
that is the Sustainable Home Owner Partnership, which is a UK-wide
project funded by the Joseph Rowntree Foundation. We have
an advisory group which involves the Treasury Department, the
DWP, various banks and so on and so forth. There is a report coming
out very soon and the idea is, knowing that interest rates are
on the rise, do we want to see what happened in the late 1980s,
early 1990s when interest rates went into double figures and basically
people across the whole of the country were forced into repossession,
and I say we do not want to see that, let us plan against that
happening. We know interest rates are bound to go up because that
is the nature of the global economy, so let us think about having
some sort of state sponsored mortgage insurance type scheme which
covers you if you get ill, covers you in certain events and would
mean that if we had an economic downtown, I hope that never happens,
if that happened on a mass scale we would be prepared in the UK
for that.
Ms McPhee: I can think of two
things which would address debt issues. One is devolved to the
Scottish Executive and it is to do with composition of debts.
We have a debt arrangement scheme in Scotland, it has been operating
for two years now, and on 30 June it will change to allow for
the freezing of interest. What it still does not do is allow a
composition of debts and we have argued right from the word go
how that would still exclude our clients. Without allowing debts
to be reduced, people will still not have sufficient income to
pay off these debts. If you have a composition of debts combined
with a freezing of interest, I think that would impact right across
the board. It would make lenders think more carefully in terms
of how they lend money, I think it would affect irresponsibility
in lending because it would have restricted the amount of money
to be paid back. It would also protect people from the harsh consequences
of sequestration and would give them a fresh start. I think that
would be a key thing. The other thing is the social fund. The
social fund should be reformed. I think it should be expanded
out to people on low incomes because it is interest free. It is
one of the key solutions, it is just that it does not reach far
enough and it needs to be overhauled. These are the two key things
which would address debt issues.
Q715 Mr Davidson:
Can I clarify that. Basically the problem with the social fund
is there is not enough of it?
Ms McPhee: There is not enough
of it and not everyone can access it. Some of the things that
happen when you are in it are it does not give you enough money
or asks you to repay over too short a period of time.
Q716 Mr Davidson:
That is partly because there is not enough money in it, is it
not, because it is a revolving fund?
Ms McPhee: Yes, it is.
Ms Gaffney: I will go back to
the one which I have been going on about. I do believe that we
need to address the issue of poverty and that work takes people
out of poverty in earning a decent wage. While we welcome the
minimum wage, I think that has got to be looked at and increased.
Q717 Mr Davidson:
To what level? Does the CAB have a line on what the minimum wage
should be?
Ms Gaffney: No, the CAB does not
have a line on what the minimum wage should be.
Q718 Mr Davidson:
Do you then?
Ms Gaffney: I would say that people
should have £7 and over £7 as a minimum wage, but in
line with that, while I welcome Working Tax Credit and Child Tax
Credit, which has benefited many people through the poorest sections
of society who are on social housing, it is taken as income and
affects their housing benefit and I would like that to be addressed
so that those poorest sections of society can also benefit from
Working Tax Credit in the way that others can.
Mr Patton: Two things, again,
Chairman, and these are personal reflections rather than the policy
of the Scottish Credit Union movement. One is maybe egotistical
or esoteric. I would like to see increased funding of education.
Mike talked earlier about the culture of debt. We have a target
that 50 per cent of our young people should now go into higher
education, when most of us in this room, those of us who are involved
in higher education, maybe with the exception of Mr MacNeill,
but those of us of an age who went through higher education, did
not have to rely on our parents or the banks or student loans
to pay our way through higher education, indeed most of the Cabinet
probably benefited from that, including the Chancellor. Education
is a devolved issue but, at the end of the day, the funding for
education comes from Westminster, and we are creating a culture
that it is satisfactory to borrow money to pay for your education,
albeit that student loans are at a very low rate of interest,
I appreciate that, but not all of the student debt is met by student
loans. A lot of them become involved with banks and other credit
agencies and they carry that with them into adult life, so the
pattern is set that borrowing is an acceptable norm. It is axiomatic
certainly when one hears politicians speak that all graduates
earn more in their lifetime than the rest of the population, that
may well be true, but I know a considerable number of graduates,
and I only have to look at my own family for examples, who are
not earning a very high wage post graduation. I have a daughter
who is doing a PhD at the moment and is earning less than £35,000
per year on her third degree and after 12 years in higher education.
I give that as an example. I think we have to look at the funding
of education and try to decrease this dependency on debt, which
50 per cent of the educated people are bringing with them into
society and a dependency on the banks for loans and all of the
evils which have been spoken about by other members of the panel.
The second thing I would say is there has to be a heightened awareness
from Home Credit people. Susan talked about people who are happy
because they are only paying £8.50 a week, but they do not
really appreciate that when they are paying £8.50 a week
they should really only be paying £4 for the money they are
borrowing if it is a reasonable rate of interest they are paying.
I think it should be incumbent upon credit providers to state
clearly how much this loan is going to cost them and how much
of that is in interest charges, just in the way of other lending
agencies. When a person borrows from a credit union there is truth
in lending. We are ethical lenders, as Chris has said. They know
at the beginning when they borrow the money how much the loan
is going to cost them in interest charges, how much they are going
to have to repay and what the total repayment will be. Indeed,
if the capacity to repay is not there, then a credit union should
not lend that money because lending money to people who cannot
afford to repay is not helping them in the least.
Mr Mallon: I agree with what John
said. I do like the idea of something to do with a cap of interest
rates and I think it is something to be thought about, also, things
such as arrangement fees, et cetera, for loans should be brought
into the whole calculation. It is always outside the calculation,
so it can be a very false figure you are given. Ourselves as credit
unions do not have that within it, so it can be met.
Q719 Ms Clark:
What we want to move on to is the whole issue of housing, which
you have already touched on, and the way that housing costs in
particular impact on the poorest and most vulnerable in society,
and to what extent they contribute to the debt which people suffer.
In particular, one of the things we would like to look at is eviction
rates. Do you know how eviction rates in Scotland compare, for
example, with the rest of the United Kingdom?
Mr Dailly: I know we have only
got limited figures, we have only got statistics for the public
sector, and something like 30,000 cases every year in Scotland
are raised by councils and housing associations. We are not sure
exactly because nobody is counting the private sector landlords,
but, of course, they are more likely to go through to the end
with eviction. I spend a lot of my time defending eviction cases
and one thing I would say is it seems to me that often when people
are taken to court for eviction they have fallen on bad times.
They are out of work, for example, or are into benefits for whatever
reason, so their income is very small, maybe £50 or £60
a week. They then get taken to court and the difficulty is that
in going to court, even when you get the case continued, cases
are sisted, frozen, for you to make your payments. In that situation,
when the case comes to be dismissed at the end of the line the
landlord will seek judicial expenses. Those figures went up in
2002, so, technically, even for a case that does not do very much,
just sits in court and then gets dismissed, you are looking at
more than £300. Interestingly, Fife Council, where its tenants
are repaying rent arrears, will not charge them the court expenses
because built into those judicial expenses is a profit. It always
strikes me that in, for example, Glasgow, the biggest city in
Scotland, which has got the GHA, the Glasgow Housing Association,
the biggest landlord in Europe, it does not have a policy which
does that. Then you get a situation where you have got somebody
who is living on a very small income and they then get these court
expenses added. If we are going to say that we have got social
landlords, then they should be different from private sector landlords
and they should do what Fife Council does.
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