Business, Innovation & Skills Committee - Minutes of EvidenceHC 1649

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 22 November 2011

Members present

Mr Adrian Bailey (Chair)

Paul Blomfield

Julie Elliott

Rebecca Harris

Margot James

Simon Kirby

Ann McKechin

Nadhim Zahawi

________________

Examination of Witnesses

Witnesses: Joanna Elson, Chief Executive, Money Advice Trust, Professor Iain Ramsay, University of Kent, and Dr John Gathergood, University of Nottingham, gave evidence.

Q1 Chair: Good morning and welcome to this morning’s session. Can I thank you for agreeing to come before us today? Just before we start, could I ask you to introduce yourselves? I know you need no introduction, but it just helps for recording and voice transcription purposes. If we start with you, Dr Gathergood.

Dr Gathergood: I am John Gathergood, I am a lecturer in economics at the University of Nottingham.

Joanna Elson: I am Joanna Elson, I am Chief Executive of the Money Advice Trust.

Professor Ramsay: I am Iain Ramsay, I am a Professor of Law at the University of Kent.

Q2 Chair: Thanks very much. Just before we start, obviously some of the questions will be fairly general. There are three of you; I do not need each one of you to repeat the same message. Obviously, if somebody makes a point that you disagree with profoundly or you feel that there is need to add a further point to what has been said by another member of the panel, then feel free to do so, but in the interest of brevity, if you could avoid repeating yourselves. I will just start with a fairly general question: basically, what causes people to get into unmanageable debt?

Dr Gathergood: There are maybe three main explanations for unmanageable debt. In about 50% of cases, an individual moving into consumer credit arrears or payment problems has experienced some kind of individual level shock. One could think of unemployment, divorce, ill health or unexpected expenses. If you look at the histories of people with debt, about half of the people in debt problems have some recent event in the last couple of years such as those.

The second major cause is macroeconomic developments and shocks, so interest rate movements-which impact all households but most affect households that are highly leveraged and have large credit commitments-and aggregate movements in unemployment as well.

The third factor is what we might describe as individual imprudence. Some proportion of debt problems are inevitably explained by people over-borrowing due to a lack of self-control in their finances, maybe being illiterate financially and not understanding the true cost of credit; that would explain some proportion of observed debt problems.

Q3 Chair: Do either of the other two members wish to add to that?

Professor Ramsay: I would agree pretty much with those points. The study from 1989-in 2002 there was a replication of the study-showed that unemployment and other changes of circumstances in people’s life situation were the primary causes. The Insolvency Service’s data show that as well, as do the Consumer Credit Counselling Service’s statistical data. In terms of imprudence, it is sometimes difficult to assign a definitive reason to why people get into serious over-indebtedness. For example, you lose your job and then you use credit cards to maintain yourself because you think events will get better. Do you code this as people being imprudent, or do you say it is life circumstances? It is often a combination of circumstances. We also have to remember, in terms of thinking historically, the extent to which since the early 1980s there has been an enormous growth in debt; I will not go into the reasons for that. To a certain extent, debt is being used to maintain consumer demand and maintain consumption status. There is a recent paper in the Cambridge Journal of Economics suggesting we have increasingly had a model of loans for wages over the past 20 years: two household incomes are necessary to maintain a middleclass lifestyle, so anything that happens in terms of losing a job means that you are going to have financial problems because of the high levels of debt.

Q4 Chair: Thank you. Going back to your response, Dr Gathergood, could you give us any sort of statistical proportion-I appreciate it is only a very broad estimate-of how many would fall into each category or what percentage would fall into each category?

Dr Gathergood: I mentioned that maybe half of individual debt problems could be explained by a change in individual circumstances and among those kinds of transitions, such as unemployment, divorce and ill health, unemployment or a drop in wages is the largest component. I cannot offhand give you more detailed statistics on the proportions of each, but I could supply those subsequently from various econometric studies, if that is useful.

Q5 Chair: You have loosely described one category as financial imprudence. Could you give an estimate of the element of financial imprudence that is just a lack of judgment, and the element that is just financial illiteracy and people not understanding?

Dr Gathergood: Academic studies in economics literature attempt to measure individual traits and behaviour, such as having a self-control problem or not understanding aspects of finance such as interest compounding or what "minimum payment" means on a credit card. These studies typically find that maybe between 5% and 10% of the population exhibit self-control problems in their expenditures. Given that about 40% of the population at any one time has outstanding consumer debt that is being revolved month-on-month, some form of financial imprudence, in terms of lack of self-control, might be prevalent in one-quarter of those. The statistics on financial illiteracy tend to be stronger, so it is true to say that across the board consumer credit users typically have poorer levels of financial literacy than those with investments and net saving behaviour. Relating that kind of measure to specific outcomes is more difficult because it tends to be very individual and specific, depending on the type of credit that someone is using.

Q6 Chair: Has it got worse recently?

Joanna Elson: Yes, it has got worse recently. We commissioned Dr Gathergood to do some work on this for us, looking at the figures through the downturn, and also looking forward. He collected for us statistics looking at the four major providers of free debt advice-Citizens Advice, the Consumer Credit Counselling Service, Payplan and National Debtline, which we ourselves run. The number of people seeking advice during that period went up from between 1 million and 1.2 million before the downturn to about 1.5 million. The figures have slightly stabilised since then: they are at about 1.3 million now and have stayed at that rate for about two years. There are fairly significant levels of demand still.

Q7 Chair: There is a correlation between the macroeconomic situation and the levels of personal indebtedness and problems arising from it; is that a reasonable observation to make?

Professor Ramsay: I can simply make the observation perhaps in relation to insolvency, which is obviously the ultimate remedy, and other forms of composition of debt. It is true that the level of individual insolvency has increased in the UK, but the UK level is still significantly lower than that in a country such as Canada or the United States. It is about the same as in Australia and slightly higher than in France or Germany. I would not say "correlation", but there is a rough relationship between level of outstanding household debt and levels of insolvency. All other things being equal, the more debt a country has, the more insolvency; in other words it’s an inevitable aspect of household credit and debt.

Dr Gathergood: It’s also worth noting that personal insolvencies began to arise more dramatically before the onset of the credit crunch and the recession. It was 2005-2006 when there was a large increase in bankruptcy filings and awards of IVAs. To some extent, I think the consumer credit crisis, the problems that we experience today, predated the more general recession in the economy.

Q8 Chair: That is interesting, but has it got worse since the recession in 2008?

Dr Gathergood: Yes, since 2008-2009, the personal insolvency rate has increased by 30%, as has the number of individuals seeking advice about their debts. The amount of credit written off by lenders has also increased by around 1 percentage point from 1.5% to 2.5% of outstanding debt since the first quarter of 2008.

Q9 Chair: So it was becoming a problem before the actual recession, and that obviously has aggravated an underlying problem that was emerging. That has partly answered my next question, which was: what problems are due to socio-economic factors and trends? Is there anything you wish to add about the social and economic trends taking place and how they have been impacted on by the recession, over and above what has been said already?

Dr Gathergood: It is worth drawing a distinction between two main socio-economic groups who struggle with debt problems. There are low-income households who struggle to meet their everyday or necessary expenditures and use credit as a means of sustaining a minimum level of consumption; they are perpetually in debt. There is also a large group of middle-income households, often young families, who have taken out debt on the expectation of income growth, so that the mortgage and consumer credit decision is made in part in expectation of promotion and real wage increases and such like. Particularly in the current recession, those households have been particularly vulnerable because, as unemployment rises and real earnings growth is very weak, they are not seeing the increases in household income that they had expected. So the debts that they took on in anticipation of income growth are now becoming a larger burden.

Joanna Elson: Our services are seeing across the board that debt is no respecter of social class. At National Debtline now, we have as many people calling us who have an income of £30,000 or above as those who have an income of less than £30,000. That is a change since the downturn.

Q10 Nadhim Zahawi: Just following on from that question about trends, what trends are you seeing in terms of overall household debt over decades, for example?

Joanna Elson: Do you mean in terms of proportions of debt?

Nadhim Zahawi: Precisely.

Joanna Elson: We have had relatively stable proportions of debt for a number of years. Things like bank loans, overdrafts and credit cards come fairly high up there. One that is coming up as a trend, and has been for the last two or three years, is utility debts, perhaps not surprisingly. Government debt is also up there; 36% of people who have called our services have a debt to the Government in one way or another, whether that is council tax, benefits overpayments or things like TV licences, Child Support Agency debts and so on. There is also an increase in high-cost credit, which I know you are interested in. We started collecting data on payday loans a year ago when they started to become an issue; we were getting 200 calls a month then, and it is over 1,000 calls a month now.

Dr Gathergood: Looking more generally, cross-country over long periods of time, there has been an accumulation of debt in most Western economies. Most of that is attributable to more sophisticated credit scoring, allowing higher risk consumers to access debt whereas previously they would not have had any access. As Iain mentioned, that partly explains the increase in the bankruptcy rate: you have more high-risk individuals with access to some credit, but because they are higher risk they are more likely to get into debt problems. There is about £200 billion worth of outstanding consumer credit in the UK economy. That is about 80% of household disposable income. Since the 2005-2006 period, when household debt problems seemed to increase, most households have been repaying their consumer credit balances, so the gross value of outstanding debt is declining and the real value-

Nadhim Zahawi: -has fallen, that is my point.

Dr Gathergood: Yes, it is declining more sharply. Whereas in 2005, total household debt was about 100% of household disposable income, it has now fallen to around 75%, which is similar to the level at the turn of the millennium. Although the nominal value of debt increases, in the same way that nominal GDP tends to increase even during periods of recession, relative to household income or to prices, the trend is actually for falling household indebtedness.

Q11 Nadhim Zahawi: Over the period of the downturn, since 20072008, is that fall accelerating?

Dr Gathergood: Yes, the fall is accelerating. In the broad sweep, most households with consumer credit are reducing their balances, but there is a concentration of households with debt problems, and that concentration is larger than it was previously.

Q12 Chair: So, broadly, those who can afford to pay off debts are doing so, presumably due to the uncertainty of the economic climate, but the number who actually cannot afford to sustain their debt is increasing.

Dr Gathergood: Yes.

Q13 Simon Kirby: Just a quick technical question: is the total level of debt the best indicator? Surely the interest on that debt is a more telling figure.

Dr Gathergood: There are various ways to look at the statistics: you could look at income gearing, the proportion of household income that is used to pay debts; the total interest burden of debt in terms of the gross value of payments to service outstanding loans; or the value of outstanding loans. The value of outstanding loans is a helpful measure because the debt, ultimately, has to be repaid. The interest-based measure-the interest payable on current debts-is more a measure of the flow of payments required to maintain a particular level of debt. I think if one were to look at alternative statistics, it would be more useful to think about the distribution across households, because 60% of households in the UK have no outstanding debts. Most households have access to debt, most obviously by credit card, but most credit card users pay their balances off before the interest-free period expires.

Q14 Chair: We are talking about unsecured debt; we are not talking about mortgages and so on.

Dr Gathergood: True. So something like 75% of households hold an unsecured debt product, most commonly a credit card. Only 40% of households have an outstanding balance that is accruing charges on a consumer credit product. That is across the broad range of different forms of unsecured credit. If you break it down across households, there is a wide distribution of levels and types of debt.

Q15 Chair: Just to clarify that, 40% of our population have outstanding balances they are not paying off that are actually accumulating. Have I interpreted that correctly?

Dr Gathergood: Yes; 40% of the population borrow on a credit product-as opposed to a credit card-that they pay off within 56 days, incurring no interest.

Q16 Nadhim Zahawi: I want to go back to the concentration of those who have unmanageable debt. Joanna referred to the number of calls from higher income groups. Can you shed some light on numbers-i.e. what is that percentage of higher income groups? What income levels are we talking about? You talked about £30,000 salaries at the higher end. Can we have some more hard data: within that concentration of people who are in unmanageable debt, what is the profiling in terms of incomes?

Joanna Elson: We can look at that and I can send it to you, but I have not got that off the top of my head. I do not know whether Iain might have some of that information.

Professor Ramsay: I can give you some very raw thoughts on insolvency. In the US, there is the idea that insolvency is a middle-class phenomenon. In the UK, it is very difficult to generalise because we do not have terribly good data, but bankrupts generally have a high level of unemployment and a low level of home ownership. Of those on debt relief orders, the Insolvency Service data show that 63% are female, 80% are not in employment and 45% are single. For those who do IVAs, which is the composition, again we do not have very good data, but the limited studies in the mid-2000s showed there were more homeowners. The majority are unskilled, semi-skilled and clerical categories-C and D-but they are in employment. Perhaps up to 33% own a home. The most recent data from the annual report of the Consumer Credit Counselling Service, show that the average annual gross income of a CCCS client is £22,000, which is £3,500 less than the UK average; 55% receive some type of tax credit or benefit. In general we are looking at lowermiddle/lower-income and poor consumers who take the ultimate remedy, if you like: insolvency and debt repayment. That is not to say that more higher income people are not using these services, or that debt does not affect everyone, but one probably would say that, to the extent that people are using these safety nets, they are in these particular groups.

Q17 Nadhim Zahawi: One of your points was that 63% are female.

Professor Ramsay: That is on the debt relief order, which is essentially for people who are very poor.

Q18 Nadhim Zahawi: Is there any more gender profiling? Are we seeing a skew, as in two-thirds to one-third, in that case, for females?

Professor Ramsay: The Insolvency Service explains that by saying that women have lower levels of debt generally than men. I am not terribly aware of studies of gender in debt. I do know, although I have not looked at it recently, that the 2005 Tackling Over-indebtedness Annual Report, by the Task Force on Over-indebtedness, suggested that women were over-represented in all types of over-indebtedness indicators. I would have to go back to the report to look at the details, but you might want to follow that up. The Griffiths Commission in 2005 said debt disproportionally affected low-income families and lone parents, which would often be women. Unlike in the United States, where there have been some studies on bankruptcy and gender, I am not aware of much further analysis. I don’t know if my colleagues are.

Joanna Elson: We did a little bit of work on advice-seeking behaviour in terms of gender, focusing on men because there had been some done on women before. That found that men were less likely to seek advice, which is just about borne out in our own statistics; they wanted to be in control and to look after things themselves; they had an over-optimistic view on the prospects for improvement, so they did not feel they had to seek advice; they wanted to have do-it-yourself types of remedy, which was just one of the reasons why we introduced an internet tool called My Money Steps. That is what we learned about men and advice-seeking behaviour.

Dr Gathergood: If you are interested in detailed breakdowns of level of debt and debt behaviours across income distribution, gender and household composition, it is quite feasible to put together a set of statistics for submission to the Committee.

Nadhim Zahawi: If you can, that would be very useful to the Committee.

Chair: Yes, please do.

Q19 Nadhim Zahawi: Is high-cost consumer credit-payday loans-exacerbating the situation or is it a valued resource for consumers?

Joanna Elson: I am not a person who generally seeks to ban things; there is some use in these products, and for some people in specific circumstances they can be helpful. There is a big health warning around that. I have mentioned the statistics we have on the rise in people having problems with payday loans. It is an area for me where I would not be looking to ban things, but I would be looking at whether the regulation around it is sufficient and whether people understand what they are getting into. For instance, with payday loans you will know there is a process where you can roll over the loan for a short period of time. Every time you roll it over, of course, you have an additional charge. That is where people get unstuck. They do not realise that, very quickly, they are into a big spiral. If they use it for the purpose that perhaps it was intended, which is a stop-gap, once, that is fine. If that is not understood, and it is used in the way that many people are now using it, it can definitely exacerbate things.

Dr Gathergood: Payday loans are expensive, relative to other forms of credit. They might not be expensive relative to other credit options for people who use them, for instance if the choice is between a payday loan and an unarranged overdraft. Payday loans are also available at very short notice, in some cases over the counter or bank transfers in 10 or 15 minutes. I would draw a contrast between two types of users of payday loans. For people who have had a financial shock and need money quickly to address that, who intend to repay, will be in a position to repay and need the money now, a payday loan can act as a high cost but effective form of insurance. For people who lack control in their expenditures and might take out debt in order to purchase something they want at short notice without an ability to repay, a payday loan is an opportunity for them to be a victim of their own behaviour. Payday lenders would obviously associate themselves with the former group, who need short-term credit and for whom it is welfare-improving, but in providing loans they are opening themselves up to a client base who might be more impulsive and make poor use of credit.

Professor Ramsay: I would generally agree with the comments that have been made. Payday loans are of course regulated under the Consumer Credit Act, so you will see their advertisements indicate that the APR for a payday loan is usually around 1,000%. However, people continue to use payday loans, which suggests that, as Joanna said, one needs some specific regulation of payday loans in terms of rollovers, whereby people are using them on a continuing basis. I was involved, in Canada, in writing a paper for the Government on payday loans when they were developed in the early 2000s. Canada now has regulation of the cost and these other aspects of payday loans. I think the regulation is necessary to protect against the type of borrower that Dr Gathergood was talking about who may be disadvantaged by using payday loans.

Q20 Nadhim Zahawi: We touched on the lack of financial education as a factor in people borrowing at extortionate percentage rates. You are at the coalface; how do you best tackle that? There are a lot of initiatives around, but we still have a gap. The reason why people go for things like payday loans at 1,000% or 2,500% is possibly because it is accessible, easy and they do not need to read a thousand pages of stuff.

Joanna Elson: I think that is right. Professor Elaine Kempson did some work in 2006 on levels of financial capability, and found them low, particularly among the under 40s. That study is going to be, in some sense, repeated; I do not imagine very much will have changed since then. You are right; there is something we need to do. I am a big supporter of financial education in schools. I think that is the right place to start teaching children about money, but of course that is not the whole picture. People are not legally liable for a debt until they are 18, so, in some senses, until you experience things you do not really learn the lesson. However, I do think that schools are an important place to start.

Beyond that, I think it has to be about the touch points where people need advice and information, where they are likely to get the educative effect. For instance, we do an impact report on our services, and 86% of people who have been through our debt advice services say that they feel more financially confident, and more capable of dealing with their finances going forward. Looking at the free text, they say things like, "It was horrific. I didn’t understand. I am not going to get in this mess again. Now I understand. I can do an income and expenditure; I know where to go." That is a powerful tool for rehabilitating and getting people back in control of their money. Our vision at the Money Advice Trust is about helping people both tackle their debts and manage their money wisely. I think the two have to go together.

Dr Gathergood: If will just add two brief points. On this issue of financial literacy, it is fair to say that most people in the population have some understanding of financial products, but sometimes not enough to make the right decision. If I could give an example, I think everyone knows that a lower APR means that a loan is cheaper compared to a higher APR, so one would naturally look for the loan with the lower APR. You may find a loan with an APR of 12%, and that is the cheapest you can get. What does a 12% APR mean? If you ask individuals, "Now you have that loan, what actual stream of payments does that involve?", it is difficult for people to make that calculation. One needs the literacy to identify the cheapest loan, which is quite straightforward-you look for the cheapest APR-but also the literacy to be able translate that, or for the lender to present it to you, in terms of a stream of payments over a period of time so you can then sit down and think, "Can I afford those payments?"

The most obvious point at which to identify individuals who lack literacy is when they make the loan application. If you are not going to borrow, if you do not have a borrowing need, you do not really need to know about consumer borrowing, but if you are at the point of application then it is in your interest, and it is commonly in the interest of the lender, for you to understand what this involves in terms of a stream of payments-pounds per week, per month, whatever the payment period is.

Professor Ramsay: Could I make a comment? Generally there is a lot of support for the idea of financial literacy and financial education. Obviously, one could not be against the idea of ensuring that people make the right decisions. But we do not know that much about the effect of financial education. For example, the World Bank in its Good Practices in Consumer Protection in Financial Services says that, "Improving financial literacy is a long-term process for which little is clearly understood as to what works (and what does not) in improving financial behaviour." A review of behavioural finance for the Financial Services Authority suggested it was not the absence of information but so-called behavioural biases that caused consumers to make repeated mistakes. It is sometimes difficult to change these behavioural biases. I think it is important to identify the socalled teachable moments, but even there it may be difficult. For example, in Canada, financial counselling was introduced as mandatory for all bankrupts, but it is still not clear whether that has had an impact. One study managed to look at a cohort who had not had counselling and a cohort who had had counselling over a long period of time, and had difficulty finding a difference in their subsequent financial behaviour. I think it is a good idea, but we need to be careful about it and assess it carefully. I do not think one could see it as a substitute for regulation.

Q21 Chair: That is an interesting observation. It is possible to construct an argument that somebody with greater self-confidence, as they say, in understanding finance might be more prone to taking risks than somebody who is not. Is there any evidence to substantiate that?

Professor Ramsay: I think there might be; I would have to go and check.

Dr Gathergood: As it happens, this is a topic I am doing some work on at the moment. I think what you have surmised is exactly correct. If one attempts to measure people’s financial understanding and then asks them how confident they are in making financial choices, one finds that there is a subset of individuals who appear too confident relative to what they understand. That is associated with problem debt. I can provide some more detailed statistics, but that phenomenon is not uncommon.

Q22 Chair: I would like to go back to a previous question. Dr Gathergood pointed out that the payday loans market comprised two groups of people: those who had a specific expenditure item that they wished to pay off prior to payday, which they could clear through their pay, and those who were using the payday loan to subsidise a standard of living that would cause them to roll over the debt. Do you think that there is any point to, or potential benefit in, looking at the way payday loan companies advertise their product, to try and draw out this distinction and discourage the latter group of consumers?

Professor Ramsay: To a certain extent, that is already envisaged in the responsible lending guidelines of the Office of Fair Trading and the implementation of a European directive requiring creditors to explain the credit to a debtor. The guidelines suggest that, in explaining the credit to the debtor, one thing they should say is, "This is a short-term loan product that you should not be using on a continuing basis." So there already is that potential. The question is whether you want to have notices, for example, in stores, and how effective that would be.

Q23 Chair: The issue is advertising and attracting such people.

Professor Ramsay: In terms of having a disclosure at the bottom.

Chair: Yes.

Dr Gathergood: This is a tricky issue. Take the issue of how immediately the money is available; that might attract people who are impulsive and want to buy something quickly, but it might also be useful for people who have a short-term financing need and need the money quickly. It is not obvious that, if you make money available more quickly, you will necessarily get people who walk into loan shops, grab the money and go and spend it on something that they should not. The most obvious indication of whether a payday loan is being taken out to fund a necessary short-term expense or an unwise expense is what the money is spent on. Some payday lenders are able to identify that; others, most obviously those who deal in cash, are not.

Joanna Elson: There is quite an interesting suggestion in the ABCUL-Association of British Credit Unions Limited-submission to this Committee. Just as we have said that fee-charging debt management companies that advertise and deal with customers ought to tell people that there is a free alternative-a number of you have signed an EDM to that effect-the ABCUL idea is that those who advertise highcost credit ought to say, "Actually there is an affordable alternative, which is a credit union." I do not know how well it would work and I do not know if any research has been done on that, but it is an interesting idea.

Q24 Margot James: Is there any advice for people coming at the debt issue from the other end of the telescope, if you like-rather than about how to deny yourself things and reign in, about how to get more for your budget. A lot of people, I think, come into this too late because they fear they do not know how to manage their situation; if they only knew what the possibilities were to get more for their spend they might be seeking advice earlier.

Joanna Elson: That is a very good point. You are hearing later on from a number of debt advice providers. All of them will be doing that. When somebody comes to a debt advice provider they will be looking at these kinds of things: can you increase your income, can you decrease your expenditure? Are you getting the best deal on your telecoms and utilities? What about your mortgage? Are you paying over the odds for that? Do you need that gym membership? Are you getting the tax credits and benefits to which you are entitled? We did a piece of qualitative research called Facing the Squeeze earlier this year, which looked at how 30 low-to-middle-income families were coping with the downturn. What that showed was that people were trying all kinds of things. These were fairly desperate measures for some of them: selling pets, bringing food home from work, and these kinds of things. What they were not doing was the thing that would have made the difference. The advice-it does not have to be face-to-face; it could be on the telephone or internet-will help you prioritise things and ensure you are making the right choices. People were not intuitively doing those things. So, yes, I completely agree with your question.

Q25 Rebecca Harris: Professor Ramsay has spoken a couple of times about the need for regulation in some areas. I wanted to bring the panel on to your views on the Government’s response to the consultation on consumer credit and personal insolvency, which has very strong emphasis on a voluntary approach from the industry. I just wanted to hear your views on that, and whether you think the Government have got the balance right.

Joanna Elson: It is often wise to start with a voluntary approach, and there are some good examples of that. The latest tranche of the BIS announcement yesterday included the commitment that the Government were working with the providers of store cards to make a number of adjustments. For instance, a number of colleagues in the room have been concerned about the practice whereby, when you buy something-it might be a Christmas present-you are offered the chance to take a store card. They will say, "You can have a discount on that if you take the store card today." We all know that store cards have relatively high levels of interest; you can probably borrow the money more cheaply elsewhere, and that might not be the best route. Therefore, people are being tempted down a route they really should not follow. So the Government have a voluntary agreement with the sector not to continue with that practice. Therefore, there are some things in there that I think are absolutely the right thing, and the voluntary approach is right.

There are areas, though, where there is such consumer detriment and such an imbalance, an asymmetry as it were, between the provider and the person in debt that the Government need to be willing to step in if those things do not work. For instance, in the announcements yesterday there was something about codes of practice for payday lending, suggesting that you could not have one code of practice but would need several because there are various different trade associations. It did not fill me with confidence that we would get on top of this fast. While I absolutely support the Government in trying the voluntary approach first, they need to be ready to step in if things do not work.

Dr Gathergood: More generally, private markets have two excellent instruments to improve the outcome for consumers, which are competition and reputation. Government activity should seek neither to restrict competition nor to reduce the opportunities for consumers to identify individual lenders and their activities. In general, I think some of the voluntary codes of practice are very generous. For example, bank undertakings with regard to unauthorised or unwanted overdraft use seem to have come a long way. Although there are some objections to the charges for these unapproved overdrafts, the fact that banks are willing even to clear balances for individuals who have not requested an overdraft yet have spent over their accounts, is in itself something of a generosity. There are areas in the market where it is not obvious that there is much in the way of competition or reputational functioning. For example, in the area of personal insolvency and management of debt through debt management plans, it is very difficult for consumers to understand which debt management companies are cheapest, or to get any kind of data on the outcomes for individuals who participated in these plans. These companies are many and various, so building a reputation is more difficult. The OFT has revoked consumer credit licences on the basis that some debt management companies were mis-advertising. When it comes to issues of reputation, one wonders how widespread those practices might be across the sector. I think it is difficult for the consumer to choose because they do not have enough information about which companies will give them the right product at the right price.

Q26 Rebecca Harris: So you are implying there is a role for the Government to play there.

Dr Gathergood: There is certainly a role for the Government to play, not necessarily to regulate and place strictures on how debt management plans work, but to make more information available to consumers. In the lending market the APR has to be reported by every lender; it is an indication of cost over a period of time. In the debt management market there is no equivalent. What is the typical amount of debt being discharged for someone on a particular debt management product? If consumers could see some kind of statistic on that, they might have some idea as to whether it is worth paying for the product. All debt management providers come up with anecdotal stories of people whose debts they have managed to discharge-someone who came to them with £100,000 of debt and paid it off in five years and similar-but that information is not widely available. Every lender can come up, I’m sure, with at least one individual whom they might have helped to a good outcome, but more data need to be in the consumers’ hands for that.

Professor Ramsay: It is rather difficult to say whether the Government have got it right because there is so much going on at the moment, and we do not know yet what the future architecture of regulation is going to be in terms of the replacement for the FSA and the role of the OFT. Clearly, one of the issues is this optimal balance of regulation of the demand side, through trying to empower consumers, and regulating the supply side. It is not clear in terms of regulating the supply side how, for example, the irresponsible lending norms will be used by the regulators. For example, the Financial Services Authority attempted to get companies to embed norms of fairness within their structure within the organisation, so that they did not mis-sell-so that problems were prevented from arising rather than being dealt with at the point of sale. There is a lot of scope for that. We have seen that very intense competition in credit markets does not always benefit consumers where it is taking advantage of behavioural biases-for example, the PPI mis-selling scandal. In terms of those types of general issue, it is probably better to try and regulate the supply side.

There is a lot of talk of proactive intervention in the documents that are circulating at the moment, but it is not clear exactly how this will work in the new architecture of regulation. What is going to be important is the sort of powers and the approach that will be taken by the new regulators of the consumer credit market. For example, firms might be required to notify the regulator if they identify problems with a product, as they are required to do under the consumer product safety regulations. Those types of powers might be conferred on the agency.

The balance of self-regulation versus regulation clearly depends a lot on the context; I am not so confident in an area like payday loans how exactly self-regulation would work. Who would enforce it? Would it apply only to companies that had signed up to the code of practice? Would it be enforceable by the Financial Ombudsman Service in terms of a norm of fairness? There is the danger that self-regulatory codes actually make the law more opaque because you have to look at the statute, look at the regulations then look at the code of practice, so it is not necessarily the case that it simplifies the regulatory landscape.

Q27 Chair: Can I intervene on that point? Earlier you mentioned the obligation to notify, if a company had a problem with a particular product. What sort of problem do you envisage, and how would the company necessarily identify it?

Professor Ramsay: If, for example, endowment mortgages were started, then a company realised that this was not working out terribly well, you could impose some type of obligation to notify the regulator, who would then be given early warning that this might be an industry-wide problem.

Chair: Right, I see; we all have our scars.

Q28 Margot James: Of all the various credit products, which areas concern you most?

Joanna Elson: I have talked quite a lot about payday loans, so I will not do that again. John has briefly touched on debt management companies. I think that is an area where there is significant consumer detriment and it is worth looking at. When the OFT looked at these companies last year, they found over 90% non-compliance with the OFT’s own rules; they found misleading advertising; and they found that poor advice was being given. The reason it concerns us so much is that we-and, I am sure, the other advice providers here-have people coming to us who have tried to put things right, responded to one of these adverts and winded up in a worse situation than when they started. These companies are taking up-front fees. They are making monthly charges of an average of 17%. They are making something like £250 million a year from this market, usually from vulnerable people who are essentially making a distress purchase. People are not shopping around; the OFT report found that. They go to the one that they see first that will help them. I think there is real consumer detriment there. I was glad to see yesterday that the Government are looking at this area and intend to do more research. We think that some action needs to be taken here quite soon.

Professor Ramsay: I would agree with that. The whole treatment of over-indebtedness and personal insolvency is an integral part of the credit market architecture. This is now recognised by international institutions such as the World Bank. We do not have much systematic analysis of it. We now have in England a complex range of overlapping alternatives for an over-indebted debtor: bankruptcy, bankruptcy plus an income order, an IVA, a debt management possibility, an administration order in the county court. It is difficult for the individual to know what to choose, which means the intermediaries, such as the debt management companies, have a lot of power.

We have a very large over-indebtedness industry in the UK; it has grown in a piecemeal way, often being driven from below by entrepreneurs, which creates a lot of noise for an individual trying to navigate the system. The system could be much simplified; for example, we could expand the debt relief order to far more individuals. It is a very limited process at the moment. There are many debtors who owe over £15,000 and have relatively straightforward over-indebtedness problems who could be processed in a relatively quick way. We might ask why people are not using insolvency, for example, rather than a debt management programme. Just to give you a contrast-I am not suggesting that England adopt this-France, for example, prohibits private forprofit debt management companies. That is just to show you that other countries do not necessarily take the same approach. I really think that we do not know enough about this area, and unfortunately I do not think the Government have done enough to simplify and modernise the system.

Dr Gathergood: I will briefly add to that. Payday loans are commonly disliked. I do not think we like the idea of people borrowing at these enormous rates or the amount of money that can be made from customers, but you cannot criticise payday lenders for not being clear about the terms of the loan; they are overwhelmingly clear and such loans are very expensive. Indeed, the APR works against short-term lenders because by its construction it exaggerates the cost of the credit that they provide. If you look on various adverts and various websites, they are really clear how much they charge, and it is a lot. In the case of personal insolvency and debt management, things are not at all clear. Academics and industry analysts at large struggle to say much empirically about the personal insolvency regime in the UK and the experience of UK individuals in debt management because we have very little data available on which to base these conclusions. We simply do not know the outcomes for IVAs or for DMPs.

Q29 Chair: I believe it was Professor Ramsay who said earlier that the level of indebtedness in France is actually less than here.

Professor Ramsay: That is correct.

Q30 Chair: You also said that France effectively outlaws private debt management companies. Do you think there is any correlation between those two factors? Is there a connection at all?

Professor Ramsay: I do not think there is a connection between the prohibition of private debt management companies and the level of debt. The reasons why the level of household debt in France is lower are various; this may be partly cultural and partly the existence of interest rate controls.

Q31 Chair: It is a fairly complex reason. Is there any evidence that the absence of private debt management companies is causing problems?

Professor Ramsay: In France, they have a single state over-indebtedness commission run by Banque de France, which is free to individual debtors. This means that the state is subsidising both creditors and debtors. It is relatively accessible to individuals. It has quite a high caseload. So I do not know that there is necessarily an absence of alternatives for debtors. The state over-indebtedness commission is quite well known throughout France.

Q32 Chair: Is there a lesson for this country in that?

Professor Ramsay: In relation to managing over-indebtedness, the issue is partly the balance between the public and the private. France contrasts very strongly with the UK because it has a totally public insolvency and debt management system, effectively. We have a much larger role for the private sector, and I think we have suggested that there are problems with that. The French system has perhaps the disadvantage that it is relatively costly because the state is subsidising both the creditors, really, in terms of their collection, and the debtors. So I think there probably needs to be some balance between these two extremes-one with this very large private sector and one that is dominated by the public sector. We should have a situation where, for example, creditors contribute their fair share towards the management of over-indebtedness.

Chair: Thank you, that is very helpful.

Q33 Julie Elliott: What can the credit and debt management industry do to improve and regulate itself?

Dr Gathergood: At a basic level, vast improvements could be made if there were more readily available information on which consumers could base decisions about which personal insolvency option or debt management option to take. A private sector solution is not necessarily a bad solution, because a private sector solution has the virtue of competition to drive down prices and increase quality. However, competition will be effective only if consumers have some basis on which to choose between competing firms. The absence of that information makes it very difficult for consumers to make a choice. The single, simplest, lowest cost thing that the private sector debt management industry could do is publish more data on the quality of its products and the outcome for consumers who take up their schemes. That would be a leap forward in terms of improving the functioning of the industry.

Q34 Julie Elliott: Do you think they are likely to do that?

Dr Gathergood: Well, they do not, which suggests that they have a private incentive not to.

Joanna Elson: Can I just build on that? If you look at some of the advertising out there, you will see on these websites a 30-second debt test that will tell you whether you are eligible for a Government-backed IVA-surprise, surprise, you are, and then you are down this route. We take 15 minutes at National Debtline to work through with people, and we do not believe you can do it in less than that. We are forever trying to keep the times down because we want to be efficient, but we do not believe you can in all conscience give people a proper solution and work through their problems in 30 seconds. I think that is indicative of the problems that we have.

Q35 Julie Elliott: You mentioned credit unions, Joanna. Do you think there is a greater role for credit unions to play in providing credit to consumers, as has been suggested in the consultation response?

Joanna Elson: Yes, I do. Credit unions clearly are a very useful source of both affordable credit and simple savings for something like 900,000 people. Clearly that is not nearly the scale that would be needed to cope with complete demand across the UK. We welcome the fact that the Department for Work and Pensions is working with the credit unions on modernising and growing. There is a £73 million project to do that. I think that is absolutely the right thing to do but, in the meantime, you cannot wait for that to happen before you sort out some of these other problems.

Q36 Julie Elliott: Does anybody else want to comment on that?

Professor Ramsay: Credit unions are a tiny part of the UK market at the moment. Ideally, we might encourage them to grow, so obviously that is a useful objective in terms of providing an alternative form of competition in the market as well. But I think they can only be one part of the solution to high-cost credit. There are credit unions in other countries, and as they become bigger they become a bit more like regular financial institutions. It may be that the ideal of the small-scale credit union in a community is a very good idea but is not necessarily going to be a major solution to providing an alternative to the mainstream. I am not opposed, but I think one has to realise that they are a very small, tiny part of the market.

Q37 Ann McKechin: I wondered if you could comment; some of the evidence produced for the Committee suggests that in other countries mainstream banks are actually providing more of this type of credit than we experience here in the UK in terms of covering the market for people on low incomes looking for credit. I agree with you that credit unions unfortunately only have a very small share, but is it a fact that we do not have enough mainstream market products of sufficient range to allow true competition to occur?

Professor Ramsay: It is possible that your evidence was in relation to something like the Community Reinvestment Act in the US where the mainstream banks have an obligation to serve, for example, lower-income communities. They do this in a variety of ways. They often partner with community institutions, which might be credit unions, or work with communities. The general assessment of the Community Reinvestment Act is that it has been relatively successful. The question is whether that could be imported into the UK, and how we would get the mainstream financial institutions to do this, particularly in a period when they are under a lot of pressure in terms of recapitalisation. I think your point does draw attention to the fact that perhaps we have to think about how we can get the mainstream financial institutions to contribute more to lowerincome communities, using perhaps the Community Reinvestment Act as an idea but not necessarily trying to import it lock, stock and barrel.

Chair: Thank you. That really concludes our questions. We have another panel to interview in a moment. I will just reiterate what I normally say at the end of one of these sessions; if you feel in retrospect that you would like to add anything to any of the answers that you have given today, feel free to submit further written evidence to us. Equally, if you feel there is an answer to a question that the panel neglected to ask you, again feel free to give us the benefit of your expertise on that. Indeed, if we feel in retrospect that we have not asked a question that we should have, we will be writing to you for a response as well. Can I thank you. That was incredible helpful, and there is obviously a high degree of expertise in this particular area. Thank you very much.

Examination of Witnesses

Witnesses: Sarah Brooks, Director of Financial Services, Consumer Focus, Teresa Perchard, Director of Policy, Citizens Advice, Delroy Corinaldi, Director of External Affairs, Consumer Credit Counselling Service, and Martin Lewis, Money Saving Expert, gave evidence.

Q38 Chair: Good morning and thanks very much for agreeing to speak to us today. You may well have been in when I made my opening remarks to the previous panel, but if you were not I will just repeat them. Obviously some of the questions will be fairly general questions. I would be grateful if every member of the panel did not feel obliged to comment on every question unless of course they either wish to contradict what another panellist has said or feel that an area has not been sufficiently outlined to us. We do want to get away some time before lunch. Before I start, can I ask you to introduce yourselves for voice transcription purposes? If we start with you, Martin.

Martin Lewis: Martin Lewis from MoneySavingExpert.com.

Delroy Corinaldi: Delroy Corinaldi from Consumer Credit Counselling Service.

Teresa Perchard: Teresa Perchard, Citizens Advice.

Sarah Brooks: Sarah Brooks from Consumer Focus.

Q39 Chair: Thank you very much. Unfortunately the representative from Which? had to withdraw today, but their submission highlights that the value of payday loans taken out by borrowers has increased from £1.2 billion in 2009 to £1.9 billion in 2010. What do you think are the reasons for this? Are there more loans or are they higher value loans, and are you concerned by it? Who would like to lead?

Sarah Brooks: We did some research on this market last year and we estimated that it had grown fourfold in a year, so we are not surprised by the latest figures showing that this market has grown. There are several reasons for that, which you have heard before, around the sort of macro-economics that people are experiencing. All sorts of indebtedness are increasing across the piece.

The other thing is to do with the growth of the market entrants. There are very low barriers to entry to the high-cost credit market: £500 for a consumer credit licence and obviously some checks, and away you go. It is obviously a very profitable market as well. So some of the reasons are to do with demand and some are to do with supply. What we have seen is that, without some checks on the market, the problems associated with the payday loan market will also grow as well.

Teresa Perchard: Can I just add to that? It is quite interesting. We give advice to 2 million people a year, and many of them have debt problems. Among our clients, the number of people who have debts to payday lenders has gone up fourfold in the last couple of years, so that is perhaps mirroring the fact that this is a source of credit that is fairly new to our market. We would expect to see debt problems with repayment.

That slightly contradicts the purpose of the product. It is intended to be a short-term, small-value borrowing to get you to the end of the month, and that is it. What we are seeing is that providers are rolling over loans and people never get to pay them back. We are also seeing that people are taking them out to pay off other debts. It is consumers doing something they thought was useful to help them meet their other credit commitments. Instead of turning to the bank or some other credit provider or using their credit cards, they have turned to this new supplier, which we have heard earlier is very accessible and very quick, with very few questions asked, so perhaps they feel it is quite discreet as well and they will not be judged if they use it. Given that on some estimates we have 5,000,000 people in need of debt advice, it is not surprising to see the market grow if people are using it to get them through to the end of the month and meet their commitments, which includes paying off other credit.

Q40 Chair: Thank you. Martin?

Martin Lewis: Let us make no mistake about this: the United Kingdom is a crock of gold at the end of the rainbow for payday lenders who have been shut down all over the world and have been regulated. We are unregulated; they are taking over our high streets; there is a massive supply of advertising. They are using technological means to make it very easy, very quick and feel, initially, very painless. It is an attractive proposition. It is simple; they give you the money. It is their limited credit scoring that’s appealing.

You understand why people do it. While I would not want to shut them down completely, because we do not want to push people into the hands of real loan sharks, who threaten to rape your children if you do not repay, what we do need to do is not be the only Wild West for payday lenders. We need to start regulating how they operate rather than letting them regulate themselves. This is a massive growing problem that is only going to get worse unless there is some form of radical and quick intervention.

As Teresa says, though, it is not the loans themselves and those astronomically high APRs, which mean nothing; it is the rollover. It is the continued borrowing, which is when an APR and compound interest kicks in. It is wonderful that you are addressing this, but this needs regulating quickly because it is growing so rapidly that we are losing control. That is what we must do and you must tell the legislators that.

Q41 Chair: This brings me on to a question that occurred to me. I believe it was Sarah who said you just need £500 to enter into the market. If I, heaven forbid, decided I wanted to set up a payday loans company, what sort of regulatory hurdles would I have to jump to establish myself as a bona fide business delivering this service?

Teresa Perchard: Basically, if you are an out and out criminal with a record of violence or discrimination, which is one of the other areas of the law, you will not get a licence, but beyond that you do not have to prove any technical competence to get into the market. You will not be tested on your knowledge and you will not be tested on your business capability, whether you know about the service, whether you know about the law or whether you have enough money to run a decent business. It is easy.

Sarah Brooks: I would agree with that. One of the other problems is that there is no differentiation in the fees that the Office of Fair Trading will charge you. If you are setting up a business that is going to be more risky and need more supervision because of compliance problems, such as some of the issues around not all but some operators in the payday loan market, you will pay the same fee as anybody else. It is a flat fee. You can imagine that £500 does not buy you an awful lot of supervision.

With the payday loan market there are two types of detriment that arise: one, where firms do not obey the rules such as they are. That is around advertising and credit checks; some of them advertise that you just will not have a credit check. I hope we will have a chance to talk about credit checking later on. There is also an issue about the way in which they try to recoup their loans if you have problems repaying-when you have continuous payment authorities they can keep dipping in to your bank account, etc., etc. Those are the compliance problems, and the OFT has about 100,000 credit licensees, not all in payday loans but it is a big share of the market now to supervise.

There are also issues around regulation, as Martin has said. We know that countries like the United States have limited the number of rollovers, so you cannot roll over more and more times. If you are rolling over or taking out a loan five times, you have a long-term credit facility, so this is not suitable for you. At the moment we know that 3.2 is the average number of loans that consumers have in the payday loan market. If we act now, we can act before the market is dependent on consumers operating that way, so there is still a window of opportunity here to legislate. We would say that rollovers and credit checks are really crucial.

Delroy Corinaldi: For those who do not know the Consumer Credit Counselling Service, last year we advised 400,000 people with debt management problems. That is more than 1,000 people a day. We see people that have multiple debt problems. You will come on to debt management plans and various other things later, and we are in that space. Last year we did not collect data on payday lenders, but this year we are. In August-as I said, we help 400,000 people a year-one in eight of those people who came to us had a payday loan. So there is a transition in the numbers of people having payday loans as a product.

That is not to say there is not necessarily a need for them-some people want them and some people can repay them. Certainly, when we look at the data that are coming through to our social policy team, there are questions about the level of credit checking that goes on, and there are questions about the fact that these individuals have debt that they are struggling to repay and yet they are able to get payday loans. The other thing to reiterate is not all of the payday loan companies are as bad as each other, but we are now in a situation where there are so many of them and they have many companies underneath them, it is very difficult to tell which are the best and which are the not so good ones. In addition, you have the OFT, which is quite under-resourced and yet trying to deal with a whole host of companies in this area and, as we will come on to later, the debt management companies. It is a very difficult area.

Q42 Chair: You talked about broader regulation. Is there anything that could meaningfully be done at the initiation stage to stop irresponsible payday lenders opening up and starting their activities?

Martin Lewis: The first problem is that we have this farce of financial regulation being split between the FSA and the OFT, where the FSA is a lot more stringent than the OFT. The regulation Teresa talked about is not regulation; that is, "You are a criminal, you can’t do it." It is a farce. I have a member of my team looking to write a guide to payday loans. We are going to call it Best Buy Payday Loans, and what it is actually going to do is list the 20 things you should do before you get a payday loan, the alternatives and everything you can check, and then right at the end it will tell you how to do it safely.

While researching, the member of my team found in the space of 10 minutes a payday loan company that is not registered with the OFT. We reported it to the OFT. It is not regulated, and for the ones that are, if most of the rates they are quoting are representative rates, then my name is Anne Widdecombe. It is just not true. Those rates are not representative. What they do is they jemmy them so that they have the lowest possible rate, which is not what representative APR should be. It is a farce and it does not exist.

So yes, the barriers should be far more similar to what the FSA operates for people who have an FSA registration. Hopefully there is going to be some merger of the two, but it is for the on-going protection of the public. While the Wongas of this world get a lot of stick-I am not a fan-they are a lot cleaner than some of the smaller ones out there. You ask how we would start; we would start by regulating because we are not right now.

Teresa Perchard: You really need to speak to the OFT about this because what they would probably say is, "We do what we can." They do have powers. They have powers to determine how much they are going to charge for the licences in the first place, having regard to the costs of regulating. This could enable them, if they generated more fee income from licences, to have the resources there to take action when they found out that one of these companies was in breach of the OFT good policy guide on responsible lending.

They could, more quickly than they have in the past, say this practice of rolling over small loans is irresponsible lending because you are not making a new judgment about why that individual needs that line of credit. They could take more action than they do. It is all about resources and get up and go, and evidence about what is going on in a fast-moving market of lots of small businesses, in most cases. It is just not designed for the job.

The consumer credit framework that we have was built for old-style consumer credit products that were not sold on the web in the blink of an eye. Product regulation and control of the design of these products would prevent some of this harm building up. It would be cheaper than regulators chasing after businesses after the event. That is why the opportunity to move credit regulation to the new Financial Conduct Authority is appealing because the product intervention approach is mapped out as the approach that the regulator will take.

Sarah Brooks: I just wanted to say a bit about some of the options for regulation because there is always the possibility of self-regulation. After we did our research on the payday loan market, we convened a round table with industry regulators and some of my colleagues here to see what we could do by agreement. To give them credit, the Consumer Finance Association, which represents quite a number of the players came along, as did Wonga and a few others, and they took forward a plan to put into place a code of practice to address some of the concerns that we and other organisations had. Disappointingly, we could not sign up to the code that was produced because we did not feel it went far enough. Some of the things would be nice for some of the consumers, but they did not get to the heart of the difficult issues for vulnerable consumers.

The Government yesterday announced that they were going to work with industry to drive forward the self-regulatory approach here, but we think there does need to be the stick of regulation if that does not work.

Q43 Nadhim Zahawi: I wanted to pick up on the point that Martin made earlier about Britain being seen as the pot of gold at the end of the rainbow for many of these companies because they have been shut down internationally. Sarah, you mentioned a couple of areas where we could look at regulation: the rollover and the credit check area. What are you seeing, Martin, that is best of breed around the world in terms of regulation? Which countries have got it right?

Martin Lewis: I think it is very difficult to find a balance, because we are absolutely guaranteed to have loan sharks if we close payday loan companies down. This is the same issue as the drugs issue. Telling people not to use them won’t stop everyone, you need to also educate people about how to use them as safely as possible if they will. People are always going to need low-cost credit, whether it is right or wrong for them. What we want to do is provide it. There are other ways to provide it. You discussed credit unions before, and the Social Fund is something I would love to come on to later. I will just put in a marker now for that, if that is all right.

I think first of all, to go back to basics, one of the great problems is the APR percentages that companies are asked to produce are a farcical nonsense when it comes to short-term borrowing. I always use this example, and we will have a smile since it is a Tuesday morning. If we were in a pub and you said, "Lend me £20," and I said, "I will give you £20 but buy me a pint next week," and the pint cost £3, that is -I will not test you-143,000% APR. That is the problem with APR regulation on short-term borrowing because £3 on £20, over a week, if you compound it over a year becomes 143,000%.

The first problem here is that these lenders are advertising 5,000%. It means nothing and it is not putting people off. There is no price competition in this market, because if there were then nobody would do it. The current idea of comparison sites, which is a plan, is relatively weak; it is not about price. What we first of all should do is incorporate total cost. This should all be about cost; get rid of rates-rates are nonsense. Companies should have to dictate the cost of the loan, and there should be a limit on the total cost of any individual transaction, which includes rollovers, which is how I have come up with the rollover issue. I have not studied the numbers. It is not what I do; we look at individual products and what the system is now. As a concept, if you borrow £100, you should never have to pay back more than £150. That is roughly how I would do it; I would base it on cost. Do not take the £50 as my limit-that is conceptual. That would incorporate any number of rollovers, which would be effectively a ban on the number of rollovers going on. What you have to do, though, is be very careful, because the problem with the marketplace, with the proliferation and lack of regulation, is I go to Delroy as one lender, and I borrow from him but I cannot pay it off, so I then go to Teresa and say, "Can you lend me £150?" So effectively you have a personal rollover going on. We have to be quite careful about that issue.

If I were doing this, I would put a total cost cap on. I would talk to the decent players out there about what the total cost cap should be. I would make them portray total cost, which includes all possible fees, which they do not do right now. The APR is a farce. I will get on my normal hobby horse, as I do every time I give one of these. I would put compulsory financial education in every single school so that there is no one in this country, unless they have mental capacity issues, who cannot understand what they are getting into. At the moment what we have is a financially illiterate nation being duped by companies who have very swift and clever marketing.

Q44 Nadhim Zahawi: Thank you. Sarah, in your recent research, Affordable Credit – Lessons from overseas, you found that mainstream financial institutions from other countries were more willing to provide lending to low-income consumers. Why do you think that is not happening here and what can we learn from that?

Sarah Brooks: The example you are thinking about is Australia, I think. We looked at France, Germany and Australia, and in Australia there was a role for the mainstream banks in working with almost the equivalent Citizens Advice and CCCS in providing low-cost loans. Why is that not working in the UK? We held an event last year where we got together low-income consumers and industry providers and we tried to tease out some of the reasons why this is not working. Some of the banks were talking about regulatory hurdles to doing that, which was not particularly clear. We do need to do some more work in exploring that, but there are issues around cost.

However, there are also, we discovered, reputational reasons. For example, the first thing that anybody who works in high-cost credit has to get over is that, say, 40% APR would be very reasonable. I remember a colleague saying, "This not-for-profit company wants to charge 40% on a loan; that is absolutely ridiculous." But for a small organisation you would need to charge that just to cover your costs. Now banks could potentially charge less because of their scale, but they obviously need to turn a profit. There has been a reason in that they do not want to have those high APRs. They are worried about reputation, they are worried about being seen to discriminate between other firms, but perhaps if they could partner with organisations, as they do in Australia, that would help with some of the brand issues because it would be a sort of badge, and I am not setting up Citizens Advice as a lender here.

Martin Lewis: Can I just add in to what you are saying? Let us remember that banks do exactly this and they charge way more than payday lenders. If you go beyond your overdraft limit at the Clydesdale bank, at £35 per unpaid transaction, and you are £1 over, that isn’t 5,000% APR-that is billions. So they do it, but they do not dress it up as interest rates. I asked a credit union what they could do instead. They said, "Well, we would not get in because we would have to use the payday lending infrastructure. If you lend £100 it will cost you a fiver, and that will be a 600% interest rate, so we do not want to do it." The whole way it is communicated is a barrier to entry for legitimate lenders because of reputational damage.

Sarah Brooks: I would agree with that. Certainly when we have raised with banks why they might not be able to provide small value loans, small units, particularly to holders of basic bank accounts, there are several issues. There is a distribution issue around small units-how they get that into their product lines when they would rather lend in thousands rather than hundreds-and the brand reputation of charging what they thought they might need to charge for the small units for high-risk customers, but it should still be a better deal than consumers are getting elsewhere.

Q45 Nadhim Zahawi: How have they dealt with that in Australia? Or do the Aussies just not care about brand reputation?

Sarah Brooks: I think partly with these organisations they have been able to explain what they are doing and to reduce the costs, because if this is the sort of Citizens Advice product, they get the kudos for working with them.

Teresa Perchard: We are not doing payday lending yet.

Sarah Brooks: It is only £500 for a licence. The other issue is, of course, that there are some things that the banks do that drive people into the arms of the high-cost credit industry. Those are some of the things that Martin, Teresa and Delroy have brought up, but there are other issues around what they do not do. They do not provide short-term credit facilities for people-people who either use their overdraft or do not want one or do not want a credit card. So there are some people who use these products because they do not want the temptation of a long-term facility.

Not everybody who uses a payday loan is irresponsible. Things happen in life. People feel that this is a way of controlling their finances. So the banks could do more to have a buffer zone. We know that yesterday there was a voluntary agreement that the banks do that, but that is maybe £5 or £10, which is helpful. Perhaps a larger amount, more akin to some of these small payday loans of £100 or so, would be more helpful.

Delroy Corinaldi: It would be interesting if you spoke to the BBA, for example, the representative body for the banks, because we have mentioned the idea of their members being involved in this market, and they say it is not an area that they want to get involved in. I guess the profit is not there and the reputational risk is potentially there as well.

Just talking about payday lenders in particular, in the UK, what we discovered at CCCS, because we only deal with people who are in debt, is that when people fall into debt and we approach the payday lenders and say, "Look, we have one of your clients; will you accept a payment from us?" a number of them reject the payment. They do not want to deal with us. I am sure we will come on to this later when we talk about the fair share contribution. We then ask whether they are going to support a debt advice charity in helping these people through financial difficulty, and a number of them push back on that as well. It is moving them from seeing it as an innovative way of engaging with people and making money to actually being responsible as well, and not all of them are committed to being responsible. That is part of the difficulty.

Ann McKechin: I am tempted to say that perhaps our mainstream banks should be working with the Post Office. That seems to be the most obvious way to rebrand it in a way that would help the people on the lowest incomes by providing exactly the types of products you are mentioning. They already have a readymade network for it; we will perhaps touch on that later on.

Sarah, your evidence stated your concerns that payday loan providers are not complying with their obligations. You mentioned three things: advertising, credit checks and the way in which they are pursuing repayments. I wonder if you could just give a wee bit more information about those three things, and say whether there is a difference between the Wongas, the major payday providers, which Martin mentioned have a known structure and practice, and the very small providers that set up for £500?

Sarah Brooks: We should be careful not to give Wonga too much good advertising, I think. There are so many different lenders, some of whom are better than others, and they are the best known.

In terms of advertising, we monitor the press and we see all the different claims that come in. The latest one is, "If you borrow from us, there is no interest, provided you pay us back within eight days." There are other ones saying, "We do not do credit checks," which is illegal.1 There are all sorts of different ways in which they try to get you in, and once you have that conversation they can bring you in. We look at the OFT’s website, which gives details of the enforcement actions they have taken as they work through some of the complaints. That is the issue in terms of advertising, and there are plenty more examples of that. I can write to the Committee if you want further details.

In terms of credit checks, there is a big problem and it spills over to other parts of the credit market. One of the things that we looked at is whether payday loan and indeed other providers are doing proper credit checks to make sure you are not borrowing from here, there and everywhere, and you have no chance of paying it back. If you are, you should be sent to get some debt advice rather than robbing Peter to pay Paul.

We looked at those issues and we found out that the problem is that, despite the rules under which payday loans companies should take steps to do credit checking,2 they were using some of their own methods. They were not necessarily going in through the main framework as is done by the Experians and Equifaxes to check that there were not loans elsewhere, and that means they were borrowing wrongly. The system works by not only checking but also putting into it. If I borrow something from you, it is your job to make a note on the system that I have done so. So somebody else can come along and see that I have this debt. If the payday loan companies are not putting the information in, other companies cannot check. Even mainstream providers could then wrongly lend because of that.

Q46 Ann McKechin: Is that going on at a wholesale level? Could you give any idea of rough percentages?

Sarah Brooks: As far as I am aware, this is fairly commonplace practice among the payday loan market.

Q47 Ann McKechin: We are talking about £1.5 billion of debt that has not been properly recorded.

Sarah Brooks: It is hard to say whether they all do not record the debts. I really do not know, but one of the things we found is that there is no commitment to do this. I do not want to exaggerate this because it is very difficult to tell. The reasons for that are also very difficult to ascertain. If you speak to the Equifaxes, they would tell you that they make these products available, they are affordable and they are there. If you speak to the payday loan companies, it does not seem to be so clear with their products. They might say it is impossible to do the real time checks because the system does not work like that and it is very expensive.

It is very difficult, and we have tried, to get to the bottom of what is happening. In other countries like Germany there is one system, the Schufa, which is their credit checking system and which seems to be more widely used and recognised. However, here we have got to a system where the main providers, the Equifaxes, Experians and Core Credits, have for some reason not been used by the payday loan companies, who have set up their own systems.

Delroy Corinaldi: I guess we are quite fortunate in that, as I said, people come to us because they have multiple debts or they are referred to us because they have multiple debts. As a result of that-I think it was mentioned in the previous session-every year we produce an annual stats yearbook, which points to individuals, the type of debt that they have, their gender, etc. As I said in August this year, one in eight people had payday loans and we are now collecting those data on a regular basis, so that we can have a better sense of the types of people who are accessing payday loans and perhaps get under the headlines a bit more and look at some of the behavioural issues behind payday loans as well.

Martin Lewis: Generally, they are not on your credit file. There are only three companies that operate credit checking; there are only Call Credit, Equifax and Experian. It is not very difficult to check. Generally, payday loans are not on there and that leads to many problems.

Let us remember that there is a big problem with credit scoring, because unfortunately any application, even with a rejection, tends to go on your credit file and counts as a search, which is a problem in all forms of lending. For example when you want a loan, only by applying do you know what rate of loan you are going to get. If you then do not want the loan, you reject the loan but it is still on your credit file as if you had borrowed. There is a big problem there. My slight worry is that people apply to find out how much they will be charged, and that goes on their file and will then disenfranchise them from borrowing. Certainly, if you have the debt, we would like to see that on the credit file, but I am not sure that every application should be on the credit file.

Teresa Perchard: Your question is really what areas are they not complying with?

Ann McKechin: Yes.

Teresa Perchard: We would say that the business practice of some of the providers of payday loans-the rollover facility particularly, but also the way in which initial checks are done-does not comply with the OFT’s guidance on responsible lending. There is that, and also there are a wide variety of practices around handling of debt. Again, they are not all in full compliance with regulatory guidance on handling customers in financial difficulty. Those are the key areas.

Q48 Ann McKechin: You have all referred to the fact that you think the OFT is not the best regulator, but to what extent do you feel any confidence that the OFT is trying to enforce existing regulations or has tried to mount any prosecutions of these companies?

Sarah Brooks: I think it is a bit unfair to say they are not the best regulator. I think they have a very tough job to do. We wanted to have a competitive credit market; we thought that might bring down costs, etc., but it has not, actually-it has just made it more difficult to police. I think they are trying to do a very difficult job in difficult circumstances, and perhaps they are not always given the full tools they need to carry it out.

They do take action against firms, but of course they need to be alerted to that as well. It is triggered by a complaint, either by an individual or perhaps by an intermediary. It is not necessarily a proactive way of doing it. So there is an issue with that, and if we had stronger regulation and perhaps, as we said before, an appetite to increase the barriers to entry, that would make their jobs easier.

Teresa Perchard: It has never been in the right place, the OFT.

Chair: Could I just intervene? We have a lot more questions and we are going very slowly. I have to give evidence on behalf of the Select Committee at another meeting and I need to be away fairly promptly. Make your questions and answers short, and of course if there is anything you wish to add, please give it in written form afterwards.

Q49 Rebecca Harris: I want to go back to an area we were talking about, which is the APR rates for short-term credit and whether they are a good indicator for customers of whether this is a good product for them or not. Are there any ideas that you have for a better way for customers to know if they are getting a good deal or to shop around for a short-term loan, if APR is not working?

Martin Lewis: The only advantage of APR is that it scares off people who understand it, even though it is a farce. My only minor regret for getting rid of it would be that, but unfortunately it is not scaring off enough people. I think total cost, based on a number of examples, is a good idea. There are ways to formulate this within the industry. That is the way it has to go on short-term lending. It has to be: if you borrow £100 over two weeks, you will repay this amount. That is what we need to be telling people. How would you compare if you were doing it yourself? You would ask yourself that question. If I borrow £100, and I pay it back in two weeks, how much would it cost me? If I pay it back in another two weeks later, how much will it cost me? It is the simple and bleeding obvious answer, if I am honest.

Rebecca Harris: It sounds simple and bleeding obvious, doesn’t it? Is that the view of the whole panel?

Sarah Brooks: I think if you have transparent charging, that would benefit across financial services.

Delroy Corinaldi: Certainly, when our helpline staff and counsellors talk to clients, particularly those who are struggling in financial difficulties, they like to know what they are going to be repaying. That is the key thing for them. It is not about the APR because they are not looking at the APR; it is all about, "If I borrow this amount, I know this is the amount I will be repaying". It is often very difficult for individuals who have perhaps never borrowed money from payday loans; I do not know how many members around the table have actually been to a high-cost credit lender previously, but we think in different ways. Those individuals who are getting that money today from Provident or Wonga or whoever it might be, are asking the question, "How much, and how much do I repay?" That is all they want to know. Martin Lewis: It is important to remember that a 3,000% APR loan could be more expensive than a 5,000% APR loan because of the fees. That is what makes it all slightly ridiculous.

Q50 Rebecca Harris: You said that people who understood what a 5,000% APR was would be scared off and would not take the product, which takes us back to the issue of financial education and how we might want to improve financial knowledge. Are there any views you have on this?

Martin Lewis: I have been running a campaign for financial education for a very long time, and what’s needed is to teach every single child from an early age. We have 104,000 people who have signed the petition; I hope all members here, if we finally get it through the Back Bench Business Committee, will support it in Parliament. What we need is for both youth and adults to be financially educated. The Money Advice Service has a remit towards it. I know there was a letter to them the other day saying, "Do not take the money away from financial education." Why has that money been put into web provision when-I am rent-seeking here slightly-web provision of money information is one of the things we do rather well, as well as debt crisis information. It is a very competitive market out there. I run one of the biggest websites, so I would know. Via the Money Advice Service we are spending a lot of money on 60,000 people doing a test, rather than face-to-face advice and financial education. Well, I have already had 60,000 people use my website this morning. It does not need three months to do that. Where the Money Advice Service is putting the money is a really interesting point.

Financial education in schools, including debt lessons both in maths and in PSHE, is where you start. It is a long-term investment, and not a very expensive one, for society. It will be the thing that will stop all of us having to be here and wringing our hands every time some new clever devil comes up with an idea like payday loans that we have not regulated yet, and pulls a fast one until a couple of years later when people start noticing that it is trading on our high streets.

Teresa Perchard: Can I just add that financial education for adults is just as important, particularly to address the issues that Margot highlighted earlier, which is how to help people get a better deal and reduce their costs, improve their earnings, reduce their cost of living, and perhaps reduce the need for them to borrow from any sources. To provide that support in communities is something that Citizens Advice is doing increasingly, because we want to reduce the number of people who come to us for debt problems by supporting people earlier. It is entirely complementary to the campaign around education in schools.

Sarah Brooks: I just want to sound a note of caution because we absolutely support financial education-we think it is a good thing-but in a market that is very complicated, which seems to be geared to trip you up, it will never be enough. We also need to have measures to ensure the products are understandable.

Delroy Corinaldi: Very quickly, when someone is in difficulty, and a trigger is to go to a free debt advice provider like us, that income expenditure piece-when you do the budgeting bit with people and take them through what is coming in and what is going out-is exceptionally good for them. They will tell you that, because they then start looking at breaking down their budget and understanding it in a more formalised way. I think if we can get that message through to some of the parents and they pass it down, we are then in a position to see some real value from it.

Martin Lewis: We have a quite deliberately dramatised tool on the site: our budget planner. At the end you press a plunger and it tells you if you spend more than you earn, and we try to make it exciting. It has been downloaded well over 1,000,000 times. Unfortunately most budgets are just terrible. They look at a snap shot of the month and they say motoring; they do not say MOT and tyres, and repairs and petrol and breakdown. There is a problem that a lot of the public budgets that are put out there are very poor. They miss out Christmas and buying a sofa every three years, which of course needs to be accounted for over three years in the cost.

Once you do it properly with people and they start to understand that you do your budget and then go on to think about how you are going to manage your money afterwards-a budget is just a start; it is not the end but the start-it does start to work. These are tools that most people simply do not have themselves and they are not being provided particularly well. People like me and other consumer websites have them, and we have 10,000,000 users a month. It is a large amount of people, but the problem is that we tend to reach the people who know they want the information, not the people who do not know that they want the information and do not know what questions to ask. In many ways, I suspect, the proportion of my users who take payday loans is smaller than the proportion of the general society, which is the same for This is Money or Which? and all the other websites.

Chair: I think we have probably given this issue a fair airing. Can I come on now to Julie now? I think one of your questions is likely to have been answered.

Q51 Julie Elliott: My first question has been answered, which was about education for young people and adults. I think you have well and truly answered that question without me asking it. The second thing I want to ask, and I asked a similar question of the previous group, is what role do you think credit unions have in providing consumer credit?

Sarah Brooks: The Government at the moment are examining how they can expand the role of credit unions by the use of the Growth Fund, and I think the results are expected in January. Our organisation has done some research, particularly with the Post Office, on how that could work. Certainly in other countries, credit unions are very much part of the landscape. In the United States, 20% of the market is credit unions. In this country there are pockets in Glasgow and other areas, where they have been very successful, but as a whole it is hard.

What we see is that the barriers to entry that any bank experiences are there for credit unions. People like to have a high street presence, there is the advertising, and there is also inertia-switching rates are very low from mainstream providers. So, there are all sorts of barriers there, but we think we need much more diversity in the market both for credit and for current accounts. It is not just about competition being more of the same but about different providers coming in and challenging the current model. We would very much welcome credit unions taking a bigger role.

Martin Lewis: Whilst I am a fan of credit unions conceptually, the problem is that their rates are not that good for a rate tart like myself, and that is what I do. Where are the best rates? It is not with credit unions. What is happening with payday loans especially, which is about quick, easy convenience, is also not replicated by credit unions. That is not a slur on the credit unions; it is partly the regulations, which are changing next year. But they are not a particularly attractive and easy proposition for many people, though we should enable them to be so.

It always interests me when people see credit unions as the panacea. I always think of a building society as the big brother or sister of a credit union. The problem is that when building societies grow, especially the really big ones, they give you profit forecasts, charge bank charges and operate in a relatively similar way to banks. There is the balance: how do you keep them small, friendly and community-oriented, which is when they tend to do the really good and beneficial things, but then have the quick shimmying operation and convenience, which is what people are crying out for, especially in the payday loan-type market. It is a difficult circle to square.

Q52 Julie Elliott: If you do not think payday loans are the answer at that end of the market, what kind of product can come in there to fill the gap?

Martin Lewis: I would first of all educate people. We need to cut bank charges to start with, so that people are not using payday loans to avoid bank charges, which, if you ask me on a technical basis, is the right thing to do, because payday loans can be cheaper than bank charges. You are often right to take a payday loan to avoid bank charges. That makes it very difficult. I am doing that purely on the basis of numbers, ignoring whether it is good or bad for you in the long run. On a piece of paper, certainly, a payday loan is usually cheaper than a bank charge. So, we need to improve that.

We need to improve education and budgeting so that people do not get there. What is happening to the social fund is just horrendous. You can get an emergency loan or a budgeting loan-a budgeting loan only if you are on benefits and an emergency loan for anyone with less than £6,000 of savings-which is at 0% up to £1,500. There are three big problems. One, it is very inflexible borrowing due to the repayment terms. People do not go to the social fund for payday loans because it is very difficult to repay them; it is rigid and strict, and the money is not out there. Two, it is a postcode lottery, depending on where you are. If you are in a poor area, they are all used up quickly; if you are in a rich area and you are one of the few poor people there, you’re more likely to be able to get one. Finally, I believe it is going to become discretionary for local councils going forward, and I do not see, with the budget cuts at the moment, that they are going to be offering them. What we used to do is have a state-funded social fund that was there to supply short-term lending for people in emergencies, and in the midst of the payday loan boom, we are taking it away. I do not get that.

Q53 Margot James: Could you comment on the Government’s response to the conclusions of the personal insolvency review, particularly with regard to debt management organisations?

Delroy Corinaldi: Most of you will know from our submission that CCCS brought debt management plans to the UK in 1993. We probably have the largest share of the market, even though we are a charity, which is about 30%. We look very closely at what the Government said with some concern regarding the role of fee chargers and whether or not more can be done to clamp down on them. Certainly, our clients are particularly concerned that more needs to be done. When you are in financial difficulty and you are looking to go on a debt management plan, it is a distress purchase; you are feeling very vulnerable. You are feeling quite embarrassed, and you will reach out to the first arm that reaches out to you, and that first arm tends to be the fee charger because they have the advertising budget. I heard Joanna from Money Advice Trust in the first session talk about this-the misleading advertising that goes on. If you go to Google, for example, and put in "National Debtline", you will be swamped by fee chargers who are trying to get in on that sector. I think more can be done in terms of the licensing conditions around debt management companies, around the regulation, and around the lack of transparency.

Martin Lewis: I do not do this-we tell people to go to them-but I think one of the problems is exactly as Delroy says. Within the financial advice market, we have different tiers. There are tied agents, multi-tied, and independent financial advisers. Within the debt management market, Christians Against Poverty and the Consumer Credit Counselling Service are exactly the same as somebody out there who is trying to make a lot of money and is going to make your problems a lot worse. It seems to me you could have different categories and different stamps that you could call yourself. When some companies say they are free but then charge fortunes on the back end, they are free at the point of delivery only. A little bit of categorised regulation that says you have to use the right terminology would be very useful, and not particularly expensive to do.

Teresa Perchard: On the Government’s response, as Joanna highlighted earlier, the regulator has reviewed the debt management market and found it wanting on a number of points about charges and quality, so there has been very clear evidence. That is backed up by advice agencies, who see poor and inconsistent service at a high price from that burgeoning market, but the solution proposed is to develop a self-regulatory protocol, just focusing on the debt management area. There are nearly 4,000 people with licences to undertake debt management at the moment, and only 17 are in the leading self-regulatory membership body, so it is hardly going to touch the sides in that market.

We think the response should have been stronger, and particularly to implement some legislation that is already on the statute books, the Tribunals, Courts and Enforcement Act 2007, which cost a lot to put through Parliament. It provides the means to bring into play a statutory debt management scheme, which would put all of the services that are being provided on the same basis.

Because it is a distress purchase, people do not go shopping for the best debt management provider; they are cold called. They are not comparing price or service, which in a way is the same as the payday lenders. There are real differences in what they are offering, and on debt management there is quite a significant consumer detriment there, and the regulator needs to define the product and the service to prevent that occurring, which is our view. "Disappointed" is the view.

Delroy Corinaldi: If I could come in quickly, all roads lead back to the OFT, of course, because the OFT has a role in regulating the sector, and one of the things we call for is an increase in the amount it costs to get a credit licence. There are many hundreds of these firms around, and the client does not know where to go. If the OFT could increase the size of the credit licence for these debt management companies, then you would at least start to drive out some of the bad players in the market. That would be helpful.

I think you have two voluntary codes for the fee chargers out there, DRF and DEMSA, and they are indicating that they are doing some good things. It was only last week or the week before that one of them identified a fee charger that is masquerading as a free-to-client debt adviser, and what they then did, which they saw as a success, was to make it public that they had actually put a fine against them and were trying to clean up their act. Well, who is the firm? They did not identify it. How much money did they make out of clients while they were masquerading as a free-to-client provider? They did not state that. I think there is a lot more that can be done.

Finally on the OFT side of things, we do not know who they are and we do not know how much money they made. It is quite likely that they are still walking around with an OFT logo on their website saying that they are OFT approved. A lot more needs to be done to clean up this sector, and it needs to be done pretty soon. As the previous session said, a lot more people are going to fall into debt.

Chair: I think we have the message. You have one more?

Q54 Paul Blomfield: On debt advice, do you think the Money Advice Service is best placed to co-ordinate provision?

Teresa Perchard: There is no reason why they cannot do that effectively. They have a statutory base for their existence. They also have a very good relationship with the Financial Services Authority to, for the first time, generate funding for money advice, debt advice, on a levy basis applied to financial firms-something that has been under debate for decades. They are undertaking a review at the moment, looking at what the services need to look like in the future. We are working very closely with them to make sure they understand what is currently available and what the needs are. There is no reason why they cannot be an effective co-ordinator. They have the resources and are being assisted by people like us to understand what the needs and requirements are in future.

Q55 Paul Blomfield: Specifically following on from that, Teresa, how is that going to affect you and the funding you receive to provide advice?

Teresa Perchard: It is difficult to be certain. Right now, the funding that the Government have been providing centrally for face-to-face debt advice in certain communities is protected for this financial year. Those services are still in place in many constituencies. The Money Advice Service has asked the Financial Services Authority to approve a budget for next year that will be sufficient to continue with those services for another year while decisions are made about what happens in 2013 and 2014.

If the service levels go down while demand levels go up in 2013 and 2014, there will be more limited capacity in CABs and other local advice agencies, and possibly also the National Debtline, which is funded out of some of that money. It could be open to competition, and that might result in a very different pattern of service delivery. At the moment it is difficult to say what capability the Citizens Advice Bureau service will have to deliver debt advice in two years’ time.

Coupled with the reduction in legal aid funding for specialist debt advice, the funding cuts that are coming in under the Bill would mean that 100,000 people who currently get help under the legal aid scheme with debt problems would not in the future. We face rising demand and reduced resources, so you can draw your own conclusions from that.

Q56 Paul Blomfield: Martin looks like he is itching to comment as well.

Martin Lewis: The Money Advice Service is a good concept, but I think there needs to be some focus. It has unique properties to do things that nobody else can do, and I slightly worry that it is not focusing on what it can do uniquely; it is trying to brand build in areas where it is not necessary. I have spent two years keeping my mouth shut on this, and today is the first day I have said it, because I think we have got to that point. I have had e-mails from people who work in the organisation saying that it is trying to brand build and build a big website, if I am going to be absolutely frank and honest with you. Personally, I do not see the point.

I would love to have a stamp-someone to check that we are compliant and doing everything right, as I am sure many of the other big editorial money websites would love-that means we can say this is being done. We have 10 million users a month; I e-mail 6.7 million people per week. ThisIsMoney is big; LoveMoney is big; Which? is pretty big – all I believe very substantially bigger that the Money Advice Service. We all do our best. You might say that we do some things you do not like, in which case, come and tell us and we will try to improve it. But why are we spending public money competing with that?

I would love the Money Advice Service to be out there doing financial education, dealing with vulnerable people and giving face-to-face and telephone advice, which there is no provision to do on any other basis, and helping debt services. But at the moment it seems to be concentrating, to a certain extent, on brand building. They are going to hate me for saying that, but it is a very deep frustration of mine. Yes, it can do the job if it looks in the right place, is my answer.

Chair: Simon, did you wish to come in?

Simon Kirby: Only to say thank you very much, it has been a very interesting session. I represent some 30,000 people in the most deprived areas of the country in my constituency. The issues are very important ones. I thank you for your input and your frank and honest answers.

Chair: Yes, I think Simon has articulated that, as Members of Parliament dealing with these issues on a day-to-day basis in our constituency, we are appreciative of the work that is done in this area and ever-conscious of the need to improve it. Hopefully, this session will go some way towards doing that. I will repeat what I said to the previous panellists: if you feel there is anything that you have not covered that you would like to, feel free to give us some further written evidence, which will be incorporated into our final recommendation. That has been incredibly helpful. Thank you very much for your attendance and for being so disciplined towards the end.