Business, Innovation & SkillsWritten evidence submitted by A4e

As providers of a wide range of front-line public services to the socially and financially excluded, A4e has rich experience of the multiple challenges people face in staying afloat. Within the broad range of social welfare issues which occur across our customer base, we witness disproportionately high levels of personal debt; limited access to affordable financial products; joblessness; poor skills; poor health (both mental and physical), and a need for consumer protection.

Since demand for consumer credit loans is largely counter-cyclical, the current economic climate makes it all the more important that the Select Committee is seeking to draw attention to this issue. Often very vocal representations are made on behalf of the credit industry itself, yet they have little experience of the problem from a social justice perspective, and no reason to approach the issue in terms of the well-being of financially vulnerable individuals. The safeguards which many respondents on consumer credit and insolvency1 have flagged up (such as the five new rights for credit card customers) are often irrelevant for our customer cohorts, because so many of them are unbanked, and excluded from mainstream financial products. These are the customers who pay a poverty premium on pay-day loans and other expensive forms of credit.

Our customers are more likely to need credit, yet less likely to gain access to it. If they do manage, they are more likely to fall prey to unscrupulous practices, and that in turn is likely to affect them disproportionately. If they are unfairly dealt with, because of their financial capabilities, they have less chance of redress. For this reason, we think it important to speak on this issue from the perspective of our customers.

There is a clear social justice case for tackling the UK’s high levels of personal indebtedness. Yet tackling debt is also an issue that is integral to the growth agenda. High levels of debt are stifling consumption, and depressing Britain’s local economies. These reasons make it imperative to act now.

Growth

Debt is not a bad thing per se, and easy credit can have an expansionary effect on the economy. However when levels of debt get too high, it has the opposite impact. In the immediate term, a one-off measure to reschedule the worst of consumer debt—the debt that is anyway unlikely to be repaid—could act as a quick and easy stimulus to the growth of local economies. Growth measures tend to be supply-side; centring around the provision of skills or infrastructure. As such their effect can take many years to be felt. If the Government were to reschedule the problem debt of the very poorest, it could act as a progressive way of putting pounds back into consumer’s pockets, fast.

The case for action is this: Places with high levels of personal debt map accurately onto the UK’s most sluggish local economies. People put all their income into servicing their loans, and consumer confidence remains depressed. In any case, because consumer debt is not a “priority” debt, lenders frequently register losses on the people targeted by the measure we propose. Therefore as well as helping the individuals concerned, this measure aims not to damage, but to increase the chances of lenders recovering their money from those who have taken out high interest loans in times of crisis. If the Government were to take advantage of historically low bond rates and purchase “problem debt” from high street lenders at a reasonable margin of perhaps two-figure interest, then consumers would have a greater chance of repaying those debts in full than they do at punitive four-figure interest rates. Creditors would get an immediate buyout that is higher than the initial cost of the loan, with a small portion of the rescheduled payment going to the Treasury to cover the cost of transaction. This sort of stimulus would be highly targeted geographically, and extremely progressive. Although the government temporarily assumes the role of creditor, it would provide the government with savings in the medium and long terms as those people spiralling into debt avoid incurring further problems and reliance on the state for their welfare. It would be a measure for social justice and for growth at the same time.

Debt sits in a Matrix of different Problems

Our experience shows that financial difficulties almost always sit embedded in a network of other problems. The role that the Work Programme can play in tackling these issues holistically is a great positive—it being the case that the alternative of disparate services and disparate points of access create a confusing customer experience, and militate against the chances of resolving the problem.

Because of the causal relationship between different welfare issues, early identification and early intervention are key to solving debt-related difficulties efficiently and at root. To illustrate the process of escalation that can ensue following a relatively minor setback, the diagram below reflects the real life experience of one of A4e’s Flexible New Deal customers.

Case study: A4e customer experience

If different welfare problems for which different advice services currently exist in isolation can be shown to spring from the common origin, then early intervention is key. Otherwise we risk simply dealing with the disparate manifestations of debt troubles. Indeed we have found that focussing on the immediate symptoms can create a dependency culture—50% of customers in our Community Legal Advice Centres are repeat customers, because the constraints of the silos in which government-sponsored provision operates mean that such advice is not necessarily linked up with changing the behaviours that precipitate the need for advice in the first place.

An easy means by which to ensure prevention rather than cure is to make financial advice available, and consumer rights known, at an early stage. As a nation we spend millions providing financial advice each year. This provision is fragmented. A way to make sure that the funding that exists meets its mark most efficiently is to offer it to people who are at the point of loan, advertised at the expense of the creditor. Currently there exist strong incentives to purchase financial products at the point of sale, however consumers need sober disincentives as well. Better publicity of debt advice would also address the fact that only one in six people for whom debt payments are forming a “heavy burden” are accessing the advice they need.

The Open Society Agenda

A4e has conducted a series of focus groups with our customers in order to gauge their opinions on the Open Public Services agenda, and found that they overwhelmingly support the idea of diverse provision, caring most about the quality of service and not the identity of provider. As healthy as such a diverse public services ecosystem can be, the fragmentation of advice services run by different bodies can create a confusing experience for those accessing debt advice. In the interests of a more seamless experience for the customer, it should be possible to direct people through a single interface, behind which sits a diversity of providers and channels of advice. If the initial sign-posting work was done largely face-to-face, with subsequent case-work done over the phone, savings could be made at the same time as improving access to provision for disadvantaged customers.

A Predatory Market

Unfortunately, financial education can only go so far. The Barrow Cadbury Trust has show that currently only 10% of debt comes from profligacy2. Now more than ever the need for credit and the surge in payday loans reflect the fact that people are finding it hard to pay their basic household bills. The dramatic rise of Wonga is just one of the signs that this problem is out of hand. Voluntary regulation is evidently not working, with the market getting more powerful at the expense of the poorest consumers who pay a premium to access the credit that their better-off counterparts can get for cheap. If the Select Committee is not minded to recommend further regulation or capping interest rates at the most pernicious end of the consumer credit market, then recommendations should take positive steps towards creating a more level playing field for Credit Unions and ethical lenders.

12 December 2011