1. The Social Fund and the wider financial inclusion agenda

Overview

1.1 There is much going on across Government to improve access to affordable credit. The Social Fund is one important part of this strategy and it has been a core part of the welfare system for the past twenty years. It provides valuable support to people – both to those in work and those who are dependent on benefits – who are facing large or unexpected financial pressures. It provides them with a safety net, in the form of grants and interest-free loans, where they are unable to access affordable credit or other mainstream credit from elsewhere.

1.2 We believe that people’s basic needs should be met, but we want to take this further and build a society where everyone is able to play a full and active part. As Adam Smith said, “necessaries” should be recognised as “whatever the custom of the country renders it indecent for people to be without [such as] a linen shirt and leather shoes”.

1.3 Issues of credit and debt in a modern society are complex. Access to credit can enable people to deal with fluctuations of income and spending and manage their lives better: it can open up opportunities. But the level, terms and conditions matter, as does an individual’s ability to understand credit, manage it appropriately and know where to go for help if it starts to become unmanageable. If credit is too costly or borrowing is excessive, people can be driven into a vicious cycle of debt which traps them financially. This can have profound effects on health and wellbeing; limiting the options for them to move into work and develop their own and their children’s lives.

Tackling over-indebtedness and promoting financial inclusion and capability

1.4 In a difficult global economic climate with many people facing new uncertainties and challenges we recognise that it is more important than ever to provide real help for people who need it at the times when they need it most.

1.5 For many people, credit is a lifeline that enables them to deal with any unforeseen emergencies that arise. Indeed, it is increasingly hard to manage finances successfully in modern society without access to services like credit, savings or a bank account. In a complex financial world, it is all the more important to ensure that people know where to get practical, impartial financial information and guidance.

1.6 Exclusion from financial services creates barriers and can lead to additional costs, particularly for those on the lowest incomes. It can be harder to get a job without a bank account to receive wages, and utility bills are higher for those unable to take advantage of the discounted rates available to those paying by Direct Debit.

1.7 Those unable to access conventional forms of credit may either be forced to look for credit from expensive money lenders, or worse still, turn to illegal lenders to provide help in the short-term^[2]. In many cases, people simply have to go without the things they need.

1.8 These additional costs can add to over-indebtedness; that is, debt which has become a major burden for the borrower. This in itself is one cause of, and a significant barrier to tackling poverty and social exclusion. Significant debt can act as a barrier to work, and make it difficult to save and plan for the future. All of this can result in additional burdens on the taxpayer^[3].

1.9 Recent research for the Friends Provident Foundation shows that 1.88 million people either have no access to credit or are excluded from mainstream sources of credit and can borrow only from high-cost lenders.^[4]

Smoothing the transition to work

1.10 We are also aware that, for some people, money worries or fear of debts, which may include having to repay a Social Fund loan, can act as a barrier to finding work or remaining in employment^[5]. Furthermore, we would like to do more to help people make a smoother transition into sustainable employment.

1.11 As part of our strategy for improving work incentives, we will seek to address the impact of debt. We want to do more to build on the Government’s financial inclusion and capability strategy to help more people make the transition to work.

1.12 As mentioned in the recent DWP White Paper, we intend to improve awareness for our Jobcentre Plus personal advisers so that they are able to signpost customers to financial advice. We also intend to make links between the Better off Calculation, the Money Guidance service and sources of debt advice as appropriate^[6].

1.13 We are looking at how the Better off Calculation (a tool used by advisers to compare a customer’s current financial circumstances against their potential circumstances if they moved into work) could be linked to the Money Guidance service or sources of debt advice as appropriate, enhancing the contribution that this process makes to tackling financial exclusion, addressing low levels of financial capability and avoiding unmanageable debt.

1.14 In addition, we are also introducing an enhanced Better off in Work Credit that will assure everyone who has been unemployed for 26 weeks or more that they will be at least £40 a week better off on moving into work. The Credit will be implemented in one Jobcentre Plus region from October 2010 and we expect the Credit to be available nationally from January 2011.

Access in rural areas

1.15 Families and individuals in rural areas experience the same financial challenges as people living in towns and cities. But living in a rural area may bring additional challenges.^[7] Higher service costs in rural areas can present difficulties when delivering financial support services. This can result in the services required to promote financial inclusion (credit unions, debt advisers, banking facilities, etc) being less accessible.

1.16 Transport difficulties can make it problematic for customers in rural areas to travel to appointments. For this reason, it is important to recognise that support may be needed to compensate for the higher travel costs incurred by customers. The Government already provides support to customers who are asked to attend appointments and interviews, and any additional attendance in connection with support that Social Fund customers are asked to access could be similarly supported.

Access to credit

1.17 Options for those on low incomes to access credit services can be limited: an inability to access mainstream credit may mean their living conditions suffer severely, or they are forced to turn to high-cost, or even illegal, money lenders^[8].

1.18 The Social Fund is one element of the credit market. The single national loans budget for 2008-09 was £624m, and the majority of recipients were people on low incomes. We know that there are other forms of credit available that Social Fund customers may make use of. For example, in 2006 the Competition Commission estimated that the agency mail order and home credit markets were advancing around £2.9bn and £1.3bn respectively^[9].

1.19 Home credit, or doorstep, lenders provide a high-cost but often flexible and easy-to-understand service, where missed payments and a doorstep collection business model are factored into the total sum to be repaid from the start. Whilst the doorstep delivery model and the option to miss the occasional payment are valued by customers, these services come at a high cost. Typical Annual Percentage Rates (APRs) of interest range from 272 per cent to 545.2 per cent^[10]. The upcoming review of high-cost credit currently being conducted by the Office of Fair Trading will discuss this matter in further detail.

1.20 Furthermore, advice from researchers, including some of those who contributed to a study into the costs of home credit for the Joseph Rowntree Foundation in 2009^[11], suggests that as many as one million households may have lost access to home credit as a result of the economic downturn and will find it difficult to get credit elsewhere. This creates unmet need and may tempt people to use illegal lenders.

Financial mobility

1.21 The Competition Commission Report in 2006^[12] gave examples of mean effective APRs for a range of providers. At the time of the report it suggested that a credit union might typically charge around 26 per cent APR, Agency Mail Order companies around 90 per cent APR, a provider of home credit such as Provident Financial at that time would charge more than 170 per cent, whereas mainstream credit from High Street banks was available at less than 20 per cent APR.

Increasing access to affordable credit

Social Housing

1.22 The social housing sector has begun to play a role in the affordable credit market. A small number of larger housing associations have now either established financial services divisions in-house, or are working in partnership with credit unions or Community Development Finance Initiatives to deliver loans products and insurance products to their tenants. These services are supported by the Department for Work and Pensions’ Growth Fund and the Financial Inclusion Champions initiative, but the present scale of delivery is small and will reach no more than 20,000 customers next year without significant further development.

1.23 These developments have shown that the sector has an appetite to play a role in this market. The Government welcomes this, but also recognises the limited effect it will have in the foreseeable future. The Government is therefore particularly interested in the proposals of the National Housing Federation to act as a broker between major housing associations, banks and Government funding sources to develop and deliver a £3 million regional, not-for-profit financial services provider. This pathfinder project could serve a further 30,000 financially excluded people.

1.24 The project could act as a means to enable potential partners and investors to test the viability of the business model before commercial investment in a major national project was sought. The ambition is that the national project could ultimately serve up to 1 million people who could not get affordable credit from other sources.

1.25 The Government is watching these developments with interest and is talking to the National Housing Federation to support early development where it can. It welcomes this initiative which could potentially meet the needs of many who suffer from the problem of high-cost credit.

Banking at the Post Office

1.26 The Post Office is a trusted brand, and is seen as a safe, secure and reliable provider of services. The Government’s decision in November 2008 to award Post Office Ltd a new contract for the Post Office card account, offered through the Post Office network, provided a foundation on which it can build as it seeks to meet the challenge of providing financial services at the heart of people’s communities.

1.27 The Post Office already offers a wide range of financial services. However, the Government believes that now is the right time to expand the Post Office’s range of financial services products – to build on people’s desire for a local bank they trust and to ensure that essential financial services are placed in the heart of communities. These products should serve the whole community – not just sections of it – and include those who may have difficulty accessing other banking products or institutions.

1.28 “Post Office Banking: a consultation on developing the banking and financial products and services available at the Post Office” was published on 2 December 2009. This set out the Government’s vision for banking at the Post Office and asked for views on this vision and additional financial products and services the Post Office could offer. Interaction with Social Fund services was discussed and questions were raised in the consultation:

“The Government already offers and supports substantial credit services for people on low incomes, such as Social Fund loans and credit unions; what other range of services could the Post Office offer to support those on low incomes and address financial exclusion, and how could these best be made to work together?“^[13]

1.29 The consultation closed on 24 February. The responses are now being considered and the Government will respond in due course.

Working with the third sector

1.30 In the Pre-Budget Report, the Chancellor announced a commitment to take forward work on a Social Investment Wholesale Bank which will aim to leverage investment for organisations with a social impact from a wide range of sources and improve their access to finance. The Bank will also aim to increase financial inclusion by supporting Community Development Finance Institutions and credit unions. He also announced an intention to provide up to £75 million for initial capitalisation from the Dormant Accounts Scheme, subject to the final volume of funds and alongside funding other priorities.

Credit unions

1.31 Many of the larger credit unions have shown that they can act responsibly to provide affordable credit and banking services to poorer people. But they face a challenge in developing cost-effective infrastructure to deliver at the scale required to make a major contribution to the problem faced.

1.32 Measures have been taken by the Government to help the credit unions to make these changes. A Legislative Reform Order was laid before Parliament on 8 March 2010, which will enable the credit unions to compete in the more commercial world in which many now operate.

1.33 The Order, which is due to take effect in August 2010, will enable corporate membership of credit unions so that companies interested in investing in their development may also become financial stakeholders and benefit from the business. The common bonds which restrict the size, consumer appeal, and opportunities of credit unions are to be relaxed. It will be possible for them to advertise and pay rates of interest on deposits in the same way as a bank or building society, rather than declare a dividend after they have closed their accounts. This measure will allow credit unions to attract the new range of members that they need to develop sustainable financial business.

1.34 At the same time, many credit union current accounts can be accessed across the Post Office network, but it is more difficult to ensure the same level of accessibility for credit union savings accounts. The Post Office Banking Consultation invited views on access to credit union accounts through the Post Office.