Executive summary

Over the last twelve years we have coupled our radical welfare reform agenda with an ambitious programme to tackle financial and social exclusion. This has been against a backdrop of a rapidly evolving financial services sector and a major transformation of welfare delivery.

The Social Fund was established over twenty years ago to provide interest-free loans and grants, mainly to people in receipt of income-related benefits. Elements of the scheme continue to provide appropriate and effective support for those on low incomes. However, it is operating in an environment which is very different to the one in which it was developed. It is becoming increasingly hard to manage finances successfully in modern society without access to services like credit, savings, a bank account or financial advice.

The Social Fund has remained largely unchanged in the two decades since its introduction. As a consequence, there are a number of limitations with the scheme as it operates in today’s world. In terms of policy:

• it focuses on the short-term needs of the customer and for some people can encourage frequent use of the system without addressing their underlying financial needs or problems or helping improve their financial capability;
• it is a passive scheme that does little to help people build up personal financial management skills; and
• it is a complex scheme. Customers can find it hard to understand eligibility and payment arrangements and to know what element of the scheme they should apply for.

There are also delivery challenges that we aim to tackle:

• there has been a much bigger increase in demand for Crisis Loans than Budgeting Loans, reflecting a problem in the structure of and access to the loans scheme; and
• additional pressure on Jobcentre Plus and the associated costs.

Reform of the Social Fund is essential to maximise its effectiveness and establish its relevance for today’s world. Our principles for reform below underpin our vision for a scheme which:

• is active rather than passive;
• makes it easier for customers to get one-off or occasional support;
• provides more support to frequent users of the Fund to help them tackle the underlying problems they face and move towards financial independence; and
• provides better value for money for the tax payer by reducing the number of frequent users.

In practice, this means a phased approach to bring about a more powerful and sustainable scheme which does much more than address the immediate needs of our customers. Therefore, we will look to bring about a range of early changes to address some key issues and steer the scheme towards its proposed role as part of the wider strategy of greater financial inclusion and capability. We also want to consult on a range of further medium-term reforms to the scheme to make the Social Fund more effective and suitable for today’s economy.

The early changes we want to make are designed to provide better help now to some of the most vulnerable individuals and families:

• changes to Budgeting Loans so that more people can apply for smaller loans earlier in their benefit claim – allowing access from Day One of benefit entitlement will prevent people from needing to apply for a Crisis Loan or having to borrow from high-cost or illegal lenders;
• a requirement to attend an interview for those customers who make repeat applications to Crisis Loans, and more stringent checks on what the loan is required for;
• more and better signposting of customers to sources of financial support, including money guidance;
• additional help from the Funeral Payments scheme for students; and
• contracting with major suppliers to provide a range of goods and services for people to access instead of cash grants.

However, we want to go further over the medium term to ensure that the system meets the needs of its customers in the future. We are consulting on ideas to:

• provide more straightforward and simple access to one-off or occasional loans, to deal with immediate problems through a quicker and more streamlined application process. This will enable more certainty and clarity for customers;
• align this with stronger support and conditions if customers make repeat applications for loans or grants, in order to address their more deep-seated financial problems. For example, we would like to hear views on proposals for a requirement to take up a full financial health check, so we can see whether the claimant is receiving all the benefits they are entitled to, to ensure that they are being directed to financial advice, to look at any debt they may have, and to see that they are taking up any additional help with, for example, housing issues or to return to work;
• consider which organisations might be best placed to provide this more personalised interaction and wider support to meet the needs of our most vulnerable customers, and at which stage it should be provided in the interaction we have with them. We would like to hear views on whether more intensive support might best be delivered by Jobcentre Plus, local authorities or third sector organisations, or possibly a combination of providers;
• require those customers who make repeat applications to develop and agree action plans with advisers, similar to those being made in jobseeker arrangements;
• look at ways in which we can refer the minority of our customers who frequently use Crisis Loans who have very complex needs to other services, or require them to take up more holistic support; and
• simplify the grants scheme and support those people leaving care or fleeing domestic violence with a regulated resettlement grant.

This Green Paper sets out our proposals for how we could deliver that vision. We believe that the Social Fund is in a unique position to help to promote financial and social inclusion and ultimately to help those who can, to move towards the labour market. By looking at a more holistic package of financial inclusion and capability measures, we want to prevent people, particularly the most vulnerable members in our society, from having to face the avoidable costs of over-indebtedness. Financial exclusion brings with it real and rising costs for individuals and their families, and these costs are often shouldered by people who can least afford them. This approach is underpinned by HM Treasury’s Financial Inclusion Action Plan for 2008-11.^[1]