This is an historic moment, but more could be done right now to tackle rip off lenders

After fifteen years of campaigning on the issue, we are delighted that Government today included provisions within the Financial Services Bill to provide regulators with the power to cap the cost of credit agreements.

The Government amendment sets out a general power for the new Financial Conduct Authority to make rules that:

• Prohibit the charging of certain types of fees which it considers to be unacceptable; and


• Prohibit the charging of costs above an amount which it specifies as unacceptable.

Further to this, the FCA is to be provided with a power to prohibit ‘rollover’ lending, which is commonly used by payday lenders.

In the event of a breach of any such rules, agreements will be unenforceable, with any payments made by the borrower recoverable from the lender, and the lender will be liable to pay compensation to the borrower.

Welcoming the Government amendment, Damon Gibbons, said:

“This is an historic moment. After fifteen years of pointing out how money lenders have been exploiting the poorest households we finally have cross party agreement that direct action to cap prices and prevent other abuses is needed . The legal loan sharks are now on borrowed time. However, we have to move forwards as a matter of urgency and the FSA should now launch a consultation to help shape the new rules as early as possible.

But more can and must be done now to protect consumers. The FCA will not be taking on the responsibility for the regulation of consumer credit until 2014. In the meantime, and faced with a possible future crackdown, many money lending companies will inevitably take one last opportunity to rip off some of the poorest households in the country.

To prevent this, the Office of Fair Trading should immediately revise its Irresponsible Lending Guidance by indicating a level of credit costs the charging above which it will take as prima facie evidence of an irresponsible lending business model. We recommend that these ‘benchmark costs’ be initially set at £20 per £100 lent for payday loans and £65 per £100 lent for door to door money lenders.

It is now six years since the Competition Commission found that home credit lenders were making excess profits. At the time of the Commission’s inquiry, Provident Financial was charging £65 per £100 lent. It is now charging £82 per £100 lent, yet its cost of capital have not increased significantly and, with improved data sharing in place across this sector it has better information available to it to assess the risk of default. By our calculation, Provident has made at least £30 million in excess profit in the past two years alone. Insisting it reduces its prices back to the level charged in 2006 would be a good start on delivering on the promises to tackle the money lenders made in Parliament today."

End Legal Loan Sharking Campaign Launched

Debt on our Doorstep is pleased to announce the start of the 'end legal loan sharking campaign' which has widespread support from MPs, campaigners and civil society groups. Further details of the campaign can be found at http://www.endlegalloansharks.org.uk/

Rate cap power for OFT debated in Commons Committee

Rob Marris M.P (Lab, Wolverhampton South West), a member of the House of Commons Committee considering the Financial Services Bill, has put down a proposed amendment to the Bill which would provide the Office of Fair Trading with the power to cap credit charges.

The amendments, which Debt on our Doorstep has helped to draft, provide for the OFT to review credit markets within six months of the Financial Services Bill becoming law to establish the level of price competition and if this is found lacking to impose a cap on the total cost for credit. Lenders who disregarded the cap could be fined or lose their consumer credit licenses.

The amendments are being debated in Committee on 14th January although time for consideration is limited and the issue looks likely to be returned to at the Bill's Report Stage debate in the Commons in the next week. A memorandum of evidence to support the amendments has also been submitted by the Centre for Responsible Credit which is available on
the Bill Committee website

Early Day Motion on Home Credit Market

Debt on our Doorstep is calling on all supporters to lobby their MP's to support an Early Day Motion (EDM number 379) put down by Ian McCartney M.P on the Home Credit Market.

The EDM, which has already attracted over 50 signatures, reads:

That this House notes the ongoing lack of price competition in the home credit market and the devastating impact that high cost credit is having on the poorest communities as reported by Channel 4's Dispatches programme on 7 December 2009; further notes that the Competition Commission's remedies for this market have not had any impact since its inquiry into the home credit market in 2006; further notes that Provident Financial now charges £82 for every £100 lent, which is 26 per cent. higher than was reported three years ago; further notes that Provident now have an estimated 70 per cent. of the market and that the `unfair credit relationship' test introduced by the Consumer Credit Act 2006 has not led to a single instance of prices being lowered; believes that urgent and effective action is now required to help low income borrowers obtain credit at a fair price; and calls on the Government to provide the Office of Fair Trading with a power to cap prices in non-competitive areas of the credit market, or the Competition Commission to immediately review its remedies for the home credit market and or the Financial Services Authority to introduce a rule requiring banks to demonstrate how they are helping to expand access to affordable credit, for example by partnering with credit unions.

Supporters are urged to write to their M.P's asking them to sign up to the EDM. The list of current signatories can be found at http://edmi.parliament.uk/EDMi/EDMDetails.aspx?EDMID=39940&SESSION=903

Speech to All Party Parliamentary Group on Credit Unions

A copy of Debt on our Doorstep Chair, Damon Gibbons, speech to the All Party Parliamentary Group on Credit Unions is now available here

New report highlights 'flawed' evidence base of Government policy on rate caps

A new report from the New Economic Foundation has revealed that Government's previous decision in 2006 not to implement a rate cap was based on 'flawed' evidence. The report, Doorstep Robbery, reveals that a prior DTI funded study of interest rate caps in other countries ('the Policis Report') failed to meet even basic standards of social research. It also indicates that poor people in the UK are more likely to be financially excluded than in France and Germany as well as paying a much higher price for credit.

The NEF report calls on Government to introduce a cap on the total charge for credit and for banks to be obliged to meet the needs of low income households for affordable credit either directly through the provision of overdraft credit or in partnership with credit unions.

The full report can be downloaded from http://www.neweconomics.org/fairlending and is being launched tonight at the London Citizens Meeting in the Barbican Centre, which will see 2,000 people call for a cap on interest rates at 20% of the total charge for credit - see http://www.londoncitizens.org.uk/pages/newsarchive/2009-11-17-%20November%20Assembly.html

Transact members again vote rate ceilings as a priority for action

Transact members have again registered their support for interest rate ceilings to be introduced into the U.K as a matter of urgency. Over 40% of all members voting in the last survey put interest rate ceilings in their top three priorities. Only securing a universal right to basic banking (57%), expanding credit unions (52%), and a national roll-out of money guidance (45%) scored higher.

Transact has 1500 members, of which 265 completed the survey. This indicates that we have the support of at least 108 consumer agencies in the UK for our campaign on rate caps.

Dood issues new seven point plan to reform financial markets

Debt on our Doorstep has today called for the Treasury to place more emphasis on protecting consumers in its strategy to deal with the financial crisis and to increase financial stability. In particular, Government should now legislate to allow the FSA and OFT to cap the cost of credit where it is apparent that these are reflective of high risks or where there is a failure of competition.

The paper also argues that Government cash used to bail out the banks must be diverted to those that need it most including homeowners with little or no equity, rather than to the wealthy who are the only ones currently benefitting from historically low bank base rates.

And noting that many people will now be defaulting on credit agreements and facing insolvency through no fault of their own, Debt on our Doorstep has also called for an immediate review of insolvency legislation and credit scoring mechanisms to ensure that people affected by the recession are rehabilitated back into mainstream financial services as soon as possible.

The full paper is available here

Cap the Total Charge for Credit not APR's

Recent discussions over interest rate caps have included concerns that DWP Growth Funds are being used by credit unions and community development finance institutions ('CDFIs') to lend out at APR's of between 30% and 40%. Because these lender's aren't driven by profit motives, it has led some to argue that interest rate caps would not be a practical means of delivering fairer prices to low income borrowers and that they would drive all types of lenders out of business.

In fact there is no reason why price ceilings would not be an effective means of ensuring people aren't ripped off in uncompetitive credit markets including home credit or payday lending. Uncompetitive markets allow lenders to mark up prices over and above where they would be under normal market conditions. They therefore make excess profits. Caps can be used to reduce prices to the level where normal profits would be made - but should not be used to eliminate point profit altogether.

The question therefore is where to put the cap, not whether it could work in principle. Capping the price of credit is more complicated than in other markets simply because the APR measurement of price is subject to vagaries. It is skewed against short term lending. The shorter the term of the loan, the higher the APR. As a result, a cap on the APR% could result in lenders simply lengthening the term of their loans in order to bring down the headline % figure.

So let's focus on a different measurement of price - the total charge for credit. Provident Financial, the UK's largest door to door lender with over 50% of the market, charge about £65 for every £100 borrowed. That’s a Total Charge for Credit (TCC) of 65%. Payday lenders typically charge between 15% and 33% total charge for credit on the first month, but this figure doubles each time the loan is rolled over. As for credit unions and CDFI's, well APR’s of 30% to 40% may sound grim, but the total charge for credit on these loans lies between just 8% and 10%.

We need to forget APR’s in this debate and support a cap on the Total Charge for Credit at somewhere around 20%. That would deliver real savings to low income borrowers and wouldn't put non exploitative lenders out of business, but it would ensure that Provident, for example, were no longer able to benefit from a lack of effective price competition and it would limit payday lender irresponsibility.

Of course, there are alternatives to capping - for example by encouraging greater competition in the first place. But since the financial crisis has hit this is likely to take anything between four and ten years to happen. And it's already been 6 years since we first highlighted the lack of effective price competition in the door to door lending market, during which time by the Competition Commission's calculations around £0.5 billion has been taken out of the poorest communities in excess profit.

So let’s not wait another decade to deliver fair prices. And let's not divide those that are on the side of low income borrowers – we know where the real problems lie. A united campaign for a cap now could make all the difference!

OFT publishes draft guidance to prevent irresponsible lending

Debt On Our Doorstep today welcomed the draft guidance on responsible lending published by the OFT.

Presenting his initial reactions to the document, Damon Gibbons, Chairman of Debt On Our Doorstep, commented:

“This draft guidance is a huge step forwards for consumers. If implemented as currently drafted it would require lenders to make a proper assessment of a borrower’s ability to repay prior to granting a loan. We know that at the moment many lenders fail to make effective checks before lending, preferring to trap people in a cycle of increased borrowing. In the long term this has devastating consequences for low income households and communities.

“The OFT is to be applauded by putting forward such robust proposals to deal with this problem and we look forward to working with them over the coming 12 week consultation period.”

Barnardo's slams Provident rates of 545%

Barnardo's 'Breadline Britain' report, published yesterday, rightly slams Provident's 545% APR loans to some of Britain's poorest families as 'extortionate'. The report comes on the same day that Provident announced a rise in pre-tax profits in the first six months of the year and following admissions from Provident Chief Executive Peter Crook that one of the effects of the credit crisis has been to drive people previously catered for by cheaper lenders to the high cost end of the market.

But what is to be done about the problem? The OFT has today published it's Financial Strategy Action Plan which contains, amongst other things, an acknowledgement that competition in our credit markets has been curtailed by the crisis and is failing to deliver a fair deal for consumers.

That comes as no surprise. In 2006/07 the Competition Commission investigation into door to door lenders found that nearly £100 million in excess profits were being made by firms in this market. But with competition weakening, the Commission's own remedies, which largely relied on people being able to build up a credit record and move onto cheaper, more mainstream types of borrowing, have failed to address the problem. The movement is all the other way.

We now need urgent and direct action to address this failure. As part of its plan, the OFT is reviewing the high cost credit market and rightly considering the case for a cap on credit charges. In our view, this cannot come too soon and we will be submitting evidence on this issue to the OFT in late August. But the real need now is for supporting agencies to lobby their M.P's to support the introduction of legislation to cap credit costs before the next general election. If you are able to help with the campaign, please get in touch by e-mailing info@debt-on-our-doorstep.com

Protecting low income borrowers in the credit crisis

Debt on our Doorstep and Ian McCartney M.P have now finalised their report on measures that government can be taking to protect low income borrowers in the credit crisis. The full report is available from the link below.

The report has now been submitted to the Department of Business, Enterprise and Regulatory Reform and the Treasury and we are hopeful of a meeting in the near future.

In the meantime, the proposal to cap prices in non-competitive areas of the credit market is gaining further support with Transact members voting this as one of their top three priorities for action in a survey at the end of 2008. Following the Transact Annual conference London in November, we understand that there will be a number of regional debates organised on this issue in Spring 2009.

Protecting low income borrowers in the credit crisis

Ian McCartney M.P to work with Dood on Rate Cap proposal

Ian McCartney M.P today announced his intention to work with Debt on our Doorstep in order to develop a proposal to introduce a system of interest rate caps, which he will submit to the Chancellor, Alistair Darling, and Business Secretary, Peter Mandelson at the end of the week.

The announcement came during a live interview on the BBC's Politics Show, North West, in which Damon Gibbons, Chair of Debt on our Doorstep also took part.

The full show can be viewed from the following link, with the coverage from the North West starting 33 minutes in.

http://www.bbc.co.uk/iplayer/episode/b00fvxd1/The_Politics_Show_30_11_2008/

Transcript of speech to Transact Conference

A copy of the speech given by Damon Gibbons, Chair of Debt on our Doorstep, to Transact's National Conference on 21st November concerning the problem of credit dependency and the need for interest rate caps in the UK is now available from the following link

http://www.debt-on-our-doorstep.com/files/Speech%20to%20Transact%20Conference%20Gibbons%2021st%20November

Jim Devine M.P puts down Bill to limit interest rates

Jim Devine M.P (Labour, Livingstone) has put down a ten minute rule bill to limit interest rates on consumer credit contracts. The Bill is also supported by other Labour backbenchers including Jon Cruddas. First reading was on 12th November and details can be found here

http://services.parliament.uk/bills/2007-08/interestratesmaximumlimit.html

We urge Debt on our Doorstep supporters to write to M.P's asking them to support Jim's bill.

Damon Gibbons, Chair, Debt on our Doorstep will also be speaking at Transact's National Conference on 21st November to debate the issue of interest rate limits. This follows a survey of Transact members last year in which rate caps came top of their list of measures that should be implemented in order to make a difference to people on low incomes.

Finally, GMTV begins two days of publicity tomorrow to highlight the costs of predatory lending by door to door (home credit) and payday lenders.

Parliamentary Support for Payday Investigation Gathers Pace

Parliamentary support for an investigation into the growth of payday lending, and other forms of extortionate borrowing, is gathering pace. David Drew's Early Day Motion, supported by Debt on our Doorstep has already attracted the support of 29 M.P's within only three days.

The Early Day Motion - number 1280 reads as follows:

That this House notes that the global credit crunch is now impacting on the ability of UK consumers to obtain access to affordable credit; notes that high cost and irresponsible forms of lending such as pay day lending, which charges in excess of 1,000 per cent. APR and traps people on lower incomes in a cycle of credit dependency, are now expanding rapidly as a result; further notes that Dollar Financial, one such US pay day lender, now has over 200 Moneyshop stores providing these loans in the UK; regards this development as extremely worrying for the Government's ambition to eradicate child poverty; and urges the Treasury, the Department for Business and Regulatory Reform, the Office of Fair Trading and the Financial Services Authority to conduct a joint inquiry into the growth of high cost lending, including pay day loans, in order to inform future regulatory action against irresponsible and high cost lenders and to contribute to the Government's aim of ensuring greater access to affordable credit.

You can view the signatories to the motion here.

Stop the Payday Loans Scandal - MP's to lodge concerns

David Drew, M.P, will tomorrow lay down an Early Day Motion supporting Debt on our Doorstep's call for an investigation into the Payday lending industry in the U.K. The move follows the excellent response from supporters to our own petition on the Number 10 website, which obtained 460 signatures in just over two weeks.

Obtaining the support of MP's is now a vital part of this campaign, and we ask that all supporters write to their own M.P requesting that they put their name to the motion. We will provide a standard means of doing this from this website in the next few days.

In the meantime, a briefing on the Payday lending industry has been prepared, as below.

Payday Lending in the UK: Background Note


1.1 Pay day loans are provided to people in employment, with bank accounts, and operate by the lender accepting a post dated cheque (usually of £100) from the customer which is dated to the forthcoming pay day. A cash advance is then made of between £71 and £85, depending on the lender’s terms (see table below for details of lenders in this market). The difference between the amount of the advance and the £100 is the fee charged by the lender. Multiple cheques are accepted at the same time, with lenders offering up to a £750 - £800 to new customers. So, for example, a new customer would provide 8 cheques to the lender, each of £100, and receive a cash advance of £640 (the difference of £160 being the fees charged that will be collected by the lender on the customer’s pay day). APR’s on the agreements are typically in the region of 1200%, although one lender states that they can rise as high as 9899% .

1.2 Customers are given the option to ‘roll over’ the cheques if they cannot afford to have them cashed against their accounts when the pay day comes around. To do this, the customer must pay another set of fees direct to the lender at the same rates as the initial agreement. So, in our example, the £800 liability could be deferred for another month by the customer paying a further £160 in fees. Rolling over loans is particularly problematic as no amount is being paid off the original liability. For example, after just 5 months of paying £160 per month in fees (total of £800), the original liability of £800 would still be outstanding in full.

1.3 The table on the following page details the main brands and companies involved in the provision of Payday loans in the U.K, and the main terms and conditions of their loans.

1.4 Some, but not all, lenders restrict the amount of times that loans can be rolled over in this way, and have policies in place that require at least some payment off the capital amount to be made once a loan has been rolled over more than two or three times. However, there are no details given as to the amount of payment that is required to be made towards the capital in order for further rolling over to take place, so debts can still be rolled over many times prior to being cleared.

1.5 Lenders frequently advertise the fact that no credit checks are required and that money is available quickly. No assessment appears to be made of a customer’s ability to repay. Application forms do not generally ask for any details concerning expenditure or outstanding debts of borrowers. It is likely therefore that these loans would fall foul of any reasonable definition of ‘irresponsible lending’ – a term included in the Consumer Credit Act 2006 that the OFT must consider when licensing credit providers from 6th April 2008.

1.6 There is an absence of published information concerning the size of payday lending operations in the U.K. However, the expansion of Moneyshop stores over the past 12 months, the entry into the UK of QuickQuid in the third quarter of 2007, U.S takeover of Month End Money and the significant increase in internet sites and financial brokers offering payday loans over the past 12 months indicates that the sector is growing rapidly.

1.7 Dollar Financial, owners of the Moneyshop brand, report that their U.K. business realized growth of 71.7% in 2007 and that U.K. loan originations increased by 55.3% or $34.5 million in that year. They have 221 company operated stores in the UK, and a further 193 operated under franchise, which is approximately 25% of all payday lending outlets in the UK . 2007 third quarter accounts indicate that approximately £16 million is put out on loan each month in the UK. We estimate that a customer base of approximately 150,000 - 200,000 people would include what be required to sustain this. Assuming that the outlets of competitor lenders have similar reach, then this would suggest a market of approximately 600,000 - 800,000 people although recent developments including the increased availability of payday loans on the internet may mean that this is a conservative figure.

1.8 The advertising of payday loans on many websites is often deliberately vague and fails to provide essential information, such as the APRs, and the impacts of rolling over loans on these. In some case advertising may breach the relevant regulations. For example, the website for Quicksilver payday loans, a brand of MEM Consumer Finance Ltd., contains the following statement:

“Payday loan companies are required to calculate the APR% for their customers even though the measure is inappropriate for 30 day (i.e. very short term) cash advances. We’ll calculate it when you go through the application process…”

MEM Consumer Finance Limited also launched a TV advert in December 2007, which is running throughout 2008, under the brand name Payday Now!. This fails to mention the APR of loans at all.


Main Payday Lenders in the UK - Terms and Company Information

The Moneyshop £9.99 on first cheque of £100 only – APR of 260.2%. Usual rates, and anything other than the first cheque, are charged at £14.99 and advances made of £85.01, which would bring APR’s up to approx 1,000% Owned by Dollar Financial, US company expanding in the U.K. Has over 250 stores in the UK now and in the quarter to 31st December 2007 recorded lending growth of 55.3%. The company lends approximately £2.5 million per month

Month End Money,also trading as Payday Now!, PayDay UK, Payday Store, Quicksilver Payday Loans £25 per £100 borrowed. Will lend up to £750 to new customers. APR – 1355%. The Quicksilver website states that full roll overs allowed for two months, then some element of capital repayment required in addition to the roll over fee (amount of capital to be repaid not specified). Owned by MEM Consumer Finance Limited which was acquired by US company CompuCredit in 2007 - unfortunately Compucredit’s accounts do not break down by country, so it is not possible to determine the size of the UK operation. The company has launched a TV ad in December 2007 which is running throughout 2008

Payday Express, Wageadvance.co.uk, Paydaysolutions.org.uk. £20 on each £100 borrowed. APR 1286.1% (based on 31 day month). Will lend up to £800 to new customers. Money available over the internet and paid into bank accounts within 2 days or same day (for which an additional £15 fee is charged) After 3 loans, customers can apply for an increase in the limit. Owned by Express Finance (Bromley) Ltd – Turnover of roughly £1 million per annum. Family owned firm.

Albemarle & Bond. Payday loans available up to £600. No information on website concerning charges – available from within their pawnbroking stores. A national pawn broking company with 75 outlets that has expanded into pay day lending. Company income from payday lending has increased from £0.05 million in 1996 to over £3.6 million in 2006.

Chequebook Loans. £20 on each £100 borrowed – APR 1286%. Company based in Luton, offering payday loans over the internet. Private limited company. Exempted from last accounts requirements on basis of small size. Next accounts due in April 2008.

Payday Advance UK. £29 on each £100 borrowed – no APR figure given on the website. Limits of up to £1000 for new customers. Company registered in Malta. Member of Consumer Credit Association UK.

QuickQuid. £25 - £50 charge on each £100 lent. (APR generally 1,576.5%) Website also states that typical rates range from 1351.7% to 9889.3% A subsidiary of CashNetUSA and Cash America Intl.. Only operates on the internet for UK customers – a service started in the third quarter of 2007. No figures yet available concerning take-up. Next financials released on 24th April 2008

Today's Times: Debt charities cast a wary eye on waters as loan sharks circle

Christine Seib , The Times 25th March 2008

Doorstep lenders and loan sharks are moving into the space left by Britain's high street banks, whose tightening credit terms are leaving millions of people without access to mainstream finance.

Debt campaigners have seen hordes of clients forced to borrow at extortionate interest rates because they have had their credit cards cut off or have been refused loans as the country's biggest banks react to the global liquidity crisis.

Banks have scrapped 125 per cent mortgages, increased the minimum deposit needed for first-time mortgages and reduced credit card limits as the banks' own borrowing costs rocketed in response to a worldwide collapse in interbank lending.

Last month Egg, the online lender, cancelled the credit cards of more than 160,000 customers. Many lenders, including Nationwide, Britain's biggest building society, are charging higher rates for borrowers who do not have a 25 per cent deposit.


At the same time, Provident Financial, the country's most prominent doorstep lender, has predicted a booming 2008. The lender said this month that the number of people who fell into the “non-standard” category of borrowers had grown to about ten million.

The Financial Services Authority estimates that up to seven million people had difficulty gaining mainstream credit, and Citizens Advice reported last week that mortgage arrears problems had shot up by 35 per cent in the first two months of 2008, compared with the same period last year. Citizens Advice bureaux said that they had dealt with 215,000 new debt problems in January and February.

Doorstep lending, which usually involves small loans on interest rates of 100 per cent or more, with payments collected each week by a local agent, is legitimate, but debt charities fear that unauthorised lenders are also capitalising on the increased number of people who have found their usual lines of credit diminished or cut off.

Faisel Rahman, managing director of Fair Finance, a non-profit sub-prime lender based in East London, said: “It's a race. We can forge a new way of lending but we can assume that our competition will also move in.”

Neil Cooper, of Debt on our Doorstep, which campaigns to end high charges for sub-prime lending, said: “I'm sure unauthorised lenders will see an opportunity there, but the biggest risk is the sub-prime lenders who already have their infrastructure set up. People will be forced to go to them for very expensive loans because they can't get credit elsewhere.”

Keith Tondeur, president of Credit Action, a charity that offers budgeting education, said that many of the people who were turning to sub-prime lenders had previously been good customers of the high street banks. “People who've been able to borrow at will are now unable to do so,” he said. “This comes at the same time as rising food and fuel prices and declining asset values — it's not a pretty picture.

“There's a great core of people who've been borrowing happily for 20 years and all of a sudden that's no longer available to them.”

Case study

Luis García, 38, who asked The Times not to use his real name for fear of reprisals, repaid more than £15,000 over five years after borrowing £3,000 from a loan shark in Britain.

Unable to get a standard bank loan, the Colombian borrowed the cash in 1999 to set up a new life in the UK, but, with repayments of £450 a month, was unable to pay off the principal.

“I was paying 15 per cent on my loan, but if I couldn't pay the full £450 and gave him only £300 one month, the other £150 went on to my loan and I paid 15 per cent on that as well.”

When his lender, also from Colombia, threatened the life of Mr García's family in his home country unless he kept up the huge repayments, Mr García turned to Fair Finance.

He said that he cried with joy when the non-profit sub-prime lender offered him sufficient credit to pay off the loan shark.

Fuel Poverty Measures Should Show the Way to Affordable Credit

A report in today's Observer (see below) highlights the need to force energy companies to introduce 'social tariffs' to ensure that low income households can access the energy services they need at prices they can afford. Efforts to encourage the industry to establish voluntary mechanisms to look after these consumers have failed, according to the National Energy Association and Npower. The result has been an horrendous increase in the level of fuel poverty -households are defined as being in fuel poverty where they spend more than 10% of their disposable income on fuel bills.

There are lessons here for those seeking to ensure access to financial services, and to affordable credit for people on low incomes. The Financial Inclusion Taskforce is behind the game. Whereas the Government has set binding targets for the energy industry to eliminate fuel poverty in England by 2010 and across the UK by 2016, no such ambition has been set out for the Financial Inclusion Taskforce or the financial services industry to establish access to affordable credit. In fact, even the term 'affordable credit' remains undefined by the Taskforce. Despite this lack of precision, a recent mapping exercise has been conducted by the Taskforce to establish those areas of Great Britain that have the least access to affordable credit. The results are confusing as they give no indication of the level of resources necessary to solve the problem of rip off credit provision to the poor. And there is no evidence of effective pressure being exerted by the Government or Taskforce on banks to meet even those gaps in provision that have been revealed. The Growth Fund for credit unions and third sector lenders of just £45 million being devoted to this purpose is woeful in its inadequacy.

Debt on our Doorstep's research last year into the debt burdens of low income households revealed that the poorest households are paying an average of 11- 12% of their incomes on unsecured debt repayments. Using the same definition of poverty as is used in relation to fuel, that puts somewhere approaching one fifth of the population, those in the lowest income quintile, in debt poverty. As Alistair Darling approaches his budget preparations, he would do well to set out some targets and mechanisms to deal with this including a responsibility for banks to deliver services to low income communities at affordable prices.

Energy companies should be appladed for recognising the need for Government intervention to force a level playing field in the industry and to secure services for low income consumers. Now is the time for banks to accept that the financial services market requires the same medicine.

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Npower admits laws needed on fuel poverty
Tim Webb
The Observer,
Sunday March 9 2008

This article appeared in the Observer on Sunday March 09 2008 on p3 of the Business news & features section. It was last updated at 00:04 on March 09 2008.

RWE Npower has privately admitted that energy companies will only tackle fuel poverty effectively if the government forces them to do so.

The energy industry has been trying to resist moves to force companies to do more to help the soaring numbers of 'fuel poor' in this week's Budget. The government has set a legally binding target to end fuel poverty in England by 2010, and across most of the UK by 2016.

But in a letter to energy regulator Ofgem in September, Npower admitted that the government's approach to date, to encourage companies to offer more subsidised or 'social' tariffs to poorer households on a voluntary, as opposed to compulsory, basis would not work.

'At present, government is encouraging the delivery of a social action solution within a voluntary framework,' the company said in the letter. 'It is doubtful whether this is the most efficient approach and it is also seemingly inconsistent with a market framework.'

It went on: 'We believe that the interest of the fuel poor is best served by a mandatory social tariff and this is the only means by which the government's 2010 and 2016 objectives can be achieved. There is no obvious reason why these targets will be delivered within a competitive retail market.'

This weekend, the government was still considering how to address fuel poverty in the Budget. The companies are expected to escape a windfall tax if they contribute a 'voluntary' levy to help those struggling to pay their bills.

Energy companies currently spend just 0.11 per cent of their £24bn turnover on tackling fuel poverty on average. Spending varies: British Gas, owned by Centrica, spends 0.49 per cent of its turnover, while Scottish and Southern Energy and Npower spend just 0.07 per cent. Many of these supposedly cheaper tariffs are actually more expensive than the tariffs offered to other customers. For example, British Gas's social tariff for gas and electricity is on average £96 more expensive per year than for ordinary customers paying by direct debit.

At the end of last month, Energy Minister Malcolm Wicks reiterated to fuel poverty charity National Energy Action that the government would not introduce mandatory social tariffs.
Jenny Saunders, chief executive of National Energy Action, said: 'It would be preferable to have a legislative framework, rather than rely on the goodwill of companies for a one-off gesture. Some companies are doing their bit but to have a genuinely socially just energy market the government will have to intervene.'

Fuel poverty is defined as a household which spends more than a tenth of its income on heating and lighting.

UK Government confirms 'Greed & Fear' as causes of credit crunch:

Writing in 1998, Professor Susan Strange wrote that:

"“Greed and fear are the two human emotions most evident in the day-to-day behaviour of the international financial system today….Either dealers are drawn by greed to take too big risks with their own or, more often, with other peoples’ money; or they are overcome by fear that the risks they have taken will catch them out. In their rush to escape the consequences of greed, they may start…an avalanche of panic that carries away the innocent along with the guilty.” (Mad Money, pg. 139)

10 years later, the Treasury have confirmed this assessment - although they use less obvious language. Their current consultation on proposals to increase stability in the world of banking highlights the two causal factors of greed and fear in the language of the marketplace: with 'search for yield' as greed, and 'uncertainty' as fear.

The Treasury's current consultation on proposed measures to stabilise the financial services sector notes that:

"...the disruption in global financial markets in the second half of 2007 followed a prolonged period of macroeconomic and financial stability and low interest rates in the UK and globally. Historically low interest rates encouraged investors to ‘search for yield’ by investing in increasingly risky financial products without being fully compensated for the additional risks, leading to a general under-pricing of risk. Benign macroeconomic conditions and the search for yield also encouraged an erosion of credit risk assessment standards in some markets, most notably US sub-prime mortgages." (para 2.2)

and then at para 2.4:

"Although the US sub-prime mortgage market is small in relation to the global financial system, difficulties in valuing many of the residential mortgage-backed securities (RMBS) and uncertainty about where the risks associated with sub-prime mortgages had been distributed led to significant uncertainties about the losses and their impact on banks’ balance sheets."

However, rather than focusing on ensuring that lenders act responsibily in the first place, the proposals concentrate on allowing the Government, Bank of England and FSA to prop up banks that get into difficulty. Banks, it would appear, are now too big to fail - with the consequent moral hazard that means they will invariably take greater risks with other peoples' money in the future.

This is the wrong approach - act now to tighten the rules on responsibility in lending, and link the huge level of assistance currently being given to banks with additional requirements that they meet the needs of all communities in the U.K for affordable credit.