Business, Innovation & Skills Select Committee Debt Management Inquiry

Transcription

1 Business, Innovation & Skills Select Committee Debt Management Inquiry A submission from the Association of British Credit Unions Limited (ABCUL) November 2011 Contact Details Mark Lyonette Chief Executive mark.lyonette@abcul.org / Matt Bland Policy & Communications Officer matt.bland@abcul.org / ABCUL, Holyoake House, Hanover Street, Manchester, M60 0AS

2 1. Summary We welcome the opportunity to respond to this consultation on behalf of our 275 credit union members in England, Scotland and Wales. Credit unions provide safe savings, affordable credit and other financial services to over 900,000 people in Great Britain. Credit unions are the only lenders in Britain which are subject to an interest rate cap limited to lending at no more than 2% a month on the reducing balance, which equates to an APR of 26.8%. Many loans are made at less than this rate. We responded to the Government s 2010 review of Consumer Credit and Debt and called for actions to be taken to help support credit unions to sustainably and responsibly extend affordable credit to its members and help steer consumers away from high cost credit options. The main suggestions were: o Consideration of a wealth warning on advertising for high cost loan products, ideally directing people towards sources of information about lower cost credit, including credit unions. o Scrutiny of the pricing practices of rent-to-buy retailers, where the stated APR is misleading as extra costs including insurance and high starting costs inflate the cost to a high cost level. o Consideration should be given to the fact that APR is a poor indication of interest charges on short-term, small-sum credit and that a total cost of credit charge in monetary terms per 100 borrowed would be a better indicator o Improve the credit history data that is available through credit referencing agencies such as including debts to all high cost credit, rent-to-buy purchases, social housing rent arrears, tax arrears and utilities arrears o Increasing the capacity of social lenders o Penalty charging for current account services needs to be reformed and made more transparent o Full recognition is required for credit unions and other ethical lenders in the debt and insolvency system.

3 2. Introduction 2.1 We welcome the opportunity to respond to this consultation. ABCUL is the main trade association for credit unions in England, Scotland and Wales, and our members serve around 80% of Britain s credit union membership. Credit unions are not-for-profit, financial co-operatives owned and controlled by their members providing safe savings and affordable loan facilities. Increasingly a small number of credit unions offer more sophisticated products such as current accounts, ISAs, Child Trust Funds and mortgages. 2.2 At the end of June 2011, credit unions in Great Britain were providing financial services to 826,557 adult members and held more than 689 million in deposits with more than 561 million out on loan to members. An additional 114,000 young people were saving with credit unions At 30 September 2010, the 325 credit unions belonging to ABCUL were managing around 512 million of members savings on behalf of over 611,037 adult members. 2.4 The Credit Unions Act 1979 sets down in statute the objects of a credit union; these are four-fold: The promotion of thrift among members; The creation of sources of credit for the benefit of members at a fair and reasonable rate of interest; The use and control of their members savings for their mutual benefit; and The training and education of members in the wise use of money and in the management of their financial affairs. 2.5 Credit unions in Britain are small, co-operative financial institutions often extending financial services to those unfairly excluded from the financial services the majority take for granted. They are owned and controlled by a restricted membership and are operated for the sole benefit of this membership. The Credit Union Act 1979 sets down these operating principles in law. 2.6 In the past decade, British credit unions have trebled their membership and assets have expanded four-fold. As this growth has taken place, the role that credit unions can play both in providing equitable financial services to the whole of their communities and providing diversity in the financial services sector has been increasingly recognised by government and policy-makers. 2.7 The Coalition s Programme for Government committed to promoting mutuals as part of a diverse financial services system and the Department for Work & Pensions is currently conducting a feasibility study the outcome of which will determine whether and how the earmarked 73 million credit union modernisation and expansion fund will be invested in the credit union sector. 2.8 A Legislative Reform Order has recently been made which will make changes to the Credit Unions Act 1979 and free up credit unions to reach out to more people. 2.9 Both of these initiatives demonstrate the strength of the Government s commitment to the promotion of credit union growth in Britain and a cornerstone of any growth strategy is the implementation of effective, appropriate and proportionate regulation. 1 Figures from unaudited quarterly returns provided to the Financial Services Authority

4 3. ABCUL s response to the Government review of credit and debt 3.1 We have concerns about the structure of the credit and debt system and the effect that it is having both on vulnerable consumers and on credit unions ability to serve them. We made these concerns clear and set out possible remedies in our response to the Government s debt and credit review last year. 3.2 We set out our proposed action from Government and the rationale behind this below: 3.3 Scrutiny of the coloured-pricing practices of rent-to-buy retailers such as Brighthouse where prices are inflated to reduce the stated APR Rent-to-buy retailers are a major growth industry. Many recent news reports have demonstrated the remarkable growth of the sector over the past year or two. Such retailers are able to advertise reasonable-sounding APRs of around 30% but supplement this through requiring their customers to take out insurance cover for goods purchased. This can see goods cost significantly more than they would elsewhere often more than double the cost from other providers. 3.4 The importance of providing better information on the availability of affordable credit for example, an obligation for high cost lenders to flag up credit unions at the point of sale Often people who use high cost lenders are in need of quick cash for an emergency expense. They are not rationally shopping around but obtaining cash any way they can. Also, the marketing techniques of these firms door-to-door, aspirational or quick fix TV advertising can encourage consumers to take up offers of credit without comparing the long term costs, only whether they are affordable on a weekly or monthly basis. Because of this it is vital that alternative, more affordable credit sources are made known to them and, therefore, a requirement to flag up credit union loans at the point of sale could reduce people s reliance on high cost alternatives. Baroness Wilcox, BIS Parliamentary Secretary in the House of Lords, recently expressed interest in this proposal in response to an oral question from Lord Kennedy of Southwark. 3.5 Price comparison for high-cost credit under the service as set up as part of the recommendations of the Competition Commission s review of the home credit market should take account of the fact that many of the target market do not have access to the internet Whilst the internet has become ubiquitous in the modern world, it is generally those that are most vulnerable and on lower incomes that lack access. Disclosures about other credit available should be obligatory for these lenders at the point of sale. 3.6 Consideration should be given to the fact that APR is a poor indication of interest charges on short-term, small-sum credit and that a total cost of credit charge in monetary terms per 100 borrowed should be a requirement of credit advertising standards APR annualised percentage rate is, as the name suggests, a means of calculating the annual interest charge for credit. Because of this specific, annual nature, small sum, short term credit over a period of only a few months or weeks can provide APRs of hundreds or thousands of percent. We would prefer a more intelligible measure based on the total cost of a loan per 100 borrowed. This would serve much better in demonstrating in an easily understandable way the cost of different short-term borrowings which translates easily into comparison between lending and is directly relatable to a person s budget. Obviously, given that APR as a measure is bound by EU legislation this would likely need to be a complementary measure alongside the APR but would enhance the level of information available to consumers when making borrowing decisions especially those using high cost credit.

5 3.7 Steps should be taken to improve the credit history data that is available through credit referencing agencies such as including debts to all high cost credit, rent-to-buy purchases, social housing rent arrears, tax arrears and utilities arrears At present, credit referencing agencies do not have various types of data available to them which are directly relevant to the types of lending that credit unions are engaged in. Without information on high cost credit, rent-to-buy purchases, social housing arrears, utilities arrears and tax arrears, credit unions struggle to make responsible lending decisions and individuals predominantly using these kinds of credit are unable to build a credit history. These gaps should be addressed as a matter of urgency if credit unions are expected to lend responsibly to those otherwise excluded. 3.8 The OFT should collect more data from the home credit and high cost credit markets for robust market analysis Too little is known about the home credit and high cost credit markets. The Competition Commission inquiry half-way through the last decade has been the only comprehensive analysis of the market and since that time there have been a variety of significant developments such as the advent of US-style pay day lending and the collapse of several large home credit companies. It is very difficult to assess needed interventions in this market without full, comprehensive data on it and therefore a commitment to regular market analysis should be put in place. 3.9 Steps need to be taken to increase the capacity of social lenders, such as credit unions, in order to disrupt the activity of high cost creditors that suck funds away from the poorest communities. Plans for a back office system for credit unions could see a step change in the sector in this regard Credit unions and social lenders are often the only source of affordable and inclusive financial services available to those otherwise excluded from mainstream financial services. If we are to ensure that everyone in society has access to credit on fair and affordable terms, the credit union sector must be assisted to grow in line with its internationally-proven potential. In the US, Canada, Ireland and Australia more than one quarter of the population belong to a credit union. Legislative reforms to the Credit Unions Act have recently been approved by Parliament and this will benefit the development of the sector greatly. However, it is vital that support continues. The Department for Work & Pensions is currently considering whether and how to invest an earmarked 73 million credit union modernisation and expansion fund and ABCUL proposes that some of this be used for the development of a suite of centralised back office services which would provide the sector with economies of scale and scope which would see a step change in the sector s development. Without a significantly strengthened credit union sector we have significant concerns that measures to cap the costs of high cost credit could push people into the hands of unlicensed lenders or loan sharks Penalty charging for current account services needs to be reformed and made more transparent the Credit Union Current Account, for example, charges a transparent monthly or weekly amount to cover account administration costs rather than funding through penalty charges which research has shown is favoured by those on a low income The free when in credit model of transactional banking is unfair. Whilst the majority receive their transactional banking free of charge, those on the lowest incomes are made to pay towards the administration costs of the whole transactional banking system through penalty charges that they struggle to avoid because of their low income level. The Credit Union Current Account (CUCA), on the other hand, is structured so that all account holders pay a weekly or monthly fee towards account administration and, in return, are given greater flexibility in managing their income and expenditure and are not charged enormous fees for missed payments. Independent research by Liverpool John Moores University has shown that this is preferred by those on a lower income. It is

6 unacceptable for those on the lowest incomes to subsidise the services enjoyed by those on the highest and this needs to be addressed robustly to ensure a better deal for consumers The court system for enforcing debts should be reformed to make it more cost-effective perhaps through the creation of a non-court statutory debt resolution system which would be more efficient and leave the courts free to deal with points of law At present the court system for enforcing unpaid debts is far too expensive for credit unions to deal with especially where financially inclusive activity is concerned. For example, for a 300 loan over 6 months at the maximum credit union interest rate of 26.8% APR, the revenue generated is around 20. But the court debt enforcement system is very expensive and, even where a court order is granted, can be difficult to enforce. We feel that consideration should be given to other forms of statutory debt enforcement which are more efficient and cost-effective so that credit unions can enforce debts effectively Full recognition is required for credit unions and other ethical lenders in the debt and insolvency system. Unable to price for risk due to the statutory interest rate cap and working on tight profit margins through charging affordable interest rates means that increasing bad debt and insolvency is jeopardising the role credit unions are able to play in supporting the financially excluded. This could involve: an obligation to approach credit unions to re-negotiate terms before filing for insolvency the Common Financial Statement should include a credit union savings and / or loan repayment trigger figure alongside other necessary outgoings a formal acknowledgement in debt advisor and Insolvency Service guidelines that insolvency can jeopardise credit union membership and may leave an individual without access to affordable credit and, therefore, should steps be taken to retain these services Credit unions are seeking to provide an affordable credit service in a market which is dominated by high cost alternatives. The effect of this is to mean that profit margins on lending are extremely tight for many of those financially excluded that credit unions serve. And whilst the Government is keen to promote the role credit unions play in this regard, most notably through initiatives by DWP, at the same time credit unions are experiencing a much tougher bad debt environment with insolvencies and debt management plans increasing for their demographic. Until now there has been no formal recognition of the fact that, where a credit union member makes themselves insolvent or offers a nominal repayment in a structured debt management plan, unlike with commercial lenders who can price in risk through not being subject to an interest rate cap or not having any scruples about charging hundreds or thousands of per cent interest, credit unions lose a chunk of their members funds which takes several similar loans to make up. The increasing incidence of this means that over time, credit unions are finding it more and more difficult to serve this market. The suggested actions above would greatly improve the situation for credit unions in recognition of the vital support they provide to some of the most excluded people in society and the fact that Government is both encouraging credit unions to intervene in this market but at the same time penalising them for doing so As routine, a debtor s circumstances should be reviewed regularly as part of an insolvency so that, should the circumstances improve, more of the debt be repaid as opposed to written off Too often our members find that debtors financial circumstances improve but they do not either resume payments or increase the level of payments made. In the Scottish Debt Arrangement Scheme system, regular reviews are conducted to assess an individual s circumstances on an annual basis and changes made to the Scheme accordingly. This should be considered in England and Wales, also.

7 3.14 The Scottish Government s proposed Debt Arrangement Scheme system should be studied for replication in the English and Welsh jurisdiction features such as the provision to the debtor of the full implications of different debt solutions, open disclosure of the full cost of a solution and obligatory signposting to free debt solutions provided by Citizens Advice or the Consumer Credit Counselling Service should all be considered As above, the Scottish Debt Arrangement Scheme system has several key features which would be significant improvements upon debt solutions in England and Wales and would redress the imbalances in the system which favour the debtor at present and would also provide concrete safeguards to protect vulnerable consumers from unscrupulous debt solution providers Credit unions report that there are a great many unscrupulous debt management and insolvency practitioners operating in the UK and that they can charge excessive, hidden fees which leave individuals no better off after making payments for long periods. Full, statutory regulation of debt management companies is required as proposed some years ago by the Ministry of Justice The Ministry of Justice has deferred the question of whether to introduce statutory regulation of debt management companies until after the Government s debt and credit review and we would like to see this come about as a result of the review The routine maxing out of Common Financial Statement trigger figures should be effectively enforced against too many debtors are encouraged to pay as little as possible towards their debts through inflating their monthly expenditure We recognise that this is not a legitimate practice and is discouraged by national bodies and authorities but many of our members continue to see the practice taking place. 4. The Government s response and conclusion 4.1 We recognise that the Government has not responded on a number of issues contained in the original document and is allowing the recently introduced Consumer Credit Directive to bed in before proposing any further action on a number of issues raised in the original consultation. We look forward to further action being taken. 4.2 The Government s commitment to reviewing the case for a total cost of credit cap as opposed to an interest rate cap is a welcome one however we continue to be concerned about the impact this might have upon individuals without proper, scaled-up alternatives being available. Any action in this area needs to run hand in hand with initiatives to scale up third sector lending and we look forward to the DWP s decisions in this area. 4.3 Elsewhere, the Government has asked the OFT to get tougher on debt management companies and other related areas but, whilst there have been come high profile actions, we hope that full sector-specific regulation will be considered once time has been given to assess recent actions. 4.4 We would happily provide further information and evidence on any of the areas covered in this document. ABCUL November 2011