Examination of witnesses
Francis McGee and Caroline Rookes CBE.
Q90 The Chairman: A very warm welcome to our witnesses today. I will ask them to introduce themselves in a minute. This is our ninth oral evidence-taking session. Welcome to this session of the Select Committee on Financial Exclusion. You have in front of you a list of interests that have been declared by members of the Committee. As you know, the meeting is being broadcast live via the parliamentary website. A transcript of the meeting will be taken and published on the Committee website. Of course, you will have the opportunity to make corrections to that transcript, where necessary. Could you both briefly introduce yourselves?
Caroline Rookes: I am Caroline Rookes, chief executive of the Money Advice Service. For those of you who do not know us, the Money Advice Service exists broadly to help people to manage their money better. We do that in three ways. First, we provide day-to-day money guidance, primarily through a website, around events such as buying a house, having a baby and budgeting, to help people to make better financial decisions. Secondly, we are the biggest single funder of free debt advice, which we fund to the tune of about £40 million a year. We co-ordinate the free debt advice sector and try to raise standards there. Thirdly, we lead a long-term financial capability strategy. Last October, we published a 10-year strategy that brings together all sectors to try to raise financial capability across the UK, which remains dismally low.
Francis McGee: I am Francis McGee, director of external affairs at StepChange Debt Charity. We are the largest free provider of debt advice and debt solutions operating across the UK.
Q91 The Chairman: Thank you very much for coming and giving the Committee your time. We very much appreciate it. I will kick off with the first question. In your view, is it possible to differentiate prevention and response in debt and money advice work? How much of your work is preventive in nature and how much is responsive? Do you think that balance is correct? What have proved to be the most effective of your preventive activities?
Francis McGee: The overwhelming share of the charity’s work is responsive. In each of the last two years, we helped more than half a million people with problem debt. We forecast that it will be more than 600,000 this year.
We do aspects of preventive work. We do quite a lot of online and social media communication around things like money tips and awareness of financial difficulties, how to spot them and how to respond to them. We also work very closely with creditors, which is very important preventive activity. About half the people who come to us are referred to us by creditors. The earlier and more effective that referral mechanism is, the more likely you are to avoid at least some of the harm and to secure a permanent recovery from debt problems. The other thing that we do, which is the role of my area of the charity, is try to intervene in public policy, to encourage a concerted public policy response to problem debt.
You asked what is effective. We know that working well with creditors can make a real difference. When creditors communicate successfully with their customers and refer well to us, it can have a real impact on the speed and effectiveness with which people deal with problem debt. We also know that a concerted effort on the public policy side can make a real difference. We might talk a bit later about the measures taken to cap payday lenders, for example, which have made a real difference to problem debt. All that I would say for now is that there are many more occasions when public policy has not yet taken such decisive action, and perhaps it should.
The Chairman: I am sure that we will come back to the public policy issue later in the session.
Caroline Rookes: The Money Advice Service provides both preventive and responsive help. There is clearly a need for both. We know that there are around 8 million people in this country with problem debt. The number stays stubbornly around 8 million, so there are a lot of people who need responsive debt help. I will give you an example of one of the things we have been working on at the Money Advice Service. As well as funding responsive debt advice, we have been working on an initiative called the single financial statement, which is a single income and expenditure statement to be used by all creditors and debt advice agencies in the context of debt advice work. It will come in next year. One of the things included in that is a small savings element, so that we are helping, in a small way, to get people to build some financial resilience against future shocks to stop them falling back into debt. The other thing that I would mention is that, in the £40 million that we spend on debt advice, we ask providers to ensure that there is some holistic support for the wider issues that people who are in debt have.
I will say a bit about the other side of the money advice work. We hope that the money guidance day to day is preventive, because it helps people to make good financial decisions, but we also have a financial capability strategy. That is trying to get us from a position where one in five people cannot read a bank statement and 16 million people have less than £100 in savings. We are working with all organisations, across all sectors—government, regulators and banks—and bringing them together. The Money Advice Service’s role has been both to bring the organisations together and provide leadership, and to develop a whole suite of evaluation tools.
You asked whether the balance between preventive and responsive is right. We cannot answer that question, because there is so little hard information about what works. One of the things we did this year was to launch a “what works” fund. We asked organisations to bid to set up new initiatives, to fund evaluation of existing initiatives or to test scaling-up initiatives, all around financial capability, so that we can gather evidence of what works and what does not. We can then make sure that that is shared across the piece and, importantly, passed on to the new organisation when it comes into being.
Lord Haskel: I am very interested in what you said about your work with creditors. Do you find that the majority of creditors are co-operative? Do you find that the private sector takes one view and the public sector another?
Francis McGee: Among the creditors we work with, there is a variety of practices and effectiveness. Over the years, the financial services sector has come to work with us very well. We have very efficient and effective mechanisms to refer people. The sector’s forbearance and collection practices are improving—often pushed by regulation; let us make no bones about it—and have improved a lot. On many measures, they score better; maybe we can talk a bit further about that. When we ask our clients which of their creditors have treated them fairly and which have treated them unfairly, relatively few people—something like one in five—say that a high street bank has treated them downright unfairly, whereas getting on for half of people say that a local authority has treated them unfairly. Utility companies, payday lenders and others may be somewhere in between.
Caroline Rookes: I mentioned our work on the single financial statement. At least three of the high street banks are working with us on that and are prepared to use the statement next year, so there is willingness. There is no doubt that there are different drivers in the public and private sectors, but there is willingness to work with us.
The Chairman: Caroline, you talked about the “what works” fund that you are setting up. What is the timescale for that being in place, operating and getting out some good practice?
Caroline Rookes: That is interesting. Until two weeks ago, we thought that the Money Advice Service would no longer exist post March 2018, so we are funding our first set of initiatives up to the end of the 2017-18 financial year. At the moment, we are in the process of working with 62 organisations to work up their bids, so we hope to get the initiatives up and running. Some of them are already running. We are just putting in place an evaluation before Christmas, so that we start to get results before the end of March 2018. Now it looks as though we have a longer breathing space. Although we have worked with the first 62 organisations, there are another 28 bids that we want to take forward. We will start to get information over the next year or so. Then in the future, we can continue to develop much more evidence about what works.
Q92 Lord Northbrook: Do the Government have a leadership role to play in addressing financial exclusion? How do you think such leadership should be delivered, and by whom? What impact do you believe stronger national leadership and co-ordination would have on organisations providing debt and money advice?
Caroline Rookes: Do the Government have a leadership role? The short answer is yes. There is a lot that the Government can do. There is clearly a role for the Government when there are market failures. They have stepped up to do things around basic bank accounts and the open banking standard. The same applies to the FCA and other regulators, who are also leading some work on ageing society.
It is about more than that. At the Money Advice Service, we are co-ordinating the financial capability strategy, which we see as an underpin of financial inclusion. I think Chris Pond described it at his session with you as the foundation of the pillars. It is an important element. Yes, we are bringing all organisations together, but there is no doubt that, with more visible and more expressed support from the Government, we could do more. They can help in a number of ways: for example, by giving out strong messages about the importance of financial resilience and of all sectors working together, and through initiatives like Help to Save, facilitating savings.
One area where they really need to be more active is in financial education. At the moment, the Department for Education is absent from all the work we do on financial education, yet last week the OECD published a report that showed that on financial numeracy the UK was 23rd of 30 countries. It is absolutely dismal. The Government need to get behind issues like that.
Lastly, it is important to get the new guidance body right and to make sure that it has a wide enough remit to continue to deliver longer-term strategies around financial capability and co-ordinating financial education, as well as short-term day-to-day help.
Francis McGee: I strongly agree. The answer is yes, the Government have a leadership role. For me, there are three aspects. First, the Government have the tools and levers to create frameworks within which policy and practice are made. Secondly, that extends to setting the powers and duties of other bodies. Caroline mentioned the new money guidance body, but it goes to the remit of financial regulators, education bodies, local authorities et cetera. The third area, of course, is the Government’s own practice, which we were discussing a moment ago. From the perspective of problem debt, not only are the Government an extremely important creditor—who, the evidence suggests, have something to learn about their own practices as a creditor—but they are a safety net. They are a provider of support and services that will sustain or restore financial inclusion and mitigate financial exclusion. I would argue that in some areas those safety nets are being eroded. In those three aspects, the Government absolutely have a leadership role to play.
Q93 Lord Haskel: I want to pursue the role of the Government a bit further. Recently, they revised their plans for the delivery of public financial guidance. They are going to put the pensions and financial advice services together in a single body, to be created, incorporating money guidance and pensions advice. You hinted at the possible timeline. What do you think should be required to realise this? How will it be made into a success?
Caroline Rookes: There is quite a lot of work to do. We believe that a single body is the right approach, as we advocated in our response to the original consultation, because people’s issues do not fall into neat categories. Even when it comes to retirement, people need to think about paying down mortgages and debt, as well as what they are going to do with their fund. For me, a single organisation to which everybody can turn in the first instance is absolutely the right approach.
In considering the aims of the organisation, it is important to think about getting the balance right, as I alluded to earlier. There will be some areas where the new organisation provides in-depth guidance directly—for example, on pensions—and others where guidance already exists outside, to which people could be handed off. The warmer the hand-off is—the closer the person can be taken to the new service—the better. The organisation needs a balance between providing direct services and commissioning services, and between the day-to-day guidance that it provides and retaining its leadership role around financial capability and financial education. For me, the overriding objective, however it is framed, should be to build financial resilience in the UK. It should do that by providing money and debt advice, directly or indirectly, by continuing to provide strategic leadership in financial capability and by co-ordinating financial education. When you look around the world, you see that that is the model most countries are moving to. It is the model that seems to be most successful in countries such as New Zealand.
Francis McGee: I agree with a lot of that. The real meat is in what the body is asked to do. As a debt advice provider, I hope that you will excuse me for saying that one of the attractions of version 1 of the proposal was having a body charged specifically with ensuring the provision of debt advice, with fewer competing considerations. On the other hand, the chief drawback that I always saw with that was the loss of the strategic leadership function. Having one body focused on commissioning, rather than two, will not in itself solve that. You need a remit that creates the space for that strategic leadership function.
Lord Haskel: You said that the longer-term strategies require things like the involvement of the Department for Education, financial regulation and other parts of government. Do you think that the sort of organisation that is foreseen will be able to straddle all those different bits of government?
Caroline Rookes: Yes. We are doing that at the moment. We have quite a powerful financial capability board. You will know some of the names on it, such as Sherard Cowper-Coles, Hector Sants and Otto Thoresen. We also have Steve Webb. We have all sectors represented, including government and the regulator. The Government could perhaps take a more active role there. The organisation is unlikely to be able to persuade the Department for Education to get heavily involved; we need the Government for that. An organisation such as this body can make progress. Indeed, we are starting to develop credibility in the work that we are doing on financial capability, because of the robustness of the evidence, the evaluation and the thinking that we are producing.
The Chairman: I have a quick follow-up. Francis, what sort of relationship would you like organisations such as yours to have with the new body?
Francis McGee: One governed by openness and transparency, from the point of view of commissioning services. The sector would be entitled to be involved in creating the plan for which services are required—creating the gap analysis, if you like. That would go a long way. There is an onus on the sector itself to collaborate beyond institutional boundaries to create the most innovative and best-fit services. There is a role for the new body around sufficiency and adequacy. There is long-standing underprovision of free debt advice in the country, if you compare measures of need with the amount of free debt advice provided. A partnership that is able to increase the resource available is definitely part of that relationship. Those are the kinds of things that I would like to see.
Lord Kirkwood of Kirkhope: You are describing something that supports the evidence we have already had on getting a push from government, but a wide waterfront of political issues has to be addressed, from local government onwards. Where would you suggest that we recommend the Government place the Minister at the centre of this? Does it have to be a Treasury Minister? Could it be someone else? What would your advice be on that?
Caroline Rookes: That is an interesting question. It is one departments are wrestling with around this new body, because there is a question about which department owns it. If the new body has an overriding objective to raise financial capability or resilience—call it what you will—that is where the responsibility will rest. It does not necessarily matter, as long as there is a department that owns the issues and strategies and is prepared to champion them. It could be the Treasury or the DWP. I would not see the lead being the Department for Education, but I would want it brought into the fold, so to speak.
The Chairman: Francis, your final point about sufficiency and adequacy was very important. In your view, is the underprovision of free debt advice at the moment a result of a funding gap, or are there other causes?
Francis McGee: It is exacerbated by a funding gap, for certain. In many parts of the UK, direct public provision of advice and guidance has been withdrawn at a great rate of knots. Local authorities no longer provide the direct debt advice or money advice to local people that they used to provide. The cuts to the legal aid budget have reduced another swathe.
As regards the kind of debt advice that we offer, there is a slightly wider point, which goes to some of the roles and responsibilities of the new body. We have to think about how the body will be funded. If the idea is to continue to fund it, as Caroline is currently funded, through a levy on the financial services industry, there must be some regard to the sorts of things that it is proper for that industry to fund. I happen to think that funding debt advice is a due responsibility of the creditors who contribute to the debt in the first place. Many creditors step up to that admirably, either through the levy or by funding StepChange directly, with great generosity. Other creditors just do not. I am afraid that the Government and the public sector are foremost among those that do not step up to their responsibilities to fund debt advice. You must have regard to how this stuff will be funded when you set the powers and duties of the body, otherwise you create instability and ask the body to get into things where its funders can reasonably say, “Why am I paying for that? Why is the general taxpayer not paying for it?”
Caroline Rookes: What Francis says is absolutely right, and it is getting worse all the time. We have just heard that in the last few weeks 13 local authorities have withdrawn all funding from debt advice, which is terrible.
There is another issue, which is the demand for debt advice. Our data tells us that around 8 million people are in debt, but only 17% of them are seeking help. It is not as though the gap is manifesting itself in queues and queues of people. I am quite sure that there are queues somewhere, but for a number of reasons people are not demanding debt advice. That is a problem that we also need to crack. It is about a whole range of things, such as people putting their heads in the sand or being embarrassed about it. As well as increasing supply, we have to do work on the demand side.
Q94 Lord McKenzie of Luton: That leads nicely to my broader question. We have heard plenty of evidence that the welfare advice sector has contracted, at a time, of course, when changes in welfare have been extremely intricate and profound. Given the relationship between welfare and financial exclusion, is there benefit in the new money guidance service having some responsibility for providing advice on welfare and social security issues and, if so, how? If not, who should do that?
Caroline Rookes: It is a good question. At the moment, we provide some guidance, but not in any depth. We take the same approach on social security benefits as we take on tax, which is that they are very complicated and others are better placed to explain them, although we have guidance about benefits.
As Francis said, we are funded by the financial services sector. I do not know how the Government will choose to fund the new body. Assuming that it is through a levy on the financial services sector, there is a question about whether the sector would think that it should provide guidance on welfare benefits. You are right; there is a very close link. It is an important part of money and debt advice that people maximise their income and understand the benefits they are entitled to, but there is a question about whether financial services would see that as their role.
We are working closely with the benefits system. At the Money Advice Service, we have developed a budgeting tool to help universal credit claimants budget effectively. We would certainly see the new body collaborating in that way, but I am not sure that it should be the place to go for welfare advice.
Francis McGee: Can I give a slightly different angle on that? I absolutely agree that the relationship between welfare advice, money advice and financial exclusion is a critical point, but as welfare entitlements and welfare eligibility tighten, we are seeing evidence that people increasingly turn to consumer credit to do the same job for them. According to our research, 26% of our clients claimed benefits in the first month after suffering some form of income shock, 33% used their credit cards, 40% used their overdrafts and 7% used a payday loan. The consequences of that and the interaction between welfare advice, debt advice, expectations of creditors, and their products and conduct, and financial regulation are becoming increasingly intertwined. I know that the FCA is trying to kick off a debate about responsibilities in the area, and I warmly welcome that. It is a debate that needs more airing.
Lord McKenzie of Luton: Is there an argument in favour of a wider, separate, national body to address this? A lot of local authorities and organisations within local authority areas give advice on an ad hoc basis, but it is never comprehensive or across the piece.
Caroline Rookes: CABs are probably the most active. We tend to refer people to them or, in the case of older people, to Age UK. There are specialist providers such as Macmillan, but the main one is the CAB. There used to be a provider; it was called the Department of Social Security. That was in the old days.
Francis McGee: I have one further observation on that. One of the new complexities that we are confronting, as a national debt advice provider that gives advice on the phone and online, is localisation of welfare. Running an efficient national line, trying to give advice to people about what provision may be available in their postcode, is really hard. We are relying increasingly on calculators and tools when there is a simple answer, regardless of where you live, and referral when there is not.
Lord McKenzie of Luton: Can I ask a slightly different question? How can the Money Advice Service work to ensure that the learning that it has acquired to date is not lost in the new body?
Caroline Rookes: We are trying to be absolutely at the centre of the programme to build the new body. The original plans were to get rid of the website, which, despite criticism over the years, is now functioning extremely well. We get around 25 million contacts a year, and the cost of acquisition is pence. We have to make sure, both from a customer point of view and from an efficiency, value-for-money point of view, that the whole range of tools and services—the sophisticated web infrastructure that we have—is passed on to the new body. We also want to make sure that all our evidence about consumer needs is passed on. We have quite an extensive segmentation of consumer need, which a lot of organisations are now using. We have strong partnerships with the BBC, with government, with the NHS and the DWP, with organisations like Mumsnet and with the banks. All that needs to be passed on.
I am trying to ensure that we are at the centre of the discussions as the new organisation is shaped. Under the original proposals, there was a project structure that included us, the FCA, the Treasury and DWP. That has been disbanded because of the change of plans, but I am pressing hard to set up something very similar, and I think they will respond. Because the Money Advice Service has all the processes, systems and structures of a complete body, which the rest of what will come into it does not, I am happy to second people to ensure that we make the most of all the learning and all the resources we have that can make a difference going forward.
Q95 Viscount Brookeborough: Can I take you back to people’s early years and schooling? We have read your evidence, and have heard from others, that the figures for children and teaching in schools are fairly dismal, especially in England, perhaps less so in the regions; I come from Northern Ireland. What new initiatives do you believe are required to improve the delivery of financial education in primary and secondary schools? What is required to ensure that activities are targeted, co-ordinated and adequately funded? How will you measure that?
Caroline Rookes: First, schools are very important, although perhaps not as important as parents. The important thing is to get to children when they are very young. At the moment, we are piloting financial content in existing parenting interventions in Wales to test that out.
Turning to schools, the report that the APPG on Financial Education for Young People produced set out a number of recommendations which we would support. For me, the key is primary schools. We know that habits and attitudes are formed before the age of seven. We also know that a lot of learning takes place before the age of 12, so it is critical that financial education is taught, and taught well, in primary schools. One big problem is the fact that teachers do not feel confident to teach it. There are a number of reasons for that. One is very closely linked to numeracy. Some teachers are afraid of maths in the way that a lot of adults are afraid of maths, particularly in primary schools, where it is not necessarily seen as a skill that teachers need. Most teachers do not have training in financial education; I think one teacher in five has had it. So there is something about training teachers; there is something about the resources that teachers need.
The other area that I would say is a priority is young adults—the 17 or 18 year-olds who are making the transition to independent living, whether to college or to work, away from home. When they reach 18, they are prey to offers of credit and so forth. Like all of us, they make daft decisions that then come back to haunt them, because they do not understand credit ratings. There is an awful lot that can be done around 17 or 18 year-olds.
An argument that is often put forward is that financial education does not work. There is some evidence that it does. A parent and student study in Brazil showed impact on the financial behaviour of both. There has been some evaluation in the three US states where financial education is mandatory. Again, it shows positive results, but we need to do an awful lot more to evaluate what works, and that is where the Money Advice Service comes in.
Viscount Brookeborough: Is not one of the issues that it is not mandatory and, therefore, simply does not happen? We have been given evidence that, as you said, all too often teachers do not have confidence. In one case, the person giving the evidence said, “They do not have the confidence to teach them about pensions and things like that”. You are not teaching primary school pupils about pensions; you are teaching them how to play a game with money—about saving or whatever. To me, there seems to be a bit of an attitude of, “We are not going to do it, and we will find excuses for not doing it”.
Caroline Rookes: I agree that it should absolutely be on the curriculum in primary schools. There is so much scope to teach it in all sorts of different ways—experiential ways.
Viscount Brookeborough: If the children find it fun, the parents will find it fun.
Caroline Rookes: Absolutely. I totally agree. That is what needs to happen. It is on the curriculum for secondary schools, but half the schools do not need to follow the curriculum. It is not tested in any serious way by Ofsted, which is another thing we need to look at. If it is not tested, not surprisingly, schools will focus on results that make a difference.
Viscount Brookeborough: I have one more question, which has a yes or no answer. Given that school is the one time when every single person goes through an institution, if it was mandatory, would it not provide a base from which to work to solve all the other problems in the future?
Caroline Rookes: I do not know that it would solve all problems, but it would provide a very good base—
Viscount Brookeborough: It would provide a base on which to work.
Caroline Rookes: Totally.
Francis McGee: I agree with all of that. This is an area where the “what works” approach Caroline talked about can make a real difference. We have to get smarter at working out how to reach different subject areas of the curriculum, how to support teachers and how to deal with different learning styles, different needs and so on. It has to be a much more structured and broad-based approach.
To pick up the last point, I take the view that financial education will not solve all problems. It is potentially necessary, but it is certainly not sufficient. You cannot educate people out of every vulnerability. You can help them to take decisions that may build their resilience, and you can teach them things that may help their decision-making when they encounter difficulties. However, when you look at the vulnerabilities that drive exclusion and problem debt, I do not think that education will ever be the sole answer in dealing with them.
The Chairman: Lord Holmes, do you want to come in at this point?
Lord Holmes of Richmond: No. I was nodding in agreement.
Q96 Lord Harrison: How effective is government policy such as the proposed Help to Save scheme in building financial resilience? Are further policy interventions required? Are employers, banks and other organisations doing enough to help those on the lowest incomes to save and to build financial resilience? Francis, in answering that, would you link it to the very interesting statement in your written evidence that “both debt and financial exclusion” should be tackled together?
Francis McGee: I will try to answer those questions in sequence. We strongly welcome the Help to Save initiative. We have research showing that, if every household had £1,000 put aside for a rainy day, it would keep half a million households out of debt. That is not a bad aspiration to have. There is a long-standing gap in government savings policy, where the existing interventions do not reach those on the lowest incomes. This initiative will start to make inroads there.
The legislation currently before Parliament can be improved in two or three very specific ways. It could be made to fit better with the reality of the circumstances of the people it is trying to help. They are people who often have very uneven incomes and are in very unstable situations. For that reason, having a hard and fast cap at £50 a month of savings does not fit those circumstances terribly well. A £50 average over time might work better, because people might be able to do more one month and rather less the next.
If it is to act as a buffer against financial difficulties and problem debt, it would be altogether better if the government bonus—generous as it is—were available every six months and people did not have to wait for two years. When we spoke to our clients about this scheme, something like half of them said that they experience some sort of income shock every six months or so, so putting money to one side for a two-year period will not provide them with the accessible rainy-day buffer that they need. If they wanted to use it in that way, they would lose the bonus. The third area is that we need to find a way, if we can, of protecting the accumulating savings pot from creditor and insolvency interventions, so that if somebody hits the buffers while they have an account they do not lose the money to insolvency actions and so on. That is on the Help to Save point.
You asked what more could be done. If I understand the Government correctly, it is interesting that they are saying that up to 3.5 million people could potentially benefit from the Help to Save scheme, but their impact assessments talk about only a fraction of that as the number of accounts that they expect to be opened. There is obviously a wider problem around access to savings for low-income people. We have done quite a lot of work considering whether and how an adaptation to the pensions automatic enrolment system could be used, and how you might be able to attach a rainy-day savings buffer there. That picks up your specific question about employers. The workplace, changing as it is, is still potentially a very useful and economical route to giving people access across a wide range of financial circumstances. Your final point was about how to tie that to exclusion and debt.
Lord Harrison: Yes. You made that point in your written evidence.
Francis McGee: It goes back to Caroline’s point about resilience. The vulnerabilities that create financial exclusion and the vulnerabilities that give rise to problem debt are very often the same. They are things like not having a stable and predictable income and not having a set of safety nets when you hit hard times. Savings are one kind of safety net. They provide a buffer, so that when the boiler explodes or the car breaks down you do not need to resort to credit to get by. We know that, if you resort to credit, you risk putting yourself into a spiral of dependency that could end in very chronic exclusion and very chronic problem debt. Does that help?
Lord Harrison: That is very helpful. Caroline, could you tackle the same questions? Could you also tackle Francis’s point that the two-year gap before you can access the £1,200 is a test on the recipient, and his analysis that the help that is available is not always appropriate? For instance, when I read that the ISA limit was increased to £20,000 or, indeed, that a lifetime ISA was being introduced in March this year, I thought, “This isn’t of any interest to people we are talking about”.
Caroline Rookes: The Help to Save initiative probably is. Our research shows that probably about half of those eligible for it have no savings, so it should make a difference to them. It is absolutely critical, as Francis said; if we are going to build resilience, people need that rainy-day savings pot.
It is too easy to dismiss people on low incomes as not able to save. We did a very small-scale piece of research in 2014, where we challenged 24 people on low to moderate incomes to save £100 a month. More than 20 of them did it, some on incomes as low as £15,000 a year. They kept video diaries. When you see the confidence—how empowered people feel—you realise how important it is. For one lady, the important thing was that she had been able to afford to take the dog to the vet. It is so powerful. It is vital that we create a culture of rainy-day savings, but I do not underestimate the problem. We are talking about a major cultural shift—moving away from spending today and worrying about tomorrow when it comes—so there has to be a multi-sectoral approach to saving.
As Francis said, the workplace is important. One of the areas we are looking at in the context of the financial capability strategy is how we can use the workplace, in two ways, to help people to save—to build rainy-day savings. One is to use payroll, building on the idea of automatic enrolment, although it is too soon to put anything on the back of auto-enrolment, not least because it does not finish rolling out until 2019. The other is to get employers onside, not just to provide the saving schemes but to ensure that people have guidance in the workplace. One of the work streams of the FCA Financial Advice Market Review is looking at what employers can do to help their employees. Automatic enrolment has brought money issues back into the workplace. People tend to trust their employer, so there is some fertile ground to build on there.
Lord Harrison: The other point that I made was about the ISA—the provision that was made in March.
Caroline Rookes: The lifetime ISA.
Lord Harrison: This is not to do with the people we are concerned with, is it?
Caroline Rookes: I would not have thought so. There is a question about how the lifetime ISA fits with automatic enrolment. For me, the important thing is to get people saving for their pension. Automatic enrolment will do that job. Giving people a choice, effectively, by saying, “You are automatically enrolled in a pension. There is now this lifetime ISA alongside it”, is complicating things for people. The people we are talking about are people who should accept being auto-enrolled in their workplace pension.
Lord Harrison: Francis, do you want to tackle the ISA point?
Francis McGee: I have made the point, really. The statistic that I happen to have in front of me is that, if you are in a household that earns less than £26,000, you are half as likely to have an ISA as you are if you are in a household that earns over £50,000. It is a question of reach. That goes to the incentives and targeting of financial services companies and so on. There is a gap among people for whom saving every pound is a hard thing to do. They do not yet have access to the kinds of rewards that are available to people for whom it is less hard.
Q97 Lord Empey: In the collection of debts such as council tax, are the Government and local authorities getting the right balance between, on the one hand, ensuring that public moneys are collected and, on the other, helping those who are struggling to manage their debt? How might those practices be improved?
Caroline Rookes: You are looking at me, so I will take it first, but I suspect that Francis will have a lot to say on this. I do not think that the balance is right. There are pretty variable practices around, but it appears that local authorities, in particular, can be very heavy-handed when dealing with council tax arrears. It is important that they look at the balance between recovering public moneys and helping people to get out of debt. I am sure that Francis will mention research that StepChange has done about the cost to society of people being in debt—lost productivity, health issues and so on—so it has to be important to help people to put their affairs in order, rather than sending the bailiffs around to bang on the door.
There are three things that we would suggest. One is that the Government work more closely with the debt advice sector, so that people are referred to debt advice more quickly and more seamlessly. The second is that they introduce processes that are more aligned with those used in other parts of the debt advice sector and with creditors. The third is that there is an approach to forbearance, which may well come up when we talk later about the Scottish system. I am sure that Francis will have a lot to say.
Francis McGee: I talked earlier about our premier league table, which we included in our written evidence. Local authorities were up there in second place, with 42% of our clients saying that, as a creditor, they had treated them unfairly. The only group above local authorities in that league table were bailiffs. When you consider that over half of bailiff cases are in relation to council tax debts, you start to build a picture of the important role that local authorities play in problem debt and the harm that it causes. In 2015, 30% of our clients came to us with council tax arrears among their debts. Only four years earlier, it was half that, so it is an accelerating problem.
I completely take Caroline’s point, which I support, about signs of heavy-handedness. The first thing that we encourage people to do is to engage with their creditors. Some 86% of our clients said that they engaged with their council; 65% of those said that, by return of post, they got a threat of enforcement or court action, or a demand for the whole year’s outstanding liability. The puzzling thing is that there is very little evidence that it works.
The Money Advice Trust is another debt charity, which runs the National Debtline—I think you saw Joanna. It did some absolutely first-class work. It made freedom of information requests about local authorities the length and breadth of the country. When it looked at bailiff use, it found that the top 10 councils for frequency of bailiff use collected 22% of their debts, but the bottom 10 councils for frequency of bailiff use collected 31% of their debts. There is evidence to suggest that it does not work.
What can you do? We need better joining-up between the appropriate bits of central government and local councils. There are bits of guidance about what good practice means, but they are non-statutory. There are competing incentives on councils: to abide by principles of good collection and put affordable repayment front and centre, on the one hand, versus cash collection in-year, on the other. There is plenty more that can be done.
Lord Empey: We all understand that a local authority has to do what it can, in fairness to everybody in the area, to collect the money that it is owed. That is common ground. Some debtors may say, “It is a local authority. It is off a broad back. I’ll worry about something else, rather than them”. People may tend to put them at the bottom of the pile. The other thing is that in Northern Ireland, where I come from, we do not have council tax; we have property-based rates. Of course, a property is physically there, so we have a very high collection rate. I wonder whether the system itself is at fault.
Francis McGee: It is very difficult to analyse whether people put the council at the bottom of the pile and to provide evidence for that. We can talk more about this when we discuss forbearance and so on in general, but we know that, typically, our clients present with five or six consumer credit debts, plus a couple of priority arrears—a council tax liability, a water bill or whatever. It takes only one of those creditors to break the spirit of good collection for the person to be sent into a “robbing Peter to pay Paul” scenario.
Taking your point about broad backs, I would start on the basis that there is a responsibility on government, central and local, to provide leadership by example in these areas. The only other thing I would say about perverse outcomes is that there is evidence that, even when a council is successful in collecting its council tax, its collection of rent from social housing often falls off, so it is even robbing itself. I do not know whether that works in the rates scenario.
The Chairman: We need to press on a little now. Francis, would you be able to provide the Committee with a note on that very interesting point? You talked about the evidence for different approaches by different local authorities and the different results they have had. It was almost as if you had some sort of league table.
Francis McGee: I do not have a league table, but I can find the National Debtline stuff for you. I have two or three really good examples of where good practice seems to be working.
The Chairman: That would be excellent.
Q98 Lord Holmes of Richmond: What has been the impact of the recent regulation of payday loans? Should other forms of high-cost, short-term finance be subject to similar regulation?
Francis McGee: In 2013, one in four of our clients presented with at least one payday loan debt. Since the introduction of the price cap, that has fallen to one in six. There is no doubt in my mind that regulatory intervention has made a real difference in the market.
Next week, we will publish some new work that points to some continuing issues in that market, which suggests that it is by no means job done. A lot of the pricing that we are now seeing is clustered very close to the cap. The products have changed. There are now fewer classic 30-day payday loans; there are more instalment products over several months. Arguably, the price cap is not right for those products. It was not set with those new designs in mind. There are still problems with people having multiple loans of this kind. Where our clients have a payday loan, over a third of them have three or more. That suggests that there are still issues with affordability assessments and responsible lending. There are still issues in the payday market.
On other forms of high-cost credit, the FCA has made some very welcome moves to start to take action around guarantor loans. People often ask me, “Where are you watching next?” You watch the things that are rising at a fast rate. Guarantor loans are still low in absolute terms, but they are rising quickly. We are also starting to see the guarantors, as well as the original borrowers, coming to us for debt advice. The FCA is starting to take steps in that market, so let us see how it goes. It is also intervening on rent to own. There are still some quite difficult practices in that market. We want to see it go further. A lot of bundling goes on. You have to take out very expensive warranty products alongside the actual goods, and some of the collection and repossession practices in those markets still need straightening out.
There is room for intervention in a variety of different high-cost credit markets. Whether a price cap of the payday loan style is the right intervention in each one I will leave to the regulators, but we are certainly anxious for action to protect vulnerable people.
Caroline Rookes: I do not have anything to add to Francis’s comments.
Q99 Lord Holmes of Richmond: Let me ask you another one, then. Do you think that adequate protection exists around more traditional products such as overdrafts and credit cards to stop people getting into difficulties with those products?
Francis McGee: Would it astonish you if I said no? In the work that we will publish next week, we asked people who have been declined a payday loan what they are using instead. The single biggest category is a different payday loan, but the next ones are doorstep loans, credit cards and overdrafts. Credit cards and overdrafts can both lead to persistent problem debt.
With credit cards, there are the serial minimum payers—the people who pay the contractual minimum, month in, month out. In 5.1 million accounts, it will take more than 10 years to clear the balance. People have multiple cards. A third of the people who present to us with credit cards have three or more. People have their credit limits increased without asking. We think that people should have control over how much credit they have access to.
There is room for regulatory interventions on credit cards. Companies could do things to increase the minimum payment. We did some sums. You could get the repayment period down from 18 years to three years if the minimum payment went up by £10 a month on some products. That is at least a trade-off that is worth debating. We think that unsolicited credit limit increases should just stop.
On overdrafts, the Competition and Markets Authority has recommended that the banks set themselves a monthly cap on unarranged overdraft charges. We think the regulator should set that cap for them. Many of the main banks already have self-imposed caps, yet we still see people who are chronically excluded and in chronic financial difficulty picking up £45 a month charges in five or six months out of 12. A lot of problem debt is caused by mainstream credit products.
The Chairman: Thank you very much. Is your question quick, Lord McKenzie?
Lord McKenzie of Luton: Hopefully. If it is not, perhaps the witnesses could write to us on the issue. You intimated that issues around credit scoring are too lax, in a way, because they allow proliferation of debt. Is there something at the other end of the spectrum, where lack of transparency on how it all works makes it more expensive for people to borrow?
Francis McGee: I think Caroline has talked about credit scores.
Caroline Rookes: There are a lot of issues around credit scores. Can we write to you on that?
The Chairman: If you could write to us, it would be very helpful.
Q100 Lord Kirkwood of Kirkhope: Time is against us. I want to put a narrow point to Francis about forbearance, but could I ask two contextual questions before that? The first is a bit of a leading, lawyer’s question. In relation to the trends in the problems associated with financial exclusion and inclusion, would you both agree that the problem is actually accelerating—I think Francis used that phrase—and that things are now getting qualitatively different? Is there a way of characterising that? Is it just getting steadily worse, or is it getting dramatically worse? What is your sense? The evidence that we have is that it is getting worse, and quite badly so. You both have very interesting perspectives on this. I would be interested in your quick assessment of how bad is bad.
Caroline Rookes: It is not getting dramatically worse. It is certainly not getting any better, but indicators such as levels of financial education tell us that in the future things could get dramatically worse. With uncertainty coming down the line from Brexit, the potential is for a dramatic decline in people’s circumstances, because they do not have the resilience to cope with the shocks that may well come down the line.
Lord Kirkwood of Kirkhope: That is the point I was driving at.
Francis McGee: I completely agree with that. I would distinguish two groups that are vulnerable. One is a group that has persistently low incomes and, therefore, vulnerability to not being able to make ends meet, month in and month out. It is not clear to me that that group is getting decidedly bigger or smaller. It has been persistent over years, if not decades. There is another group that is facing increasing vulnerability. It is a group that is often in work. Only a third of our clients are out of work; this is a working problem. It is to do with the nature of work—with work not providing a steady, predictable income for everybody in the way it used to. That is related to zero-hours contracts, rising self-employment and different forms of work. It is creating a group whose numbers are rising, I believe. It is the group that Caroline characterised as increasingly at risk from future economic uncertainties—a Brexit-related slowdown, higher inflation and so on.
Lord Kirkwood of Kirkhope: That is extremely useful. Caroline, can I turn to you and talk about a contextual question that the Committee is facing? We are considering this subject in the middle of the gestation of the transition to the new body. I would be very interested to know how you think we might be able to assist with that. You said that you had put in some evidence to the Government. I do not know whether we have seen that; if we have not, maybe we could see it.
Caroline Rookes: Yes.
Lord Kirkwood of Kirkhope: While you are answering that, I have a slightly cheekier question. Some of the evidence suggests that, since 2011, the momentum has faded from this whole subject. The Money Advice Service has been through some uncertain times as part of that. Your evidence is very strong this morning, but are you able to assure us that the learning points have been made, the future is clearer and the difficulties in the past are now behind you, in the work that you are doing to put the organisation back on track?
The Chairman: Can I intervene at this point? They are very important questions, but time is very much against us. Could I ask for some very succinct answers, please?
Caroline Rookes: Okay. Very succinctly, yes, we have put a lot behind us. A lot of the issues that have been around about the Money Advice Service are based on out-of-date information. Last year, we worked with a whole range of external stakeholders to produce a corporate strategy, which had unanimous agreement among those stakeholders. The important change was that we accepted the need to move more towards commissioning, to have less duplication and to look more at filling gaps. It will not be entirely commissioning—there will be areas where we continue to provide a service—but we will move away totally from duplicating other areas. We have also developed a lot more insights around financial capability and around customers. We have done a lot of work that has increased our credibility.
On the issue of helping us, for me, the important point is to raise the question of very low financial resilience. That is a fact. It is a fact that, in the short to medium term, people may face a lot of uncertainty and turmoil around Brexit. Longer term, people are saving into pensions that will be much smaller than they were in the past et cetera. It is about getting the Government to accept the importance of financial resilience, and its ever-growing importance in the context in which we are all operating.
Lord Kirkwood of Kirkhope: That is very useful. I have a single-sentence question for Francis. Why should the Committee not recommend that we put in statute across the United Kingdom the debt arrangement scheme that applies in Scotland?
Francis McGee: Why you should not? I cannot think of a good reason.
Lord Kirkwood of Kirkhope: It was a bit of a leading question.
Francis McGee: The debt arrangement scheme is not perfect, but I can offer many suggestions on how to improve it to something that would work brilliantly well across the UK.
Lord Kirkwood of Kirkhope: If you could do that, it would be very helpful.
The Chairman: That would be excellent.
Q101 Lord Shinkwin: Mindful of time, I have two questions. One is for answer now, if you would, and the second is for written answer after today. Both of you touched briefly on good practice. I was particularly interested in your “what works” fund, Caroline. Could you each give us just one example—your top example—of good practice in local, regional or devolved government that you would highlight for possible wider rollout? The question for written answer is this. Francis, you mentioned that one of the new complexities that we are facing is the localisation of welfare. Given the localism agenda, how can a co-ordinated approach to tackling financial exclusion be achieved? Perhaps I could hear your top example of good practice.
Caroline Rookes: I would instance some pilots that we have been running in Scotland helping vulnerable people to see that they need help and then supporting them to get that help. A group of volunteers is working with people who are probably too fearful to approach agencies, getting them to the agencies and really transforming their lives. The trouble is, as you say, that it is very localised. It is one to one and very expensive. One of the things we want to do in the “what works” arena is to see the extent to which you can scale up some of these initiatives. There are a lot of them, particularly in the devolved Administrations, because we are operating in a much smaller area and it is easier to test initiatives. We want to look at whether there is any scope for scaling up some of those.
Francis McGee: I can think of two local authorities in England that have set up partnerships with local credit unions or social lenders and with white goods providers. They have a very good mechanism, with very quick referral, decision and intervention, to get people stuff they need, whether a loan, goods or whatever. That kind of multipartite partnership seems to work very effectively.
The Chairman: We look forward to your written answer to the other question. We are coming to the end of the session. I apologise for the fact that we have gone over by five minutes or so. Could I ask you to finish with a one-sentence response to a question that I always ask at the end of these sessions? Looking at the subject of financial exclusion overall, where do you think the Committee should focus its attentions most? What is the top area for us to focus on?
Francis McGee: If I am allowed one sentence with some semicolons in it—
The Chairman: That is fine.
Francis McGee: The key vulnerabilities driving financial exclusion are around the erosion of the income safety net; what is happening when people are in work, when they are out of work and when they move from being in work to being out of work. That is the first area. The second is better forms of credit, which is the social lending point, and alternatives to credit, which are things like saving. The third is things that will help recovery, so that financial exclusion does not become chronic and does not give rise to long-term scarring. That is about access to debt advice and other forms of advice and things like the protection offered by the debt arrangement scheme.
Caroline Rookes: For me, it is, first, pushing hard for the new money guidance body to have the right remit, powers and resources, so that it can continue to work to improve financial capability, financial resilience and financial inclusion; and secondly, really pushing hard to get financial education properly taught at younger ages.
The Chairman: Thank you very much. It has been a very good session. We are very grateful to you. We have got a lot out of it, so thank you for your time.
