StepChange Debt Charity welcomes the opportunity to respond to the call for evidence from the Treasury Committee on access to basic retail financial services.  We are the largest specialist debt advice charity operating across the UK. In 2016 some 600,000 people contacted our telephone helpline or online debt remedy tool for advice and information about problem debt.

Summary

• Basic retail financial services are unlikely to meet the needs of financially vulnerable consumers where they are priced or structured in ways that push them into problem debt.
• There have been positive developments in ensuring some financially vulnerable households have access to basic transactional banking services without fear of facing bank charges. However, there is more to be done to ensure all those that need a fee free basic bank account can access one in practice.
• We are also concerned about the levels of persistent debt when mainstream financial services like overdrafts are accessed. This is a widespread problem with more than half (52%) of our clients having overdraft debts. When interest and charges build up, overdrafts can go from offering short-term access to credit to becoming a long-term borrowing problem.
• We think there is a case for a cap on particularly harmful unarranged overdraft charges and believe more work is needed to tackle persistent overdraft debt.
• There are other high cost credit products that continue to cause problems for those, often financially vulnerable, borrowers that use them. Regulatory intervention in markets such as payday lending was important and necessary to reduce this harm. FCA rules on pay day loans – prompted by Parliament - have reduced the number of consumers using this market, but in practice this has only restricted access to potentially harmful credit for people who would struggle with product terms available.
• This is a positive development but also raises the broader question of where these financially excluded households can turn when they need help with emergency and essential expenses.
• If a well-regulated and competitive market cannot provide financially vulnerable consumers with products that meet these essential needs the resulting social policy question must be addressed by government.

Competition in retail banking
 

1. There has been a considerable push to improve the state of competition in retail banking with the Competition and Markets Authority’s (CMA) recent retail banking market investigation.[i] We are concerned that financial markets do not always work for the most financially vulnerable consumers and in some cases competition can drive poor outcomes for these consumers. As the FCA points out in its recent ‘future mission’ consultation, price discrimination and cross subsidies can disadvantage some consumers. We believe this is a particular risk for financially vulnerable consumers who have become ‘locked-in’ to using high cost products, including persistent overdraft debt.  Competitive financial services markets may not be fully meeting the needs of vulnerable consumers without unreasonable risk of detriment.

Persistent overdraft debt

2. An example of this is consumers with persistent overdraft debt, including those who struggle to get out of their arranged overdraft and those that face charges for regularly going over their overdraft limit.  The main issue is where overdrafts that are designed to be a short-term credit product become a long-term borrowing problem. Overdrafts are a significant part of the debt landscape, with more than half (52%) of our clients having overdraft debts. 

3. The CMA’s investigation found that although overdraft users have the most to gain from switching, they are the least likely to switch.[ii] It was ‘heavy unarranged overdraft users’, those that used an unarranged overdraft for nine months or more in a year, in particular that were the least likely to switch. Therefore heavy overdraft users were the most likely to experience what the CMA calls an adverse effect on competition. Moreover, these consumers are unable to access credit facilities that do not push them further into financial difficulties.

4. Overdrafts charges resulting from regularly having to go into an overdraft or over an overdraft limit can lead to and exacerbate financial difficulties for many financially vulnerable households. We surveyed our clients with overdraft debt to explore their experiences of overdraft charges and found that:

• Our clients with overdraft debts went into their arranged overdraft in 11 of the last 12 months on average.
• They went over their overdraft limit (into unarranged overdraft) in five out of the last 12 months on average.
• They were charged an average of £45 for going into unarranged overdraft. Therefore on average in a year they are charged £225 in unarranged overdraft charges.

5. The CMA’s remedies to address lack of competitive pressures in overdrafts include text alerts and grace periods to warn customers before they are likely to go over their overdraft limit. They also include a new requirement on banks to set a maximum monthly charge cap (MMC) covering all unarranged overdraft charges, to be set by the banks themselves. We have expressed our concerns that these remedies will not go far enough to tackle persistent overdraft debt. The FCA has begun a review of high cost credit, including overdrafts, and we believe it is essential the FCA goes further than the CMA and takes action to tackle the role of overdrafts in problem debt.

6. Firstly, we are concerned that the CMA’s proposal that the MMC be set by the banks is likely to have extremely limited impact. The four major high street banks that make up 77% of the market already set their own limits on monthly charges, and these can be as much as £90 a month. Moreover, banks make over £1 billion a year from unarranged overdraft charges and given these substantial revenues there may be little financial incentive to lower existing charges. There is a clear need for an unarranged overdraft charge cap to be set by the FCA as an independent regulator. The FCA has stronger consumer protection powers than the CMA and is best placed to balance the competing priorities of lenders and consumers and set an effective and fair cap. The FCA has a good track record in this area introducing a cap on the cost of payday loans which has reduced the detriment faced by financially vulnerable consumers.

7. The FCA should also be looking at the product features and charges associated with arranged overdrafts. The FCA should take action to ensure that lenders do more to identify and support people who are trapped in an overdraft cycle and give them better and more manageable ways of paying down their debts. For example, banks could identify where customers are struggling with their overdraft and separate their debt from the transactional banking facilities (This might be achieved by converting the overdraft into a loan at a non-punitive interest rate and a sustainable repayment schedule). This would bring vital stability to household finances and provide a sustainable and affordable way of repaying their debt balance.

8. The FCA review of overdrafts should conclude with action to tackle harmful overdraft charges and clear outcomes on reducing the number of people struggling with persistent overdraft debt.

Financial exclusion

The provision of basic bank accounts

9. There have been recent improvements in access to banking with the introduction of fee-free basic bank accounts. These were introduced following government action to get an agreement from the banking industry to establish these new accounts. This gives access to bank accounts without the risk of building up overdraft or bank charges to people who do not already have a bank account and are ineligible for a standard current account. The government have reported that over 4.1 million customers have opened these bank accounts since they were introduced in in January 2016.[iii] 

10. However, some of those people that already had basic bank accounts before the new fee-free accounts were introduced are not being switched over so are still being charged on their existing accounts. Concerns have been raised that of the eight million people with basic bank accounts, around half are still able to be charged for failed payments with Treasury figures showing that 3.7 million basic bank account holders are not on the free-fee accounts.[iv] To get the benefits of the new fee-free accounts, existing basic bank account holders have to be aware of the new accounts, understand if they are eligible, know how to change on to the new account and contact their bank or a new bank to switch onto the fee-free account.
11. The Treasury should extend the commitment from all the banks to offer fee-free basic bank accounts to those that need them. This would mean that all existing basic bank account and other current account holders who meet the conditions for the fee-free basic bank account are offered them with a choice of staying with the same bank, or switching.

12. Another issue is the obstacles some can face in trying to get a new fee-free account. The criteria for the fee-free account means people can only get one if they either don’t have an account at all, have one elsewhere and want to switch, or are in financial difficulty by an unclear definition and proactively want an additional account. This potentially excludes many who have a basic bank account and feel reluctant to switch providers or are not considered to be in financial difficulty. We have evidence of our clients being rejected when trying to open a basic bank account:

13. These examples suggest that some people are being denied access to the fee-free basic bank accounts even if they meet the criteria and need them. This may be due to a gap between bank policies and their practices on the ground. Treasury should explore why banks are not always in practice meeting the commitment to offer fee-free basic bank accounts to all those that need them. The banks should also recognise when people are in need of these accounts and proactively offer them rather than on some occasions refusing them.

The efficacy of consumer credit regulation

14. We believe the FCA regulation has made some good progress in controlling some of the more egregious problems in the consumer credit sector. A good example of this are the interventions in the payday lending market that capped the excessively high interest rates and charges in this sector, strengthened affordable lending guidance and limited the rolling over of loans.

15. The price cap on and better regulation of payday loans has had a significant impact with substantially fewer people with payday loan problems coming to debt advice charities like StepChange. In 2013 nearly a quarter (23.4%) of all our clients had payday loans and this fell to 16.3% in 2016. In contrast, we saw 82% more people coming to us with payday loan debts in 2013 than in 2012. The FCA’s necessary intervention has clearly had a positive impact by substantially reducing the numbers of people falling into difficulties with payday loans.

16. These essential regulatory actions have therefore gone some way to tackling the worst excesses of the payday loan market. However, problems remain in this industry as our research on our clients’ experiences of payday loans finds continuing issues with lending practices, affordability assessments and the treatment of customers in financial difficulties.[v] For example, multiple payday loans are still an issue with over a third of our clients with these debts having three or more loans and a lack of evidence that real-time data sharing is preventing this.[vi] The FCA is evaluating the impact of the price cap as part of their broader review of high cost credit, and we hope they will tighten their other pay day rules to tackle these issues.

17. The FCA estimated that around 160,000 people a year would no longer get payday loans as a result of the price cap. Our research found that of those clients who were rejected for a payday loan the majority felt they had few other options. 40% missed a bill or loan payment, 31% borrowed from friends or family and 34% borrowed from other lenders. Of those that borrowed from other lenders, most turned to another payday lender (22%) or home credit lenders (20%) and others turned to mainstream credit (18% used their credit card and 14% used their overdraft). Only a very small proportion (3%) said they went to an illegal loan shark. Therefore just over a third of our clients who were ‘declined applicants’ felt they had to turn to another commercial lender and were not seeking help from more affordable alternatives like community lenders or local welfare provision.

If you borrowed from another lender, which other type of lender did you use on that occasion?

[It is important to note that the sample size for this question was very small (just over 100 clients)]

18. The FCA interventions have inevitably reduced the supply of payday loans for some. This is positive as wider access to high cost credit was clearly not the answer for financially vulnerable households. Before the price cap and other FCA interventions, many of our clients were using payday loans as a last resort but when they struggled to repay and were hit by the interest and charges their debts would spiral out of control. It is likely that if they got into difficulties with their payday loan they would also be falling behind on other bills or other credit repayments. Therefore it is welcome that the price cap has led to restricted access to credit for more 'higher-risk' consumers.

19. Nonetheless it raises the necessity of ensuring these and other financially excluded households have improved access to affordable credit alternatives. This issue appears to be beyond the current remit of the FCA and should be a priority for government policy.

Access to affordable credit

20. We believe the government has not gone far enough to improve access to more affordable, sustainable bank and non-bank credit products for the more financially excluded. Despite changes to the payday loan market, there are over 4 million people using credit as a ‘safety net’ and finding it difficult to repay.[vii] They are significantly more likely to be in or at risk of financial difficulties as 60% are keeping up but struggling and over a third (36%) are falling behind on bills and credit commitments.[viii] 16% of the 4 million, said they used high cost credit to meet essential and emergency expenses.

21. Other research has found that consumers using high cost credit feel they have no other option as they are not able to pay in cash or access mainstream credit.[ix] Our clients have told us about how they lack access to affordable credit options so have to turn to these high cost products:[x]

“As my credit rating was non-existent I had no option but to use doorstep lenders who were only too keen to 'help'.”

“When I needed help I looked at lots of different options but in the end the only thing I could get was a payday loan.”

“I never expect to get credit from high street lenders these days…I hate being shackled by high interest rates even after I have rebuilt my financial stability.”

22. The main response of the Government, alongside strengthening financial regulation, has been to encourage the growth of non-bank community lending. The Department of Work and Pensions has invested £38 million into the Credit Union Expansion Project (CUEP). But credit unions and community development finance institutions (CDFIs) still have limited reach and the commercial banking sector has done little to address the needs of those currently forced to turn to high cost credit. Our research found that only 5% of those needing affordable credit were using community lenders.[xi]
23. Social Fund crisis loans previously provided support for many of these households as 21% of those in the lowest income quintile accessed these no-interest loans in 2011.[xii] However, crisis loans (and community care grants) were abolished and replaced by local welfare support schemes in England and the Scottish and Welsh welfare funds in 2013. The English local authority schemes and Welsh scheme have an uncertain future as there is no specific UK government funding for local welfare assistance after 2015/6.[xiii] Although the Welfare Funds (Scotland) Act 2015 has provided certainty that the provision will continue in Scotland.[xiv] Other interest free loans, Budgeting Loans (to become Budgeting Advances under Universal Credit) have continued to be available through the Department of Work and Pensions. However, these loans are inaccessible to households that do not meet the eligibility criteria typically either if they are in work or have not been out of work long enough to qualify.

24. The provision of non-bank credit sources either through community lenders or through local authority or what is left of the Social Fund are not able to meet the demand for affordable credit. This leaves many of the most financially vulnerable struggling to access credit that they can sustainably manage and repay. There is therefore a case for greater provision of alternative affordable credit safety nets for those where any form of bank and non-bank commercial credit is not viable.

25. A scheme in Australia provides evidence of how business and government can partner together to provide support for the financially excluded unserved by other markets. Good Shepherd Microfinance, funded by the Australian Government and a major bank, provides a no-interest loan scheme (among other financial products and services). It has helped over 125,000 people who have previously been excluded from mainstream credit and an evaluation found that they were three times more likely to be severely financially excluded than the average Australian.[xv] The evaluation also found to the scheme improved economic and social outcomes for more than a third of clients.[xvi]  So far, there is one no-interest loans scheme in the UK - Tenbury NILs (based on the Good Shepherd scheme) set up in Worcestershire through charitable donations and support from the local council.[xvii]

26. There is a pressing need to further expand the supply of accessible, suitable and sustainable credit for those whose access to credit is currently limited to high cost products.

February 2017