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Money, money, money

Professor Elaine Kempson

Professor Elaine Kempson

19 September 2009

The Personal Finance Research Centre (PFRC) is an independent centre that specialises in social research across all areas of personal finance, mainly from the consumer’s perspective

Many people, particularly those living on low incomes, cannot access mainstream financial services such as banking, insurance, credit and savings products. Financial ‘inclusion’, a term coined by the PFRC, aims to tackle such exclusion by providing people on low incomes with access to appropriate and affordable financial services. In 2005 the Government set up the Financial Inclusion Taskforce, of which Elaine Kempson is a member. The Taskforce monitors progress on the objectives the Government has set out to achieve and makes recommendations on what more needs to be done.

As part of this work, Kempson and the PFRC team have explored what individuals on low incomes most need in the way of financial services and why the marketplace is not meeting those needs. They have designed basic bank accounts which are very simple, ‘no frills’ accounts that cannot be overdrawn, and which are now held by about seven per cent of the population. They also played a role in the design of a ‘matched’ saving scheme for people on tax credits or unemployment benefit, whereby the Government will give qualifying individuals 50p for every pound they save. It is a very simple and time-limited initiative, but it will encourage people who struggle to save to give it higher priority. The PFRC evaluated the first pilot study of the scheme and it will be rolled out across the country next year.

The credit crunch is having a particularly adverse impact on those on low incomes, although much of the discussion has focused on the effects of tightening credit for those on middle incomes. Approximately 2.5 million people in the UK use home credit – small-sum, short-term loans – and depend on this type of finance to smooth cash flow and for events such as Christmas and children’s birthdays. However, it comes at a high price due in part to the expense of the weekly door-to-door collection of repayments by agents. Kempson and others undertook an evaluation for the Joseph Rowntree Foundation to determine whether a not-for-profit credit service might be a viable option. However, analysis showed that just to run a service on a break-even basis required an APR of 120%. Furthermore, they found that running costs would not be recovered for five years.

Approximately 2.5 million people in the UK use home credit to smooth cash flow

The seizing-up of the wholesale credit market on which the home credit lenders rely for their own funding has created a crisis of credit supply for these most vulnerable borrowers. One of the three largest credit companies specialising in this end of the market has just gone into administration and another has suspended all lending. Kempson was so concerned that susceptible people would be forced to turn to illegal lenders that she briefed Government ministers just ten days before the last Budget. The upshot was that an additional £270 million was allocated to the Social Fund, the interest-free grants and loans scheme that people on benefits can access. This was a particularly significant achievement in the current cost-cutting climate.

Sharon Collard, Deputy Director of the Centre, has worked for some time on the problems caused by unlicensed, illegal lending where there is usually no written agreement, no fixed interest rate and no fixed penalty fees. Victims can be heavily penalised for being just a day late with repayments and may end up paying many times what they originally borrowed. At its very worst, women suffer physical violence or are forced into prostitution. The Government department that deals with credit became very concerned about this and the PFRC was heavily involved in research to scope the extent and nature of the problem and to evaluate a pilot scheme set up to take illegal lenders off the streets. This scheme has subsequently been rolled out nationally and there are now hotlines people can phone to shop offenders, many of whom are going to prison.

Over the past five years the level of consumer credit and borrowing has risen by 15% a year, such that by the end of last year the amount outstanding was around £112 billion, equivalent to a debt of £1,900 for every man, woman and child in the UK. But what these figures do not reveal is how the borrowing is distributed. In fact, at any one time only half of the population owes anything at all, apart from mortgages, and within the half that does borrow, less than 5% will be seriously over-borrowed. Research into this group by the PFRC identified the emergence of some surprising attitudes to debt, particularly in those under 25 who considered themselves ‘victims’ of a consumer society that pressurised them to consume and thus borrow. When asked ‘How do you recognise whether you are getting into difficulty?’, the response tended to be ‘When your creditors threaten to take you to court’. And when this was followed by ‘What action do you take when you realise that you are over borrowed?’, the majority view was ‘You become bankrupt’. In contrast, the over-50s said they would cut up their credit cards. This major shift in attitudes towards debt had previously been reported by hearsay, but this was the first time that such clear evidence had been presented.

Over the past five years the level of consumer credit and borrowing has risen by 15 per cent a year

A recent report completed by the PFRC was commissioned by the Financial Services Authority (FSA) and designed primarily to help assess the extent to which consumers of financial products receive and use clear, simple and relevant information, since that would inform one of the FSA’s three strategic objectives: ‘to help retail consumers achieve a fair deal’. The report examined in detail consumers’ behaviour when purchasing products, and the availability, clarity, use and influence of information and advice on final product choice.

The results showed that there is a significant risk that consumers are not achieving a fair deal under the FSA’s strategic objective. Few consumers, particularly those with lower levels of financial confidence, attempt to shop around for information and advice and many do not read or understand the information that is provided to them. There was also a high tendency for consumers to be influenced in their final purchase decision by a provider’s reputation or an existing relationship with them.

As re:search went to press, it was announced that Kempson had been appointed to another taskforce – the Housing Market Taskforce – that will look at ways to end the cycle of boom and bust in the housing market. She was looking forward to bringing to the table PFRC’s considerable expertise to help resolve the root causes of instability in the housing market. The Taskforce will deliver its recommendations in 2010.

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