Select Committee on Social Security Minutes of Evidence

Examination of Witness (Questions 1 - 19)




  1. Good morning, ladies and gentlemen. Can I open the public session of evidence. This is a new inquiry that the Committee is doing into the Social Fund, and we are lucky to have with us this morning Elaine Kempson. Elaine has been a distinguished author in the whole field and we are particularly interested in the DSS Research Report No.125, last year, called Saving and Borrowing. We are also grateful for the written submission you have made, which is enormously helpful. If you wanted to say something by way of a short opening statement, that would be fine, too. We have got one or two questions that we would like to ask. A good place to start might be for you to set the scene, maybe giving us a picture of the kind of client group, in your experience, that has access to this particular Social Fund provision.

  (Ms Kempson) In fact, what I am saying relates solely to the Budgeting Loans scheme, because that is the one that I know best. I should make that point clear, to begin with.

  2. Of course, yes, thank you.
  (Ms Kempson) There is no doubt at all that the people who use the Social Fund Budgeting Loans scheme are definitely amongst the most vulnerable people we have got in British society. They are not only on Income Support or income-based JSA but, from amongst that client group, they are the most vulnerable, so that, compared with others on Income Support, they are much more likely to have a high incidence of health problems, family breakdown, of housing instability, and are much more likely to have been on benefit for long periods of time. That is derived primarily from qualitative research, not from quantitative. It is not statistical but it was quite striking when we looked at the characteristics of those who had and had not used the scheme, that they are certainly very vulnerable. And, indeed, the reasons why they apply to the scheme usually derive from that vulnerability: they arise because people have health problems; because of housing instability, in particular, they frequently borrow in order to set up new homes; and because they have got a fairly high level of family breakdown, in the wider sense, that is, with parents and the wider family, they often have nobody else they can turn to if they need money. So the reasons for applying to the Social Fund are very much tied up with those instabilities in their lives.

  3. This paraphrases you slightly, and correct me if I am wrong, but you could be interpreted as being quite positive about some aspects of Budgeting Loans, because they are interest-free and can be a beneficial source of income. But do you have a professional view about the weekly level of benefits being able to meet things like removal expenses and furniture costs, in reality, at current levels?
  (Ms Kempson) They are too low, quite simply. For anybody who lives on Income Support or income-based JSA, more likely Income Support, of course, for any length of time, it is quite inadequate to meet the unexpected expenses. And by that I do not mean major expenses, it could be something like a pair of shoes for a child, a pair of torn trousers, small things like that can really upset the financial circumstances of somebody on Income Support, particularly families with children, who find it the greatest strain, and single people living on benefit alone, who lead a very isolated life, socially very isolated, because of the levels of benefit.

Mr Dismore

  4. I wanted to look at the position of Budgeting Loans in the wider context of the availability of credit and loans for people on low incomes. What other alternatives are there available for people on low incomes who need to borrow money?
  (Ms Kempson) Far fewer than the rest of us, in short. They use mail order extensively, weekly collected credit quite a great deal, they would also use some of the newer forms of credit that have arisen over the last few years, the rental purchase schemes, known as Crazy Georges; it is a rental purchase scheme that operates a little bit like hire purchase, except that the goods can be repossessed at any stage until you have paid the total amount, and that often happens with people. It is because of the terms of those loans, as much as the costs, that people learn, to their cost, that it is not an advisable source for them. There are then variants on pawnbroking; pawnbroking is increasing and has increased over the last decade, it was in the doldrums at the beginning of the nineties. There are new forms of that, for example a company called Cash Converters, that operates in a broadly similar way, but offers a sale and a buy-back, you have the right to buy back your goods, rather than pledging them for pawning. So that is the range of options that people have. It is fairly constrained, it is fairly expensive, and some bits of it are designed to meet the needs of poor people, particularly, say, weekly collected credit, in the sense that the products are designed in a way that meets their method of budgeting. There are no penalties for late payment with that particular form of credit but it is very expensive, and a great deal more expensive than borrowing from the Social Fund.

  5. Obviously, we might expect it to be more expensive than borrowing from the Social Fund because that is interest-free, but if I just put that to one side for the moment, what APR differential is there between more conventional borrowing and those available, a sort of ballpark figure?
  (Ms Kempson) To make it more real, what I have tried to do, in fact, in the report, we have costed a washing-machine, bought through different routes, and I think that perhaps illustrates it rather more realistically for these people, because APR is a little difficult to grapple with and it gets rather distorted at this bottom end of the market. If someone were to use the Social Fund Budgeting Loans scheme to buy a washing-machine in the high street for about £400, if they bought it through a mail order catalogue and spread the cost over about 50 weeks of the year, it would cost them about £500, to go to Crazy Georges, or one of the rental purchase schemes, about £600, a £400 loan from one of the weekly collector credit companies could cost you £700. Some people, in extremis, do need to go to unlicensed lenders, and, in our experience in this study, more than in any other, they are really quite prevalent in some neighbourhoods, and people spoke very openly about them. One of the women in one of our focus groups, her cousin was a money-lender; there you might be looking at £2,000 pay-back. So that is the kind of prices that people are paying for their credit.

  6. And for a family in work, without financial difficulties, who want to borrow, they might be able to get 0 per cent finance for a year or two, to buy some item?
  (Ms Kempson) Someone in work, with a reasonable income and a stable work history and a stable housing history, all of which go into credit scoring, yes, you could get a loan a lot cheaper.

  7. What share of this low income credit market do you think the Budgeting Loans have, compared with the overall amount that people borrow?
  (Ms Kempson) That is rather difficult to answer. I might be able to calculate it, but I have not come with the answer in my head. We know that about a third of people who have a Budgeting Loan are using other forms of commercial credit, at any one time. I probably could give you an answer, but I cannot give it off the top of my head; if it is acceptable, I will give it to you in writing later, if I can calculate it.[2]

  8. Yes, if you could. So it would follow from that then that about a third of the people on Income Support are carrying debt burdens apart from Social Fund?
  (Ms Kempson) Yes, in the commercial credit area; and that leaves aside mail order, actually, mail order would increase that quite considerably, to well over a half.

Ms Buck

  9. Can I just ask something? Is that getting worse, that proportion?
  (Ms Kempson) I cannot tell you that.

  10. You do not know if the trend is changing?
  (Ms Kempson) It is really difficult; there are almost no figures on use of credit, across the whole board, so tracking trends is extremely difficult.

  11. There is evidence in the commercial market, and looking at newspapers, the availability and the fairly aggressive selling of credit is a bit more significant at the moment?
  (Ms Kempson) In the general market, the use of credit has increased dramatically. I would not know, at the bottom end of the income scale.

Mr Dismore

  12. Do you think it would be better if the system for calculating Budgeting Loans took account of the general indebtedness of applicants, rather than just the money they have borrowed from Social Fund loans that they are already committed to repaying?
  (Ms Kempson) Better for whom, is the question I would ask, really?

  13. Better for the individual rather than the Government?
  (Ms Kempson) I think it would not, because some people manage quite heavy levels of borrowing on very low incomes, whereas others simply fail to do so. But, also, if you did take it into account, you would be cutting off a stream of low-cost credit, which would make it almost inevitable that they would have to turn to high-cost. Because there is plenty of evidence already that if people do not get the full amount that they apply for, which is one of the major problems, currently, or if they get turned down, then they do turn to high-cost credit. So I think if it were added in, then it would increase the likelihood that they would have to borrow. Because they are not coming to the Social Fund for discretionary items, they are coming to the Social Fund for things that it is really quite important for them to replace or to acquire.

  14. So, effectively, people end up in a Catch 22. If the true level of indebtedness were taken into account they would not get the Social Fund loan, but if they get the Social Fund loan then that adds to their indebtedness?
  (Ms Kempson) Yes, but if you turned them down they would still borrow the money and they would borrow the money at a higher rate of interest, and then they would be in a worse financial situation.

  15. What about rescheduling, or the rate at which people have to pay back; to what extent do you think that the 15 per cent rate is variable when people actually apply for the loan and set the terms for it from the Social Fund, and to what extent do people come back later to ask for rescheduling?
  (Ms Kempson) It seems, from the evidence we have, that they do not, and they do not realise they can come back for rescheduling. The whole question of repayment levels is something that I have raised in my written submission. It is problematic, for two reasons. One, people have absolutely no idea how the amounts have been arrived at, and our report cites examples of people saying, "Well, when I had an £800 loan, the repayments were £16 a week. I have now borrowed only £400, and it's still £16 a week; now why is that?" So they simply do not understand what the repayment levels will be, and so it makes it quite difficult for them to work out, in advance of deciding how much to apply for, and what they are going to have to bear within their budgets, and that is quite a significant thing for somebody on a very low income. The point about rescheduling, it does cause some people problems, the high levels of repayment, and they do comment on how high they are, and they do not realise that if they are in financial difficulties they could ask for them to be rescheduled. In fact, the levels of repayment are very similar to those that the weekly collected credit industry would charge, and yet those repayments can be rescheduled at no further cost (there is a cost to it built into the initial cost of credit). And people are accustomed to being able to do that. I think the problem with the Social Fund is that it is perceived by its applicants to be a form of credit, and yet it operates like no other form of credit they know, both in terms of the amounts they get or in terms of the repayment schedules.

  16. What proportion of the weekly income of somebody on benefit is actually going on servicing debts, whether it be to the Social Fund or to other sources of loans?
  (Ms Kempson) I cannot give you an up-to-date figure on that. I think others might better be able to do that; or I could try to calculate for you, again.[3]

  17. Do you think these levels of debt prevent people moving from benefit into work?
  (Ms Kempson) There is some evidence that where people, certainly where they have arrears, rather than amounts they have borrowed, if they fall into arrears, that does act as a brake; although, I think, given the current rules on taking work then maybe that is rather less than it was in the past. But, certainly, some creditors are prepared to hold off while somebody is unemployed, and will pursue arrears much more rigorously once they are in work. And so the amount that you owe, particularly in arrears, rather than as amounts borrowed, can play an important part in people's decisions, and their fears, actually, their fears about, "What will happen if suddenly I've got to repay all of this money? I simply won't be able to do it on the wage that I'm getting."

  18. That is the people who have borrowed not from the Social Fund?
  (Ms Kempson) These are the people who are in arrears, so that could be housing arrears, rent arrears, council tax arrears, gas, electricity; it is not so much the amounts borrowed, because those have to be repaid, in or out of work.

  19. So that is to other, big institutions, as it were, rather than to the people they borrow the money from for the washing-machine?
  (Ms Kempson) No. I think I am drawing the distinction between money that has been borrowed and missed payments, where you are in arrears and, technically, in default, and so creditors will pursue you for the repayment of the total amount of default, and that does play a part. I do not know immediately of any evidence of levels of borrowing having an impact on the decisions to work or not.

2   Note by Witness: I have checked and this information is not available. I have, however, been able to locate figures for the turnover of Provident Financial-the largest of the weekly collected credit companies, accounting for about a third of the business in this market. In 1999, their turnover was just over £583 million. In addition, there are the other companies I mentioned-Crazy Georges and Cash Converters. So, excluding mail order catalogues, I would say that the 1999 annual turnover in this commercial market would have been around £2,400 million, compared with around £417 million lent through the Social Fund. In other words, the Social Fund is a major player. Back

3   Note by Witness: I was asked what proportion of the weekly income of somebody on benefit is used to repay outstanding loans. Again I have checked and up-to-date information is not available, although it could be calculated using data from the Family Expenditure Survey. Back

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