Ten Minute Rule Bill
The CAB service
The CAB service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination. The service aims both to provide the advice people need for the problems they face, and to improve the policies and practices that affect people’s lives.
The CAB network is the largest independent network of free advice centres in Europe, providing advice from over 3,200 outlets throughout Wales, England and Northern Ireland. We provide advice from a range of outlets, including GPs’ surgeries, hospitals, community centres, county courts and magistrates’ courts, and mobile services both in rural areas and to serve particular dispersed groups.
In 2006/7, the CAB service dealt with 5.7 million problems. This included 1.7 million enquiries on debt. The CAB service is known by 96 per of the public and 41 per cent of people have used the service at some point in their lives.
Introduction
The Personal Debt (Advice and Regulation) Bill calls for:
- Schools to provide financial education
- Advice centres to be set-up dealing specifically in personal finance issues
- Tighter regulation of irresponsible lending
This briefing sets out the position of the CAB service on each of these issues.
1. Financial education in schools
Citizens Advice is playing a lead role in the development and delivery of financial capability education, particularly to those most at risk of social exclusion. This preventative activity has been shown to help people budget, borrow and save more effectively. We want to expand this activity so that, working with local partners, we can reach one million people a year.
At present a minority of bureaux have sufficient resources to deliver financial capability education. Our vision is that by 2010 every Citizens Advice Bureau will be actively engaged. This is estimated to cost around £20 million a year and will require continued support from Government departments and the Financial Services Authority. It will also require a substantial step-change in the engagement of local authorities who do not typically see it as an issue for them. This is despite the fact that socially excluded groups with poor financial capability make particular demands on Councils’ housing and social services. We want to work with Councils and other partners to help ensure that, for example, these needs and potential benefits are better reflected in Local Area Agreements.
Many bureaux work with schools to deliver financial education sessions to students with limited input from teachers, often creating training materials from scratch. Sessions are usually delivered to older students during Citizenship classes and focus on practical topics such as budgeting and managing debt. The scheme of work can be tailored to the needs of the pupils and designed to engage students.
Bureaux engage in this work in different ways:
Cheltenham, Cirencester and Tewkesbury CAB carries out work with older pupils looking at choosing financial products, independent living, wages and mobile phones.
Hammersmith and Fulham CAB runs sessions with pupils of both primary and secondary age. This includes organising a ‘Money Week’ in each school and, potentially, a school saver scheme.
Sevenoaks CAB deliver classes to years 12 and 13 focussing on budgeting, pay, store cards and living away from home.
Caerphilly CAB work with sixth forms and local colleges to deliver financial education classes. They cover subjects including priority and non priority payments, interest rates and store cards, mobile phone contracts and costs, and banking and borrowing.
Citizens Advice supports Government steps to improve financial education in schools. In addition, we are keen to expand our work in schools, but given funding restraints we remain focussed on delivering financial education to those beyond school age.
2. Advice centres on personal finance issues
Citizens Advice Bureaux are a key local point of contact for individuals, predominantly on low incomes or benefits, who face debt problems. Of the 5.7 million problems dealt with by bureaux in 2006/7, over 1.7 million were related to debt. This represents an overall increase of 20 per cent over the last year and 100 per cent over the last ten years.
Citizens Advice believes that there is significant unmet need for debt advice but does not believe that this would be best met by finance-specific advice centres. Our evidence shows that most people who come to bureaux with debt problems will have other problems as well, perhaps requiring advice on benefits or housing issues. For example, a busy inner-city CAB found that over the course of six months last year more than half of their clients that reported debt issues reported other issues as well. Often the complexity of problems is only uncovered when clients are talking to advisers.
A study on the impact of debt advice conducted by the Legal Services Research Centre in 2007 found that debt problems were often linked to a variety of other problems, and that advice should therefore by available on a multi-issue basis (A Helping Hand: the Impact of Debt Advice on People’s Lives, LSRC, p.21):
‘More generally, the findings on the impact of debt problems provide further support for the development of co-ordinated advice and support services and networks. People facing debt problems may, for example, benefit from support in maintaining relationships, parenting, finding employment and in relation to their psychological and physical well-being.’
These findings are reflected in the Legal Services Commission’s plans to develop advice hubs, known as Community Legal Advice Centres and Community Legal Advice Networks. In addition many of the money advice centres in Advice UK are not in fact single subject agencies. The CAB service holds contracts with the Legal Services Commission to provide legal aid debt advice in 220 bureaux across England and Wales.
The CAB service is taking a range of steps to increase its capacity to provide money advice and to diversify how that advice is delivered. We are currently looking to strengthen and expand our money advice provision through a number of new schemes, including the Financial Inclusion Fund and, potentially, steps to introduce a Generic Financial Advice service.
Financial Inclusion Fund
The Government's Financial Inclusion Action Plan released in December 2007 committed £76m from the Financial Inclusion Fund for free face to face money advice. This further builds upon the commitment announced in the Spending Review 2004 toachieve a step change in the supply of free face-to-face money advice.
As a result of the Financial Inclusion Fund, Citizens Advice has received an investment of £33 million between 2006 and 2008, and will receive a further £49m over 2008/11. The initial injection of moneyenabled us to recruit and train 350new moneyadvisers to work in the most deprived communities across England and Wales.Over 2008/11 it is anticipated that the work of these new advisers will be developed further into a more holistic approach involving the introduction of a greater element of financial capability andfinancial inclusion work.
Generic Financial Advice
An HM Treasury-sponsored review on the feasibility of delivering a national approach to generic financial advice is due to report next week. The aim is to ensure that there is greater access to high quality, affordable, non-product specific financial advice for those most vulnerable to the consequences of poor financial decision-making.
Citizens Advice considers that the development of such a service is essential in tackling debt problems in the long-term. This service could offer information and advice divorced from the sale of specific products, to help people understand the options open to them, such as the savings accounts, insurance and pension choices available in their particular circumstances. To establish a national generic financial advice service delivered through the existing Citizens Advice network would cost between £25 million – £35 million per year. This would enable us to provide advice over the telephone and face-to-face from local bureaux for up to one million people each year. Citizens Advice is keen to be closely involved in the development and delivery of this proposed national service.
3. Irresponsible lending
Citizens Advice Bureaux see numerous cases where the original lending decision by the lender seems to a poor one, and a proper assessment of the client’s ability to repay is not applied as thoroughly as it should be. For example, we currently see lending institutions that fail to take into account a client’s other financial commitments. Failure to do so often causes considerable hardship for the client but also hurts the lender since they have little chance of recouping their loan. For example:
A Lincolnshire CAB reported a case in which their client, who suffers from mental health problems/psychosis and has spent various periods in her local mental health unit, applied online for a credit card in the name of Dr Indiana Jones. The client gave her occupation as 'archaeologist' and claimed her salary was £80,000. The credit card was authorised and sent out with an allowance of £8,000 credit. The application was also approved for Payment Protection Insurance cover. The client spent £2,000 on the credit card but is not sure on what. Neither the client’s mother nor any support workers knew the client had the credit card. Both have made numerous attempts to sort out the situation, sending the credit card company letters from the client’s Psychiatrist yet have had no response.
A CAB in County Durham saw a client who is a lone parent with two young children. She is in receipt of Child Tax Credit and Child Benefit. She only recently started working ten hours a week at the minimum wage. She was recently approached by a bank offering her a credit card. She told the creditor that she did not work but she was given the card anyway. She has only been able to make the minimum repayments each month but the credit limit has increased significantly. It is now £12,000 with the minimum payment of £479. The estimated interest on this balance for the following month is £156.85. The client now feels she has no choice but to apply for bankruptcy.
A Cambridgeshire CAB helped a client, a single mother on low income, who is in debt to three financial companies with the total amount owed £5,400. She paid off one of her credit card debts using a credit card cheque inserted alongside one of her credit card statements. The client did not realise that this was an extremely costly way of paying off her debt.
A Merseyside CAB helped their clients, a couple in their seventies, with three unsecured loans. The clients took out the three loans worth a total of approximately £40,000 on behalf of their son who set up his own business. The loans were to be repaid over a period of up to seven years but the clients’ son has since experienced problems with his health and his business has collapsed. In addition to the loans the clients have two credit cards on which they owe a total of £10,500. Taking into account the ages of clients, the duration of the term of the loans and the fact that they are on a limited income (they are in receipt of state retirement pension plus a small amount f occupational pension), the CAB questioned the lending decisions of the companies involved.
The Consumer Credit Act 2006
Citizens Advice campaigned in support of the Consumer Credit Act 2006. Reform of the way that consumer credit markets are regulated was long overdue. The experience of CAB clients provides a long line of evidence of unfair practices, insufficiently transparent information and lack of access to redress suffered by consumers who are often vulnerable and in a poor position to bargain on their rights. The Consumer Credit Act 2006 is a once-in-a-generation opportunity to remedy these problems without placing undue burden on the credit industry.
Key points in the Act in relation to responsible lending are as follows:
- Action against ‘rip off’ practices. The Act replaces ineffective and outdated safeguards against ‘extortionate credit’ with a clearer and more comprehensive test defining when a credit agreement should be considered unfair.
- Action against rogue traders. The Act enables the OFT to regulate the consumer credit market more effectively and provides the intermediate sanctions the OFT needs to really tackle bad practice wherever it appears.
- Quicker and better access to redress. The Act introduces an ombudsman scheme for consumer credit disputes. This will allow better access to justice for consumers, particularly those who are poor and vulnerable, as well as reducing the overall cost burden of resolving consumer credit disputes.
- Action against irresponsible lending. The Act explicitly empowers the OFT to take action against the irresponsible lending practices that contribute to the debt problems reported by many CAB clients.
Citizens Advice is monitoring the implementation of this legislation and urges that the new powers it provides should be used to their full potential.
The Banking Code
The Banking Code, a voluntary code of practice to which virtually all banks, building societies and card companies subscribe, helps drive up standards, and encourages banks and other subscribers to treat their customers fairly. However, there are a number of areas where we consider that the Banking Code should be strengthened in relation to responsible lending. In particular, we think that:
- The Code needs to put vulnerable consumers at the heart of the standards it prescribes, and this review should actively seek out the views of groups that represent vulnerable or marginalised consumers.
- Subscribers to the Banking Code should not be able to unilaterally increase a customer’s credit limit.
- The Code should require that customers should have to opt-in to receive credit card cheques, rather than opt-out.
- Lenders should have a duty to assess lending decisions, and this should be proportionate to potential consumer detriment. They should also have a duty to help borrowers assess the affordability and suitability of loans.
- The Code should be revised to state that the lender should be required to honour the cover that a mis-sold PPI policy would have provided. Lenders should be required to offer the option of paying PPI premiums on fixed sum credit agreement by monthly instalments instead of a one-off premium. The Code needs to be changed now, rather than await the outcome of the Competition Commission’s inquiry.
The role of the OFT
The consumer credit licensing system administered by the OFT should protect consumers against abusive practices by lenders, brokers, debt collectors, credit repair companies and debt management companies. Individuals and organisations must have a consumer credit licence order to lend money, collect debt or provide debt advice and management.
From the debt advice work that bureaux undertake, we are aware of a large volume of cases where the practices and policies of some consumer credit licence-holders have caused considerable consumer detriment. These practices are not confined to small companies but are widespread throughout the credit industry, particularly in respect of lending, debt collection and debt management services.
The published guidance for consumer credit licence holders gives a strong indication that consumer protection is a top priority and that evidence from complaints or third parties is used to monitor compliance with the OFT’s expectations. A number of practices are highlighted which bureaux come across very frequently in their work with consumers. In addition to advising individual consumers we are extremely keen that their experiences and evidence is used to deliver a wider remedy, of benefit to other consumers who have not sought advice.
Citizens Advice has worked hard over the last seven years to try to establish an effective working relationship with the OFT consumer credit licensing enforcement team to enable us to raise issues of licence-holders’ abusive practices from CAB evidence and urge them to take action. Citizens Advice has been concerned for a long time that the consumer credit licensing system has not worked sufficiently well to protect consumers from abuse from some financial service providers. We believe there is a substantial financial and personal cost borne by the consumer as a result of an inadequate approach to regulation in this area.
Citizens Advice would like to see the OFT taking on an expanded role on consumer credit monitoring and enforcement, and for this to be accompanied by a more accessible and high profile reporting system – which encourages consumers to report problems directly, and a more transparent and timely system of investigation and action taking.
Parliamentary contact: David Tinline Parliamentary
|
