We now come to the subject of the social fund. The clause allows the Secretary of State to make arrangements with external providers to make social loans in place of the present arrangements with the DWP. It is important for the Committee to bear in mind the background to the clause, which lies in the Governments consultation paper that was issued last November and the subsequent Government response to the consultation that was issued this month, which we understand to be the Governments current position on the matter. We welcome the proposals and the interest that the Government express in having advance payments as a way of obviating the need for crisis loans to be made in certain circumstances, which is worth exploring. Ministers will recall an occasion last autumn when the Government were facilitating, by way of a statutory instrument, the transition of lone parents from income support to jobseekers allowance, which left a gap in their provision. To fill that gap, it was suggested that lone parents should take out a crisis loan. We suggested at the time that this was not an entirely satisfactory way of conducting things, and that it should not be beyond the wit of Government to enable a claimant in such a situation to receive an advance payment, rather than having to take out a crisis loan as a result of changes that were being made by the Government. That is worth exploring.
We also noteand this is a very interesting developmentthat the Government propose not to allow external providers to impose any interest charges on those who receive loans from the social fund. That was in the Governments original consultation paper in November, but they said clearly in their response to that consultation that they did not intend to charge interest on social fund loans, including any loan scheme set up by an external provider under arrangements with the Secretary of State, and that nor do they have the legal powers to do so.
Several interesting questions arise from that, not least when, and why, the Government formed that intention, but perhaps for the purposes of this debate, it would be reasonable to draw a veil over that subject. They have set out their positionthey do not intend that the external providers should charge interest to people who are in need and receive social loansand therefore we do not need to take the matter any further.
It might assist the Committee if I indicate now that I will not move amendment 17, which would require the Government to produce a report dealing with a number of matters, including the interest charged on loans, as we now know that interest will not be charged. Also, I will not moving the amendment in light of the fact that the Government have indicated in the consultation paper that they will take powers to allow external providers to make social loans, but that they do not intend to use such powers yet. They will not use their power to give external providers responsibility for providing loans. They are setting out to undertake more consultation to develop the plans further with relevant parties, which is perhaps another reason why a report under amendment 17 would not be necessary. There will be more consultation following that which took place in November on these issues and on replacing crisis loans and the social fund with a single loan.
That brings me to amendment 16, which is still relevant as the Government are proposing to take powersalthough they do not have any intention of using them at presentto enable external organisations to make loans in place of the present arrangements in the DWP. We know that if the powers were to be used, the external organisations would be credit unions and similar organisations. We acknowledged at the outset that they were worthy bodies and far better than many of the alternatives available to people in need.
It is important, however, when we are considering the powers and the possibility of credit unions and similar organisations disbursing the loans, rather than the DWP, to remember that such organisations face expenses, which they normally defray from interest charged. Also, credit unions need to exceed their operating expenses. We would ask the Minister for a little more clarity and detail on this, given that we now know that the credit unions and other organisations will not be able to charge interest. As the Government take their proposals through further consultation, what are their ideas on how external organisations will defray the expenses that they will inevitably face through having to undertake the task of disbursing the loans on behalf of the Government? Will the Minister say whether, at this stageI know that this is all still subject to consultationthe Government have any ideas about how that will be funded?
Another important aspect is the funding of the financial advice and additional services that we apprehend from the consultation paper that the Government still intend to provide. Financial advice is a good thing for needy people who require social loans to provide the everyday items that it is hard for them to pay for out of their benefits or other income, and for people in crisis situations or facing a family or household emergency. It is important for them to receive financial advice and related services, but we would like to know how the Government propose that they should be funded. They have made it clear that the service is additional to what is already provided by the DWP, so we need to know a little bit about it.
We wonder whether part of the Governments thinking is that expenses in respect of the external provider will be paid out of the social fund budget, with the risk being that that would reduce the amount available for lending to social fund borrowerswho are, as the Minister will accept, people in difficult circumstancesor for people borrowing through crisis loans. We need to know whether these provisions will reduce the amount available to such people or whether there will be some other way in which the expenses will be met. We put that to the Minister because we want to know the Governments thinking at this stage.
We understand that, at the moment, the Governments position is fluid in respect of these issues, which are important for many needy people and worthy of exploration. We want to play our part in eliciting from the Government details about exactly how they are approaching them.
As the hon. Gentleman said earlier, in respect of an aspect of amendment 55, we have already had an assurance from the Government that interest will not be charged on loans. To save time later on, I shall make some general remarks about clause 13 because it raises important issues.
It is important to look at the time scale that the Government have used after 10 years of inactivity with regard to the social fund. A consultation was launched in December 2008, but people were given less than three weeks to respond to it, which is one third of what the Governments code of practice says should be the norm for any such consultation. Before Christmas, an article in The Guardian suggested that ridiculous interest rates would be charged, but the Government have thankfully squashed that idea. However, we now have a situation in which the Government say that they are going to carry out further consultation.
I respectfully suggest to the Government that, given the complete mess that the policy appears to be in, the most appropriate approach would be to withdraw clause 13 completely, carry out a proper, meaningful consultation, discuss the matter with claimantsthe people who will actually be affected by such changeand then come forward in the future with proposals that will work. It is clear, given what has happened, that the proposals will not work.
Who will be the providers? We know that the private sector has made it clear that
in the current economic climate
I am quoting the KPMG report
they would not wish to fund a model lending to a deep sup-prime sector.
If the Government were to say, We will go to non-governmental organisations, that would have some merit in the long term, but NGOs are saying that although they are pleased to contribute, they have received extremely short notice and they would need longer to talk about it. If the Government are serious about wanting other providers to run the social fund, this matter needs to be set in context with a set of supportswhether financial advice or whether linked to other issuesbefore we make such a change.
There could be merit in that proposal and in introducing external providers, including NGOs and charities, and having them running the social fund, but the proposal, as it stands, is half baked. With respect, it is a classic example of what we heard about earlier: not putting into the Bill provisions that could lead to complications. The Government have not thought out what they are doing or how the proposal is going to work, and the Bill does not include sufficient detail to make a proposal work, should they want to introduce one. It would be far more sensible if the Government withdrew the clause, went back to the drawing board, and introduced a measure when they had a workable proposal.
Good evening, Mr. Hood. As this is the first time that I have risen to make a speech, may I say what a pleasure it is to serve under your chairmanship, even though it is rather late in the day to be doing so? [Interruption.] It is never too late.
Since we have already, in effect, moved on to the clause stand part debate, it might be helpful if I explain what the clause intends to achieve. I absolutely disagree with the hon. Member for Rochdale, who says that we should withdraw itI shall explain why. People who come to the social fund are those whose finances are at their most precarious. They come to us for help, and it would be irresponsible, when we have made the policy decision to provide them with more support, not to take the primary powers that will give us one avenue for doing so, because, as well as requiring an emergency injection of finances immediately, each person may be in a different situation from that of the person before or after them. They may require a path out of debt, and that could include, for example, information about low-cost insurance schemes that their registered social landlord is able to provide; debt advice or debt consolidation services; advocacy for dealing with the various agencies, organisations or private companies that have contributed to their situation; or flexible repayments. They may respond well to a plan that migrates them from repaying a debt to a savings plan that operates either at the same time that they are repaying their debt, or after they have done so. Alternatively, they might be the type of person for whom that would be entirely inappropriate. They could well be the type of person who needs face-to-face support and advice, and a number of issues might need to be considered in the round, including more complicated things such as child support.
The point is that we, as a delivery Department, may not be the people who, for very good reasons, offer all those things as our core services. However, under the Bill, we will be the people who can take a primary power and provide those who have the most precarious finances with the advice and support that they need from the organisations that are best placed to help them. That is why the clause must remain in the Bill.
I do not disagree with some of the Ministers points, but I ask her to point out the additional services that she says could be better provided, because proposed new part 8ZA of the Social Security Contributions and Benefits Act 1992 is all about arrangements for external provider social loans, for the transfer of loans, for an annual report on the operation of arrangements, for repayments of external provider social loans, for the power to restrict to social loans, and the supply of information to all lenders making external social loans. The new arrangements that the Minister talks about are not provided for anywhere in the clause. There is not even a provision to introduce regulations, which is the usual catch-all that the DWP introduce. In view of the Ministers limited consultation, would it not be best if the whole clause were withdrawn, and if the Government went back to the drawing board and came up with some arrangementsperhaps in the Lordsthat enabled the provisions that the Minister wants to be introduced properly?
The hon. Gentleman is quite wrong. Subsections (5) and (6) of proposed new section 140ZA make it quite clear that we have the regulation-making power to do precisely that and to specify through contracts.
Perhaps it would be more profitable if I were to move on to the remarks made by the hon. Member for Hertsmere. I welcome his broad support for what we are trying to do and, indeed, I have seen Conservative party documents stating that it supports credit unions. A letter was even sent to me from an outside organisation explaining that it had been called in to discuss the reform of the social fund with the hon. Member for South-West Bedfordshire (Andrew Selous) and that it was greatly encouraged that he was keen to explore ways of reworking the social fund, perhaps involving partnerships with credit unions. I am delighted that the Conservative party supports usthat is extremely welcome.
Does the Minister agree, however, that some credit unions are not keen to be involved in this kind of thing and that some people in fact feel that credit unions in this country have suffered compared with those in other countries, because they are associated too closely with the public sector?
I accept that not every credit union wants to get involved, but if the hon. Gentleman were to look at the consultation responses that we published today, he would see that a large number do. The important thing to make crystal clear is that the Bill does not impose a requirement on credit unions, or any other type of organisation, to provide such loans. We are simply taking the power so that, hypothetically, we could invite expressions of interest and publish draft contracts under which such arrangements could work. The hon. Member for Hertsmere is correct to say that we do not intend to use the power at the moment.
Reference has been made to the need for future consultation, with which we agree. I would like to clarify that there will be two further sets of consultation. As the hon. Gentleman said, the first will simply give more detail about the type of arrangements that may exist if we use the power in the future, while the second will go into far more detail about how we would like to use the social fund to advance our aims of financial inclusion, and perhaps deal with some simplification measures, too. Returning to the point made by the hon. Member for Rochdale, we are today taking the necessary primary powers so that, hopefully, we will not have to return to primary legislation. We will consult on the other powers as soon as we can.
I hope that I can encourage hon. Members not to press amendments 16 and 55 to a Division. Amendment 16 would delete the paragraph enabling us to pay the administrative costs of external providers with whom we enter into a contract. In answer to the question from the hon. Member for Hertsmere, we understand that, in addition to the provision of loans, additional costs will be incurred as a result of such contracts, and we intend to pay them. That is what proposed new section 140ZA(4) sets out. It will not necessarily reduce the amount available elsewhere because, of course, there will be costs for administering such loans anyway. Furthermore, we hope that, as a result of our policy, more people will be migrated off the social fund, which could also free up resources. However, those decisions will be made in the round, across Government, in order best to use taxpayers money to achieve our public policy goals and in the overall public interest. I hope that that answers hon. Members questions.
I am grateful to the Minister for her response. She correctly set out our attitude. Our amendment was probing, as I indicated. We want to ensure that, through legislation, social fund borrowers get a better dealmore financial advice, better services and so onand that the same amount of money is available for them. Those are important considerations.
We do not seek to put up obstacles, and we do not agree with the approach that the hon. Member for Rochdale has put forward, or with his description of this as half baked. If more consultation is needed, more consultation is needed, and we hope that we can play our part in thatwho knows, we might already have played it! We do not know yet, but we might have done so constructively. Furthermore, we might have a contribution to make in the future. However, I agree with the Minister that it is not ridiculous for the Government to take powers for something that they might want to do in the future.
Whether the Government use those powers will depend on the outcome of the consultation and the various issues that I outlined in my opening remarks. We might have more to say about this matter in the future but, for the time being, we are taking a broadly constructive approach. We want social fund borrowers to get a better deal. I am sure that all Committee members share the view that more thinking is to come on this matter. Perhaps some interesting ideas will come forward during our consideration of amendment 66, which was tabled by the hon. Member for Warwick and Leamington and which I look forward to discussing. However, for our current purposes, I beg to ask leave to withdraw the amendment.
140ZD Individual social fund accounts
(1) The Secretary of State may establish a system of individual social fund accounts for qualifying persons.
(2) The Secretary of State may designate external providers to provide financial advice to holders of individual social fund accounts.
(3) Individual social fund accounts shall be used to provide budgeting loans from the social fund.
(4) An individual social fund account which meets the requirements of the Saving Gateway Accounts Act 2009 may be designated as a Saving Gateway account.
(5) The Secretary of State may prescribe the conditions under which a designated external provider may advance funds to the Secretary of State for the provision of social fund budgeting loans.
(6) A designated external provider may make a qualifying loan to an eligible person from that persons individual social fund account.
(7) The Secretary of State may prescribe conditions under which deductions may be made from an eligible persons relevant benefits for the repayment of the amount of the qualifying loan to the individual social fund account of the eligible person and to recover the allowable costs of the external provider.
(8) The Secretary of State may make regulations
(a) to establish a system of individual social fund accounts and to set out criteria for qualifying persons under subsection (1),
(b) to specify criteria for the designation of external providers under subsection (2),
(c) to prescribe the conditions under subsection (5), and
(d) to prescribe conditions under which deductions may be made from an eligible persons relevant benefits for the repayment of the amount of the qualifying loan under subsection (7)..
The amendment has been trailed, and I will seek to take our debate on the social fund a little further. We know from our previous debates that there is something of a consensus that the social fund needs reform, and the amendment outlines one way in which to take reform further in the Bill.
In essence, there are two problems with budgeting loans, which is the part of the social fund that my amendment would change. The first problem is that this part of the welfare system is, in my view, entirely passive in its relationship with our customers, and the second problem is that it is clearly underfunded.
First, to illustrate the passive nature of the current provisions, at the moment an applicant will approach us on the telephone or come into a Jobcentre Plus office. Their entitlement to a budgeting loan will be considered and, if approved, a payment will be handed out to the customer. That is the end of the benefit systems involvement with that person. There is no discussion with them about the causes of the financial situation that brought them in search of a budgeting loan. We give them no direction on where they might seek further advice to find out more about how to handle their finances, and we offer no help with future budgeting.
The second problem is that the fund is underfunded. The Government have increased the money available in the budgeting fund, which is welcome, and at the moment we have around £500 million circulating around the fundit is paid out and then comes back through deductions from benefit. However, demand in our communities for the type of assistance that the budgeting loan gives is greater even than the £500 million to which the Government have been able to increase the fund in recent years.
In the evidence session on 10 February, Martin Narey said:
The real urgency is to provide avenues of affordable credit for poor people...If something could be done on the availability of the social fund...it could make things dramatically easier for some of our poorest families.[Official Report, Welfare Reform Public Bill Committee, 10 February 2009; c. 46, Q58.]
The amendment is an attempt to address that challenge.
I estimate that demand for such financial assistance is about four or five times greater than the budgeting loan fund is able to meet. That means that benefit recipients and low-income families are looking to alternatives to the budgeting loan for credit. Only about 1 per cent. of the population have access to credit unions, which shows how small the credit union movement is in our country. Although, thankfully, the Government are doing a number of things to try to expand it, it is never going to reach the capacity at which it can be a universal alternative.
If no credit union is available, where are people going? They are perhaps going to Provident Financial, in which case they are paying an annual percentage rate of 189 per cent. on their loan, or they might be going to a more recent innovation: a new sort of store that allows people to rent an item and then own it after three years. That is another sort of credit scheme offered by companies, such as BrightHouse, but people would be paying 200 per cent. interest on the loan. People might be going to organisations such as Payday Loans, which is another fairly recent company that has come to the United Kingdom from the United States, I think. It is growing rapidly and charges 1,344 per cent. on the money loaned. If people are not going to any of the legal options, they could be visiting an illegal alternative working in their community: a loan shark whose interest rate we can only guess at, although it is probably in excess of 1,000 per cent. The repayments sometimes come with menaces, too.
Let me put things another way. If today has been a typical day, we, through the DWP, have probably agreed 4,000 budgeting loans worth a total of £2 million to those who received them. We are asking them to pay us back £2 million, with no interest, through deductions from their benefits. Again, if today has been typical, 16,000 people on low incomes or benefits will have taken out another form of non-bank loan, the total of which would have been about £8 million. However, unlike the budgeting loan, under which they would have to pay back £8 million, they will have to pay back £22 million. That shows the significance of the shortfall and explains why we need to look at ways in which to expand and recapitalise the budgeting loan.
I agree with the hon. Gentleman that arrangements with no interest are better than paying back huge, horrific amounts of interest. However, does he agree that people on benefits would be better off receiving grants rather than loans?
As the hon. Gentleman knows, there is a grant element in the social fund. Thankfully, the Government have been able to expand the facilities that are available to fund the grant part of the scheme. In our previous debate, we covered the grant elements of the social fund, but I want to expand the budgeting loan part, which sits alongside the grant-giving capability of the social fund. If we are really to address the target that we are about to give ourselves in statute to abolish child poverty over a given time, increasing the supply of affordable credit will be a crucial step in achieving that ultimate objective. When asked, most of the child poverty campaigning organisations say that the key thing that needs to be done to achieve a step change in the process towards abolishing child poverty is to expand affordable credit in our communities. I know that the Under-Secretary of State for Work and Pensions, my hon. Friend the Member for Burnley, recognises and understands that already. I welcome the fact that, through the Bill, social fund reform is under way and gathering momentum.
As the Under-Secretary said in the evidence session on 12 February, the Bill is
only the beginning of the journey.[Official Report, Welfare Reform Public Bill Committee, 12 February 2009; c. 74, Q120.]
By tabling the amendment, I am trying to put wind in her sails and to increase the speed of the journey. I am not trying to put a detailed scheme in placethat would not be rightbut I have set out a framework for a scheme that deals with the two big problems of the existing schemes passivity and lack of funding. I envisage that, instead of how the system works at the moment, the claimantwhen going to Jobcentre Plus in search of helpwould be enrolled into a social fund account. A relationship would then immediately be built with the individual, and we would not just remain passive towards that person. The account would give them access to budgeting loans exactly as they currently existI am not proposing that that be changedbut it would also give them access to free and impartial financial advice, which it is important to have. Pursuing my suggested route for bringing in additional capital from an external provider would give the opportunity for applicants, if appropriate, to take out an affordable loan.
If the additional capitalisation came from the Treasury, for example, we would be simply expanding the budgeting loan resource as it is at the moment. Realistically, however, we will not see another £2 billion or so coming from the Treasury in the foreseeable future. The additional funding that I am seeking might come from another external providerthe clearing banks, for example, might agree to grant it to the Government as a long-term loan, which the Government might at some point eventually repay, allowing the additional funds still to be interest-free. However, we might not get a deal on such terms and the external provider might want money back for giving us the loan, in which case I would expect that the kind of loans that would be granted in that way would carry a rate of interest, but one comparable to those applied to credit union loans.
It is important to stress that the existing interest-free element of loans remains in my amendment, but we would be giving people the opportunity, if the business model worked, which would of course be conditional, to gain access to affordable credit in addition to any budgeting loan scheme. That would have the effect, if the business model worked, of putting the loan sharks out of business and probably also putting many of those other organisations that are charging exorbitant interest rates out of business, which I would welcome. Of course the business case has to be made, which is why my amendment sets out only a framework into which a scheme could be dropped, rather than attempting to design it in any detail. However, it is important that we take the primary powers to enable us to pursue that route and seek the appropriate working business model.
I am simply asking the Minister to go further on the journey of which she spoke. Many vulnerable families desperately need our help. We could put a framework in place and then pursue a business model. That it is what many of the groups that have been speaking to us for many years are urging us to do, and that would make a dramatic difference to the prospects for many low-income families.
I am extremely grateful to my hon. Friend for his amendment. He speaks with considerable policy experience and knowledge in this area. In some ways, we could characterise the amendment as ahead of its time, which makes my hon. Friend a visionary for putting it forward. We agree with the spirit of what he is saying but, as I shall explain, I am not sure that it is the appropriate vehicle for addressing his policy proposal.
I agree with my hon. Friend that we need to do more for people whose finances are precarious, as I said earlier. His description of a system that needs to move from being passive to being active is entirely right. A crucial part is providing financial advice and a broader variety of services, whether through external providers or, where we can, ourselves. He talked of saving gateway accountsI do not want to be pedantic by pointing out that that Bill is not yet an Act and has certainly not been implemented. That might be one small way of saying that he is ahead of his time. Certainly, once that measure is enacted, there will be many ways for the Government to promote saving gateway accounts to the type of people who may be applying to us for crisis or budgeting loansindeed, there will be a large overlap in those two cohorts, I am sureby signposting and so on.
Part of my hon. Friends suggestion was to allow for outside capital to come into the social fund. Free money is great; I would be absolutely delighted if anyone externally wanted to capitalise a social fund and give us a pot of cash that we could lend out without charging interest and preferably never have to pay back. At this point I am not convinced that there is a business model that will do that, but if he can come to me with an organisation that will provide that money, I will be delighted to receive it, and if he knows more than I do, I will be happy to hear how that would work.
It is better for us to be able to enter into an agreement with an external organisation as we already propose, because, to be frank, it will be a financial institution and will have greater capital available, perhaps to migrate people from having a debt to being able to save, which is the spirit of what my hon. Friend is proposing. I agree that that is one of the areas in which we are missing a trick at the moment. Our ultimate goal is for people to be able to put enough money away, difficult though that of course is on low incomes, or to have other measures, such as insurance, to avoid the need for a debt in the first place. However, if they do require a debt, we need to be able to support and advise them through that process.
I am asking my hon. Friend to withdraw the amendment. However, as a direct result of his tabling the amendment, I will take it upon myself to ensure that the suggestion that he has madethat people with social fund debts or any other affordable credit debt should be encouraged in any way possible by the Government to migrate that into a savings account, current account or saving gateway accountis taken on board in the appropriate cross-Whitehall discussions that are taking place on, for example, a peoples bank. He can rest assured that he has had an effect. I hope that that will be sufficient for him to withdraw the amendment at this stage and enable us to continue discussing this worthwhile policy in the months and years ahead.
I am grateful to my hon. Friend for her reply. She has been quite warm about what I have suggested and agrees with the spirit of it. She has unbundled the proposals in my amendment and I appreciate what she has said about some aspects of it. She may be right that there could be other means of pursuing those ideas and yet achieving exactly the same end that I suggested this amendment could. I hope that other parts of it, which she has not picked up at this point, may nevertheless still be included in the further consultation that I know the Department is undertaking about the future direction of the social fund. If that is possibleI think that she is assenting to thatI beg to ask leave to withdraw the amendment.