Just last month, the financial service provider Auden Financial published its “Pandemic Penalty” report, which contained a number of troubling statistics. Some 50% of its clients now have savings of less than £100. The report found that single-parent families are the most likely to resort to short-term loans, and a third of them rely on food banks. The 18-to-35 age group is the most likely to apply for short-term credit, but also the most likely to be rejected. Only half those in financial difficulty have actually made contact with money advice providers. Surely those who turn down those borrowers need to do a better job of signposting them to the help that they clearly need.
All those statistics show just what an endemic problem debt is in this country as we reach, I hope, the end of the covid pandemic. It is no wonder that people find themselves in financial crisis when the unexpected strikes—from a fridge no longer working to a family bereavement. I congratulate Yvonne Fovargue on securing the debate and setting out such a broad spectrum of views and considerations.
Debt advisers do a fantastic job, as the hon. Lady said. I welcome the increased funding from the Money and Pensions Service, but I am also aware that debt advisers may not have the specialist knowledge needed to interrogate tax debt and to ascertain whether or not debt that an individual is informed about is actually owed in the first place. TaxAid and Tax Help for Older People, two charities that help with tax cases, looked at the data from 66 cases on their system from August 2019 to just before the covid pandemic started. The total debt for those 66 cases when they first approached TaxAid was more than £230,000. After Tax Aid had done its work, only £46,000 of that debt remained: only 25% of what was originally cited.
To me, that illustrates powerfully the point that checking that a debt is owing in the first place should be the first step. However, that requires specialist tax knowledge rather than general debt knowledge, which is relevant to the latter stage once the actual amount of the debt is established. It is all very well for us to have the finest system in the world for arranging debt repayments and dealing with debt, but why do we not aspire to similar excellence in checking whether debt is due in the first place?
Like the hon. Member for Makerfield, I welcome the introduction of the Breathing Space initiative, but, as the We Are Debt Advisers network has observed, 60 days may not be long enough to exhaust all other potential sources of income, particularly when we can see that Department for Work and Pensions decisions around extra benefits, such as the personal independence payment, are taking far longer than 60 days. Can the Government look again at whether they can be more flexible about that 60-day period, to recognise when people are in the process of securing extra income?
May we look again at debt relief orders? As a former Minister for legal matters, I know that such legal instruments can be made available and charged for only on a cost recovery basis. Some £90 to obtain a debt relief order is a burden on those already in debt. I would welcome a proper Government review of whether that truly represents nothing more than cost recovery.
On the issue of the no-interest loans, which I very much welcome—not least because of my interest in reforming local welfare assistance schemes—may I ask what progress has been made? In my view, this should not be rocket science. The original idea came from Australia, where Good Shepherd Australia has been operating microfinance for many years. To introduce it here must be a matter of cut and paste, rather than starting from the beginning to build a programme from scratch. This type of project is important, because the cost of replacing white goods is terrible for many families, who fall into debt as a consequence. We need only listen to the Liverpool-based End Furniture Poverty campaign and look at the pilot schemes that Fair4All Finance are launching to tackle what they term “appliance poverty”.
With so many people living in unfurnished, private rented properties and on low incomes, over 1 million people are lacking either a cooker, fridge freezer or washing machine. No cooker may mean a focus on costly takeaway meals for those who are time poor and no washing machine might mean a £7 trip to the launderette for a single load of washing. Getting into debt to pay for these essentials is simply not the answer.
If we are to tackle the issue of problem debt more fundamentally, we must also address the tools that people choose to manage that debt through the various forms of credit open to them, often at the highest cost to those with the greatest debts. That means the Government have to react promptly to the Woolard review, which looked at the wide picture of financial resilience, rather than just the promise of regulation for buy now, pay later that much of the media fixed on.
That wider objective should be helping those in debt out of it, and preventing those just about managing from going into debt in the first place. As Theodora Hadjimichael, chief executive of Responsible Finance, said recently,
“Withdrawals from the subprime market mean a vacuum in access to credit. Without responsible lenders stepping in to fill it, the options available to individuals who need to plug a gap in income or pay for one off expenses may become increasingly dire”.
That is very much the situation I believe we are looking at. At the moment, the least well-off are disproportionately penalised within a poverty premium that sees them subjected to higher insurance premiums and a much smaller range of affordable credit products, if any at all exist for their particular financial circumstances.
I do not believe the answer is a whack-a-mole approach that knocks out every credit option one by one. People on whatever level of income should be able to choose to pay for goods using credit, including buy now, pay later. The challenge is to ensure that those products are transparent and affordable. We need to move the focus to the behaviour of the borrower over a lifetime—looking at all their borrowing, rather than just a single test of their credit risk or a single affordability assessment. People might be able to afford a loan at a particular point in time, but then be hit by a family bereavement, which ends up changing their entire financial situation. Doing that requires much speedier progress on open banking than we have seen so far and for our lenders to see a wider picture of spending habits.
We also need greater diversity in the market. Community, voluntarist solutions exist but cannot be scaled up quickly. The arguments get quite techy quite quickly—community development, financial institutions, FinTech and how the Financial Conduct Authority regulates the sector. It is much harder to get political purchase here because it gets so complex. MPs get stuck into a “something must be done” rut that expresses itself in attempts to stop things rather than starting better alternatives.
The Government have introduced initiatives to help people build up their savings, but the payroll-based Help to Save scheme is not as transformative as it could be and perhaps needs supercharging. There are a numerous savings schemes for those on lower incomes, but all are voluntary and do not have people nudged into them in the way that occurred with workplace pensions. Ministers have spoken of replicating the contracting-in model of the workplace pensione scheme to create what are known as sidecar savings schemes for those in work. What is actually happening with that?
We need to offer a route to asset accumulation for everyone, and those in poverty three years in three should have access to the same nudge as everybody else to start building their own safety net, which would be their first recourse if misfortune struck. Government support for that nudge would reduce demands on other streams of Government welfare assistance and create a pathway out of indebtedness. So yes, we need to deal with today’s covid-related debt, but we should use this opportunity to fashion new approaches that enable a better credit market and better systems to deal with those who will inevitably, sadly, fall into debt. We will never have a world without debt, but we can help to prevent people from falling into debt, help people out of that debt, and above all create a world without destitution. That should always be our first goal as a responsible Government.