Tackling Financial Exclusion (Financial Exclusion Report)

Lord McKenzie of Luton Excerpts

Monday 18th December 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow the noble Lord, Lord Patten, and to participate in this debate. I offer my congratulations to the noble Baroness, Lady Tyler of Enfield, for her skilful chairing of the committee and to the formidable committee staff that she drew around her. They produced the comprehensive report before us today. If my copy of it appears a little dog-eared, it is because it became a useful reference document for our recent deliberations on the Financial Guidance and Claims Bill, now heading for the other place. That Bill responds very much to issues of financial exclusion, financial guidance and capability and advice services, as well as debt advice. It was significantly changed, and improved, on a cross-party basis during its passage through the Lords, so we can claim some authorship of its outturn.

Rather than being a measure which just stitches together three existing advice operations, TPAS, MAS, and Pension Wise—I will refer to it as SFGB—it has objectives to improve the ability of members of the public to make informed financial decisions, and to support the provision of information, guidance and advice. It has a consumer protection function, which includes the obligation of SFGB to pass consumer casework to the FCA where there is a suspicion of unprofessional conduct, harassment or misleading approaches. It also requires the monitoring of cold calling on consumer protection as a prelude to a ban. We know that most financial scams, particularly for pensions, start with a cold call, so this is very important.

Of particular significance in the debt space is the inclusion in the Bill of provisions which should lead to a debt respite scheme. Both the Government and ourselves had proposals on this as manifesto commitments at the last election. The purpose is to help individuals in debt and their creditors devise a realistic plan for the repayment of debt and offer protection from charges and enforcement action in the meantime. Given soaring levels of household debt, this should be introduced as soon as possible. We know that the rise of some types of debt can be strongly associated with changes in government legislation and this is not limited to universal credit. The localisation of the Social Fund, now local welfare assistance, was a matter on which our committee expressed particular concern. In its former guise, this provided a vital safety net, facilitating grants and interest-free loans to people on very low incomes who were living through particular financial pinch points. The development of diverse eligibility criteria, some with residence criteria—a problem for those fleeing domestic violence—has created a postcode lottery. The consequences are predictable: increased use of food banks; increased reliance on unaffordable short-term credit. Our report expressed concern about future funding for this area but beyond that went no further than recommending that government disseminate best practice. On reflection we might have done more.

Council tax support schemes have followed a similar pattern of being localised and having local authority funding cut, so more and more councils have had to restrict their schemes. Hence council tax arrears have moved up the debt league. Evidence suggests varying practice in collection arrangements, made worse by the demise of local debt advice. A select committee report highlighted consistent evidence about the negative impact of reforms to the social security system, especially the introduction of universal credit as a replacement for a bundle of other income-related benefits, together with the tightening of the conditionality and sanctions regime. Hardship and debt were being exacerbated in particular by the payment of universal credit monthly in arrears, by a waiting period for new claimants, by bundling rent support and by making this generally available to tenants.

Noble Lords will doubtless be aware that the Government have announced the abolition of waiting days, increased advances to 100% now repayable over 12 months, and introduced transitional payments for those previously receiving housing benefit. It was a committee recommendation that the seven-day waiting period be scrapped. This is, of course, to be welcomed but it does not solve the problem. Its year one cost of some £300 million should be seen in the context of billions of cuts past and ongoing to the social security system. We called in our report for greater flexibility around universal credit payments and a faster rollout of trusted partner arrangements.

The report also addresses issues arising from the application of sanctions, and evidence as to their effectiveness. We heard harrowing evidence about the contribution they make to financial exclusion, where individuals sanctioned look to all options to survive, including reducing payments for priority expenditure such as rent, gas and council tax. A number of witnesses drew our attention to their impact on vulnerable individuals, including those with mental health problems. Our report has not elicited any government response to justify the effectiveness of sanctions, which will doubtless continue to cause misery and hardship to hundreds of thousands of fellow citizens.

The report records that we have seen no comprehensive research on the cumulative impact of the Welfare Reform Act 2012, and what flowed from it, and recommended that the Government conduct a detailed comprehensive cumulative impact study on how changes to social security policy might have affected financial well-being and inclusion, and how they may have contributed to debt, arrears and growth of high-cost lending. The government response prays in aid the assessments produced at Budget time and the Improving Lives: Helping Workless Families recent publication, but this was part of the Government’s moving away from the use of income data—relative or absolute—and does not really meet the analysis the committee was seeking.

Financial exclusion is, as our report makes clear, multifaceted, but we heard views about its relationship with poverty and the poverty premium, of which we have just heard. That is the additional cost incurred by individuals who have to transact in the most expensive way—high-cost credit, pay-as-you-go mobile phones et cetera. If we look at these matters through the poverty lens, we should be alarmed at what is happening. After declines in poverty—child poverty—over 20 years, we now see it rising and the reasons are very clear: cuts in benefit, tax credit and universal credit, for those both in and out of work, inflation on the rise and employment now falling. There is much still coming down the track: freezing of working-age benefits, the two-child policy and more. As CPAG demonstrates, by 2020 we expect some £27 billion less on social security spending than a decade earlier. That is a difficult backdrop against which to combat financial exclusion and is a challenge to the Minister with his new responsibilities. However, I think this report should remain a significant contribution to that endeavour. The process has produced a wealth of information and experience from those whose daily lives involve operating at the sharp end.