Treasury Select Committee Report - Is it hard hitting enough?
The Treasury Select Committee Report into financial inclusion, published today, sets out a series of recommendations for Government in response to the persistent and growing problems of financial exclusion in the U.K. The report focuses on three main areas - affordable credit, savings, advice, and insurance. However, many of the recommendations fall far short of the radical overhaul required to redress years of growing levels of exclusion an failure to properly regulate the financial services industry.
The report calls for greater assistance from Government to support the third sector (credit unions and community development finance institutions) as a means of providing affordable credit to low income households, and calls for greater contributions to be made to this sector from banks and mainstream lenders. However, it does not go as far as calling for the implementation of the type of U.S Community Reinvestment Act legislation that would force this to happen. This applies equally to the Select Committee's recommendations in respect of debt advice provision, where despite a recognition of the limitations of recent additional Government funding programmes and the need to obtain greater levels of private sector contributions, there is no call from the Committee for a statutory levy on the industry or investigation of more creative mechanisms to achieve this such as increasing the tax burden for companies that fail to observe responsible lending requirements.
The Select Committee is also undecided on its position in relation to allowing direct deductions from benefit recipients to repay debts, although it rightly suggests that the Government make further investigations into the true value of this proposal before it goes further with this plan - which would significantly reduce costs of collection for the industry with no guarantee from them that it would result in lower prices.
National roll-out of the savings gateway is supported by the Committee, but with no firm recommendation on the required level of matched savings to be contributed by Government or for targets to be set to increase the savings rate amongst low income households. This is despite the DWP family Resources Survey highlighting the fact that approximtely 40% of all households with incomes of less than £300 per week have no saings at all. Pilot schemes for the Savings Gateway operate with anything from 100% match down to 20% match and the Government appears to be diminishing the focus of the Gateway on those households with the lowest incomes.
Most surprisingly, the Committee appears to have been swayed by the evidence of Professor Kempson at the Personal Finance Research Centre to delay a recommendation that the Government introduce interest rate caps on lenders. The Committee repeats the Government line that time should be given to assess the new measures introduced by the Consumer Credit Act 2006 before interest rate ceilings are reconsidered. However, any faith that the unfair credit relationship test that will be brought in by that Act will be able to outlaw unfair prices was shattered recently by the OFT. In its consultation on the draft guidance to be issued to lenders concerning the unfairness test "The OFT considers that, in practice, a court may be unlikely to find there to be an unfair relationship solely on the basis of high interest rates or charges" (para 4.16 - OFT 'Unfair Relationships - Draft Guidance, September 2006).
Professor Kempson's evidence to the Committee also flew in the face of the findings of the Competition Commission inquiry into Home Credit. In the Treasury report, Professor Kempson is quoted as stating that:
"superficially [an absolute interest rate cap] is a very attractive idea. However, our research with people on low incomes suggests that it is premature while they have such poor access to low-cost credit and could well have an adverse effect on the people it would be intended to benefit. It would, undoubtedly, lead to a displacement of costs (with more additional charges) so that they would not have to be included in the APR quoted by lenders. This would result in a serious lack of transparency for people who need it most."
However, the Competition Commission's 'proposed remedies' document reports that it would in fact be possible to model a cap that did not result in displacement of costs or lack of transparency provided it was based on the Total Charge for Credit rather than the APR - a possibility not considered within the Treasury Select Committee Report. The Competition Commission commented:
"A Total Charge for Credit cap would be likely to create fewer distortions and pose less of a risk in terms of financial exclusion than a cap on APR, and it would also be less likely to affect the loans used by home credit lenders when they are expanding as these tend to be smaller short-term loans. This would be because shorter-term loans tend to have a lower Total Charge for Credit than longer-term loans and because longer-term loans are less likely to be only marginally profitable. However, a Total Charge for Credit cap could reduce incentives to offer loans over longer periods. This particular distortion could be mitigated by having different Total Charge for Credit caps for short- and long-term loans or by exempting the longest-term loans from the scope of the price cap".
