CC(3) FI AWE 01

Inquiry into ‘Financial Inclusion and the impact of Financial Education.

Response from DWP Financial Inclusion Champions Team in Wales

How can we ensure financial education is reaching those people who need help the most, such as those experiencing a change in circumstances, for example unemployment or a sudden reduction in household income?

Again this is a complex dynamic to tackle and can only be done effectively with the full co-operation of those agencies that have contact with people in these circumstances.  This means a wide range of partners need to be tuned into ‘problem noticing’, have the volition to provide intervention or guidance and the contacts for further support services to offer. An example may be the most effective way of illustrating this point:

If an individual loses their job they may have contact with all or some of the following; the ex employer, The Job Centre, the benefits system (DWP and/or the Local Authority), ACAS, a union, employment agencies, an advice service, the Court system, a landlord or mortgage company, their GP or a child’s school.  All of these entities can at the very least provide information on where the individual can get some guidance and urge them to do so (for example via the CFEB Money Made Clear website). It may be that some of these agencies have their own support service or contact, but the ‘problem noticer’ i.e. the staff with contact, understands the issues and the opportunities for support.

We then need to make sure the support required is accessible to the individual should they be referred. As discussed at the Inquiry, there is a range of provision and this is being built on an ongoing basis.

Can financial education alone persuade people not to use doorstep money lenders, including illegal money lenders, or must other steps be taken by government and advisers?

No, but it can go some way towards persuading people to manage their money in an effective way. If individuals are up-skilled in money management, they will understand the relevance of making informed choices about and how to do that.  However, this is of little use if the informed choices lead them to use a service that is not accessible to them.This is the clear link between Financial Capability and Financial Inclusion, which encompasses access to services.  One will fail without the other.

Supplementary if needed: Does there need to be a viable and affordable alternative to doorstep lenders before people will look elsewhere for credit?

Yes.  Expecting people not to borrow to manage their finances is not feasible. If there is not affordable and accessible alternative people will continue to pay a high price (financially and otherwise) for using the available services.

Supplementary if needed: What role can credit unions play in drawing people away from doorstep lenders?

Credit Unions can, and do, play an important role in drawing people away from doorstep lenders.

Indeed, the UK Government’s Growth Fund Initiative had this as a core aim and has been successful in supporting this goal in Wales. Between October 2006 and April 2010 £6,050,126 was administered in lending through the initiative in Wales (using largely Credit Unions, but also latterly Moneyline Cymru a CDFI). The average loan size was £428. This is broadly consistent with the target since research shows that the average first loan size by a doorstep lender is £500. The initiative is estimated as saving communities in Wales over £6M in interest over using doorstep lenders.

The advantage of the credit union model is that borrowers are encouraged to save, even if just a little, with each payment.  Since the loan is affordable (due to the loan assessment process and lower interest rates) people are able to afford to save.  Consequently, by the end of the loan period people have a small pot of saving available which can either preclude the need to borrow again or often passports them for an even lower interest rate on further borrowing.  It is well known that many doorstep lenders ‘trap’ people into a long term debt situation by repeatedly lending towards the end of the original loan, or encouraging consolidation thereby charging interest on interest.

The credit union model promotes a more sustainable and controlled method of managing finances in an accessible and supportive way and often provides an ‘escape route’ for people already caught in the doorstep borrowing situation.