Indebtedness and Poverty

HC Deb 08 November 2000 vol 356 cc413-20

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Sutcliffe.]

10 pm

Mr. John McFall (Dumbarton)

I am grateful for the opportunity to speak about poverty and indebtedness.

Poverty is the biggest scar of a civilised society. So said the Secretary of State for Scotland in evidence to the Select Committee on Scottish Affairs in its report entitled "Poverty in Scotland". That was appropriate, because we cannot allow it to be thought that poverty and debt are problems only for people far away.

In Scotland, one of four households live in poverty, on incomes below half the average income. In June this year, the United Nations Children's Fund published a report that placed Britain in the bottom four of a league table measuring child poverty in industrialised countries. Child poverty in Britain has tripled over the past 20 years, and on average one in five children in Britain now live in relative poverty—in an environment where national income has doubled and redoubled since 1950. In a climate in which most of the population are becoming richer, the material and social deprivation of a quarter of the population is unacceptable.

I know that the Government are serious about their pledge to eradicate child poverty by 2020, and I commend the work of the social exclusion unit, which has devised strategies to tackle poverty and social exclusion. Clearly, the prevailing social and economic conditions are part of a long-term inheritance and cannot be reversed at once.

However, there is no room for complacency. Poverty in the United Kingdom must remain at the top of the agenda. Urgent and far-reaching reforms are needed if Britain is to improve its appalling record on child poverty. The work of the social exclusion unit has made some important contributions so far, as has the Department of Social Security through its two annual poverty audits. It is crucial that that work continues to be developed and prioritised. Furthermore, if the Government's strategy is to be coherent and effective, it must address the various dimensions of poverty and social exclusion, and ensure that policies are properly co-ordinated and implemented across Departments.

I have called the debate tonight to highlight one of the faces of poverty in the UK which I believe needs to be more central to the Government's strategy. Evidence suggests that there is a growing crisis of indebtedness in the UK, particularly among people on low incomes. That is borne out by a recent report by the National Association of Citizens Advice Bureaux, which revealed that in England and Wales, 1.5 million people approached their local citizens advice bureau for help with debt problems last year. Scottish CABs have reported similarly critical levels of indebtedness, with debt problems amounting to about £60 million handled in 1999.

My own CAB in Dumbarton has recorded in the past 18 months an increase of more than 50 per cent. in the number of debt and consumer inquiries. I pay tribute to the local manager, Joe McCormick, and his dedicated team for their many years of service to the community.

These volunteers should be assisted by a legislative and statutory framework that supports, rather than hinders, their work.

Progress has been made through the work of the social exclusion unit in identifying some of the causes of financial exclusion in the UK. It has rightly identified that the Post Office and high street banks have an important role to play in widening access to mainstream services. It has also made some important recommendations about how the Government should encourage credit union development.

However, the social exclusion unit needs to develop a more comprehensive interdepartmental strategy. That should address not only access to financial services, but ways of tackling the serious debt problems which result from financial exclusion, and which increase the burden of poverty on the country's most vulnerable citizens. In particular, such a strategy would need to address issues relating to door-to-door lending and the inadequate provisions of the social fund. More attention also needs to be given to assisting credit unions in reaching the poorest in society.

Take the issue of extortionate lending—in a climate where, according to Bristol university, 29 per cent. of households have no access to mainstream credit, it is not surprising that more and more people turn to high-cost private moneylenders to pay for essential items. They are then subject to excessively high interest charges and irresponsible lending practices.

Provident Financial, the largest home credit company, has seen its customers grow by more than 300,000 since 1995. In 1999, it charged its 1.5 million customers a typical APR of 164 per cent. and, from a turnover of £422 million, it made a pre-tax profit of £155 million.

Earlier this year, as I said, the Scottish Affairs Committee published a report on poverty in Scotland. It found that a £500 loan from a Glasgow consumer credit company could generate interest amounting to £310—but the same loan from Cranhill Credit Union Ltd. would cost £18.60. The Committee also found that the company in question encouraged people to take out further high-cost loans in order to pay off existing debts. Further examples of moneylenders targeting the poorest, offering loans without taking proper account of ability to repay, and abusing the regulations on cold calling by offering shopping vouchers, are increasingly evident.

Problems of extortionate lending have been on the agenda for some time. In 1991, the Office of Fair Trading carried out a report into unjust credit transactions, and it found that the extortionate credit provisions of the Act— the Consumer Credit Act 1974— have not effectively dealt with the problems to which they were addressed. It made a series of recommendations which were referred to the Department of Trade and Industry in February 1999, and research was commissioned into the extent of extortionate credit lending.

The research was concluded in June 1999, but the findings were not published until April 2000. The DTI then announced its intention to restrict action on extortionate credit to just one of the 18 recommendations contained in the findings. It would appear that there has been a failure to act in the interests of low-income households. In the meantime, lenders have continued to prosper.

My CAB refers specifically to breaches in the Consumer Credit Act. It says that a significant trend is a move towards passing on costs to clients. The OFT issued guidance on debt collection agencies and, specifically, on look-alike letters and collection charges, but it fails organisations such as the CAB time and again, as they are staffed by trained volunteers and it is up to them to collect the evidence on which to base a report on the unscrupulous behaviour of creditors.

To give one example, client A in Dumbarton CAB had a credit card managed by Clydesdale Financial Services, a subsidiary of Next plc. The bureau had been managing the client's repayments, and it negotiated with all creditors. The client was making regular repayments as agreed. Despite that, in July this year, Clydesdale levied a charge of £387 as an administration fee because the account was in arrears. There was no provision in the contract for such a charge, but despite repeated requests Clydesdale has refused to explain its actions or withdraw its charge. The matter has now been reported to the OFT. It has failed the CAB and the individual in my constituency. Several measures need to be taken.

First, the Department of Trade and Industry should publish all 18 recommendations contained in the Bristol university research. It should also publish a response to the consultation on consumer credit licensing that took place in May. A further consultation process should be undertaken with organisations that directly represent the concerns of vulnerable consumers. That could be achieved through the debt task force or another appropriate body.

It is time for the Government to take a serious look at the activities of licensed credit brokers, especially the practice of banks, credit card companies and other financial institutions of offering unsolicited credit facilities to vulnerable people, thereby encouraging them to incur financial commitments that they cannot sustain. They are thus caught in a cycle of deprivation. A clear timetable for implementing recommendations should also be drawn up. Urgent consideration should be given to setting statutory maximum interest rates, with reference to successful models in other European countries.

The Commission on Social Justice, which the late John Smith set up in 1994, stated: Perhaps the most soul-destroying aspect of Income Support is the Social Fund. Many people and non-governmental organisations believe that the inadequate provisions of the social fund constitute one of the reasons for the rapid growth of the private credit industry. The current system, which offers mostly loans, replaced the single payments system in 1988. At the outset, the budget was reduced by 0.5 per cent. It seems a small amount, but the effect on families was devastating. Research that the Conservative Government initiated found that 70 per cent. of those repaying loans experienced difficulties in meeting the costs of fuel and clothes when the money ran out.

Despite increases in benefits for children and other initiatives, the current level of social security is not always sufficient to enable families to meet all basic needs. Families at some time need access to a cash safety net. Furthermore, no United Kingdom Government have carried out a proper assessment of the minimum income needed to maintain health and dignity, and meet essential needs, since before the introduction of the welfare system in 1948.

Several key reforms of the social fund should be undertaken. First, a minimum income standard should be researched and established by government as a target for setting benefit rates. Secondly, the budget for grants should be increased considerably. Thirdly, new grants should be introduced to help families to meet specific needs. They should be paid at particular stages of a child's life. Fourthly, an in-depth review of the workings of the social fund, and its impact on some of the most vulnerable sections of the community, is long overdue and should be undertaken.

The fund should be part of an interim programme of assistance to be phased out in 2020, when the Government meet their poverty eradication targets. Grants should be perceived as a means of ensuring that children have the right to an adequate standard of living, in accordance with the United Nations convention on the rights of the child.

I commend the work of the social exclusion unit and the Treasury in supporting the growth of the credit union movement. However, groups such as Debt on our Doorstep, which has petitioned me, are worried that the new regulatory framework that the Financial Services Authority is drawing up is in danger of excluding those whom it most needs to reach. Greater consideration should be given to methods of ensuring that credit unions' community and social functions are preserved and prioritised.

Credit unions in some areas have set up debt redemption schemes with local authorities. Those schemes provide funds to buy out debts held by companies such as Provident Financial. Their success has been proven by independent evaluation. As well as enabling credit unions to play a vital role in tackling financial exclusion, greater investment in debt redemption schemes would also help to ensure that funding for regeneration remains in the community rather than being turned into profits for big business.

Greater emphasis should be placed on ways in which local authorities can support credit unions in their areas. As the Scottish Affairs Committee stated, the best antidote to debt, next to an adequate income, is decent advice about money, which is properly resourced and capable of development. How about establishing a money advice hotline run by local authorities, which would enable people to get ready advice?

What action should the Government take? I suggest to my hon. Friend the Minister that, to support the growth and effectiveness of credit unions, the following is necessary. First, the Financial Services Authority should be encouraged to recognise the unique volunteer control of credit unions and to work closely with all sections of the movement to develop a distinctive framework that serves the business and community functions of credit unions. Secondly, central Government should make significant investment to fund redemption schemes through local authorities. Thirdly, local authorities should be strongly encouraged to offer a range of services to support credit unions, including help to fund debt redemption schemes.

The lethal combination of inadequate incomes, lack of affordable credit alternatives and extortionate interest rates means that low-income families are quickly trapped in a spiral of unsustainable debt. Debt will no longer be such a pressing issue when the Government's poverty eradication targets are met in 2020, the incomes of the poorest are raised to such a level that those people will be prevented from falling into desperate poverty, and community finance initiatives are universally accessible. We live in hope, but, as the Rowntree Foundation recently reported, a quarter of the population cannot afford to save even £10 a month. Therefore, in the meantime, improving access to affordable sources of credit would provide a lifeline to low-income families.

Furthermore, measures to respond effectively to high indebtedness must include greater protection against unscrupulous lenders and a radical review of the social fund. Initiatives to tackle debt and financial exclusion need to be more effectively joined up across Departments. The social exclusion unit, or another cross-departmental body, should work with the Treasury, the Department of Trade and Industry and the Department of Social Security to draw up a comprehensive plan to address the areas that I have outlined. Failing that, a key Department should be appointed to take the lead in producing an interdepartmental strategy.

The 10th anniversary of the United Kingdom's ratification of the UN convention on the rights of the child falls in 2001. Article 27 refers to the right to an adequate standard of living. If the UK's ratification of the convention is to have any meaning, and if Britain's appalling record on child poverty is to be improved, urgent action must be taken to set people free from the prison of debt. I commend the Government for the work that they have done, but I urge them to become more involved with the NGOs and others who are pushing the issue so that we can reach our target—before 2020, I hope.

10.17 pm

The Parliamentary Under-Secretary of State for Social Security (Angela Eagle)

I congratulate my hon. Friend the Member for Dumbarton (Mr. McFall) on his success in obtaining tonight's debate and on his choice of subject. As his serious contribution to this on-going debate showed, indebtedness and poverty are extremely important issues. When my right hon. Friend the Chancellor said today that we wanted all our citizens to share in the growing prosperity of the nation, he was definitely addressing many people who are in the situation that my hon. Friend described so vividly.

My hon. Friend discussed in detail the shameful legacy of the previous Government, who created a divided society in which many were left behind to face a lifetime of poverty with little opportunity to escape. Worse, the previous Tory Government claimed that the poor would always be with us. When Conservative Members discuss such issues across the Floor of the House, it is clear that they still believe that. They take the view that Governments cannot make a difference—and the legacy that we inherited was that one household in five including adults of working age was workless.

As my hon. Friend pointed out, there was a huge growth in the number of children living and growing up in poverty, despite a 90 per cent. real terms increase in social security expenditure. The bills of economic failure had to be paid, and everything was left to the market, which forced everyone, including the elderly, the weak and the disadvantaged, to fend for themselves. In turn, that weakened or removed the safety net, which was so full of holes that people fell through it.

As my hon. Friend eloquently set out, the results of the careless indifference of that approach to society are stunted life chances, loss of opportunity, waste of talent and lives made narrower and undoubtedly shorter. As he indicated, the Labour Government reject that counsel of despair and believe that Governments can make a difference. I welcome my hon. Friend's acknowledgement of the work that the Government have done so far to tackle poverty and the lack of opportunity and fairness in our society, which we inherited.

I agree that that is a huge and challenging agenda, and much work remains to be done. The Prime Minister has set us the tough target of eradicating child poverty in 20 years. By the end of this Parliament, we will be on course to have lifted 1.2 million children out of poverty, which is a good beginning. My hon. Friend mentioned "Opportunity for all", the Government's annual publication of their anti-poverty report, which charts our progress against a wide range of indicators, including levels of income, length of time on benefit, widening educational opportunities, access to health services, child care and other issues. As my hon. Friend said, poverty is multi-faceted and the cure for it is not simple. However, as he pointed out, the cure relies on a multi-dimensional cross-departmental approach, which we are putting in place. I am not claiming that it is perfect yet, but we are working on it. I certainly welcome my hon. Friend's contribution to the debate tonight.

The latest report highlighted the progress made in the three short years in which we have been in power and the two years for which we have published "Opportunity for all". The number of lone parents on income support has fallen by more than 100,000 since May 1997, and the proportion of children in workless households fell to 15.8 per cent. in spring 2000, which is down from 17.9 per cent. in spring 1997. That means that 250,000 fewer children are living in workless households and 300,000 fewer children are in families who claim out-of-work benefits. That is a start, and we are getting somewhere.

The number of children whose parents have been claiming benefit for more than two years has fallen by nearly 200,000 since 1997. Educational standards, which represent the way out of some of these difficulties, are already improving, and the proportion achieving the expected numeracy standard at age 11 is up from 62 per cent. in 1997 to 72 per cent. in 2000. In literacy, 63 per cent. achieved the standard in 1997—a figure that rose to 75 per cent. in 2000. The number of permanent exclusions from school has gone down dramatically.

That is a start, and demonstrates that Government action can make a difference and, indeed, has done so. The national minimum wage has helped 1.5 million people, and there has been a 26 per cent. real terms increase in child benefit in three years. Even before today's very welcome announcements by the Chancellor, all families with children were better off by £850 a year on average as a result of changes in the social security system and the tax system. Working families tax credit is a key aim, and will make a real difference to many people who now have a real prospect of work for the first time in many years.

My hon. Friend vividly described the problems of indebtedness, and many of us recognised those problems from our constituency case loads. We have seen shady people who give out family allowance books to mothers and collect them back after they have come out of the post office and handed their money over. We know what goes on. Problems of indebtedness and financial exclusion exacerbate the problems that are faced by the poorest in our society.

My hon. Friend discussed the role of credit unions and the social fund in providing some answers, and raised the important issue of extortionate lending. We know from our own research that low income families are as likely to use credit as high income families, but use it for necessities rather than luxuries, and get a much worse deal than those who borrow higher up the income scale. We want to tackle those problems. My hon. Friend mentioned the 44 recommendations of the 14th report of the social exclusion unit policy action team, to which we shall shortly be responding in detail.

I have considerable sympathy with what my hon. Friend said about extortionate lenders, and I recognise many of the tactics that he described. Loan sharks are a curse. This matter has been taken up by my right hon. and hon. Friends at the Department of Trade and Industry, and I shall pass on my hon. Friend's comments to them, as they follow up the recent debt summit. They are examining how to update the Consumer Credit Act 1974 to limit the power of extortionate lenders, and deciding on their future policy.

My hon. Friend is right to stress the importance of credit unions. As providers of low-cost credit to people on low incomes or with a poor credit history, they have the potential to make a significant contribution to the fight against financial exclusion. The movement as a whole needs to grow. Credit unions serving deprived communities must be central to that growth, and we are taking steps to support their development.

By 2002, we want to extend the maximum loan repayment periods allowed, give credit unions greater flexibility on disposal of repossessed collateral, remove the maximum membership limit, and ensure that members receive protection as depositors similar to that received by users of other lending institutions. When a credit union works well it is fantastic, but if it is dodgy it can create enormous problems. We must ensure that with the growth of credit unions comes an assurance that they are above board and that money put into them is safe.

My hon. Friend mentioned the changes to the social fund. We have already introduced changes, which have been widely welcomed, to the way in which the budgeting loan system works. Independent research has shown that the change to the budgeting loan scheme has made it easier to use, quicker, more easily understandable and less intrusive for applicants.

Other changes to the social fund in the past three years have included two increases in the amount of money allocated to the grants budget since 1997. Those were the first increases since 1994. There has been a 15 per cent. increase in expenditure on budgeting loans, which is up to nearly £400 million, with a 9 per cent. increase in the number of successful applicants, and only a 5 per cent. increase in the number of refusals. We should contrast that with the Tories' plans to decimate the fund by taking £90 million out of it to pay for their spurious pension proposals, which will hit women, children and people with disabilities, who are the main users of the social fund, far harder than anyone else in society. As my hon. Friend said, they would hit the poorest and most vulnerable harder. It is a cruel policy.

I am not saying that the social fund is perfect. I should like to send my warm wishes to the Debt on our Doorstep campaign, whose representatives I met at the recent party conference. We had a long discussion about some of the issues that my hon. Friend has raised. He is right to say that we need a cross-departmental approach. I promise that I will consider the suggestions that he made and will pass them on to the relevant Departments. I assure him that poverty and its alleviation will remain at the top of our priorities. I welcome his interest in the issue, and the fact that we have been able to have this short but important debate.

Question put and agreed to.

Adjourned accordingly at twenty-eight minutes past Ten o'clock