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The Social Fund consultation – the baby and a lot of bath water

12.22.08 | 1 Comment

I go away for day and when I return there’s a hell of a hullaballoo about this amazing scoop by the Mail on Sunday who have ‘obtained’ the European Social Fund consultation paper. I’m not entirely sure how this counts as headline-grabbing investigative journalism when it’s been not very hard to find on the DWP website for three weeks now and been commented upon by hundreds of people and organisations already, but what would I know about that kind of thing? The consultation ends tomorrow by the way, if you want your say. I’ve had mine.Of the paper itself? Well, like the sensible Don Paskini, I do think it’s worth looking beyond the ‘27% interest shock!’ headline at some of the words in the consultation paper, though before moving on we should not that this 27% is actually the Annualised Percentage Rate (APR) calculation, generally reckoned to be a fiendishly difficult calculation but related to the compound interest rate on a loan on which the principal loan sum is not being repaid.

That’s why, in the 10 month average example given in the consultation paper and based on 2% monthly compound interest, the final interest paid is around 11% of the principal loan, which is the bit the Mail on Sunday don’t want you to pick up on because 27% looks a bit more like loan shark territory.

In this respect Kitty Usher  MP is correct, in the  Mail coverage, to say that we are most definitely in loan shark territory, where interest rates are such that the principle sum becomes unpayable very quickly; just as my own example on the same principal loan sum over the same period, a ‘reasonable’ loan shark offering you 10% per month would still mean you were owing around £280 of your £433 by the end, and that’s without any defaults.

(It should also be noted that there is an inconsistency in the paper, which refers to the setting of an interest rate of 1-2%, ‘ the same criterion which applies to credit unions’ (para 3.3) and only to the proposed ‘maximum’ 2% in the worked example in the Annex.) 

Of course, we should never have got this far. The idea of a interest charge made on a loan being made, specifically in order to enable Credit Unions to provide financial advice, should have been a non-starter.  While some people may benefit from a bit of financial advice, most people – as Don Paskini says – need a Social Fund loan because they don’t have a enough money coming in, not because they can’t manage the money they do get in.  Making financial advice compulsory (where have I heard that term recently?) element of the loan – because that is what  the Credit Unions would have to prove they have given in order to get these new contracts – is precisely the kind of ‘impersonalisation’ that the DWP claims to be working to combat in its services.

Further, the whole idea set out in the consultation paper at para 3.5, that Credit Unions should be able to use the Eligible Loans Deductions Scheme to take repayments directly from benefit, could  do with a rethink; the notion that ‘there are risks associated with lending money to those who are hard pressed to manage on a  small budget’  has a ring of, at best patronisation, at worst condemnation of the feckless poor , and seems to ignore the pretty well established evidence that poor people actually have higher repayment rates than richer people, when loans are affordable.  To suggest that loans may not be at undue risk in this way suggests to me not the need for tighter controls, but that the loan is unaffordable – in which case it should be a grant instead!

It also seems clear that the  DWP officials drafting this consultation paper have not been talking to their Whitehall housing colleagues.  While the DWP looks to deduct straight from benefit, in housing the newly introduced Local Housing Allowance(replacing Housing Benefit over time) is now being paid to the tenant, and not to the landlord as was the case with Housing Benefit.

The reason?  Well, two of the principles of the LHA are:

‘Personal responsibility– Empowering people to budget for and to pay their rent themselves, rather than having it paid for them, helps develop the skills unemployed tenants will need as they move back into work. Currently around 40% of Housing Benefit payments in the private rented sector are made to tenants, with the remainder paid straight to landlords. The Government believes that, where possible, local housing allowance should be paid to tenants, as are most other benefits and tax credits. Safeguards will be put in place for those customers that are unable to manage their financial affairs or who fall into rent arrears.

Financial inclusion – Ideally, we want people to have their housing payments paid into a bank account and to set up a standing order to pay the rent to their landlord. This has the advantage of being a safe and secure method of payment and provides certainty for landlords that rent will be paid.’

This approach is much more ’empowering’ than the DWP approach, because it’s putting its money where it’s mouth is, and trusting people to take financial advice where they need it, and get on with running their own affairs; at the DWP, it’s all about enforcement still.  It also, at a more practical level, militates against the avowed desire to increase the use of Credit Unions, since it decreases potential personal engagement with the Credit Union.

And all this is a bit of  shame, because there are some good ideas in the consultation paper, and the DWP at one level looks really committed to promoting financial inclusion. 

The proposed new powers for Credit Unions is a good thing, and in the current climate of distrust for banks Credit Unions could really get on a roll and become ‘the new mutuals’. 

Linking Credit Unions into the administration of the Social Fund would help them get customers ‘through their door’, and that will be great –  as long as it’s not linked to what are seen as punitive interest charges (the administration costs should be part of the core contract); as long as the Credit Union service is physically accessible so that claimants are actually able to get loans without 4 hours on a bus they can’t afford; and as long (of course) as it’s workable for the Credit Unions to charge (validly) interest on its own loans and not on the Social Fund Loans.

As ever, the devil’s in the detail, but we shouldn’t throw the Credit Union baby out with the Mail on Sunday’s dirty bathwater.

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