UK Govt White Paper Better Deal for Consumers July 09

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1 UK Govt White Paper Better Deal for Consumers July 09

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6 $4,100bn $3,600bn $2,200bn $1,400bn $1,000bn $100bn Sources: Martin Wolf Why Obama s new TARP will fail to rescue the banks FT, 10/02/09 & IMF Global Financial Stability Report 23/4/09

7 The Commission believes that the Bank of England is too sanguine in its outlook. Debt is a time bomb which could be triggered by any number of shocks to the economy at any time. At the end of the day there are two sharply differing views of the likely consequences of the present scale of consumer borrowing. One is that the trillion pounds of consumer debt is a time bomb ticking away. At some date an explosion will occur a collapse in house prices, higher interest rates, recession in the economy, growing unemployment, debtors unable to pay off their loans, repossessions and increasing insolvencies. The other view is more sanguine and represented by the Bank of England and the Government

8 The Commission believes that the Bank of England is too sanguine in its outlook. Debt is a time bomb which could be triggered by any number of shocks to the economy at any time. At the end of the day there are two sharply differing views of the likely consequences of the present scale of consumer borrowing. One is that the trillion pounds of consumer debt is a time bomb ticking away. At some date an explosion will occur a collapse in house prices, higher interest rates, recession in the economy, growing unemployment, debtors unable to pay off their loans, repossessions and increasing insolvencies. The other view is more sanguine and represented by the Bank of England and the Government

9 The Commission believes that the Bank of England is too sanguine in its outlook. Debt is a time bomb which could be triggered by any number of shocks to the economy at any time. At the end of the day there are two sharply differing views of the likely consequences of the present scale of consumer borrowing. One is that the trillion pounds of consumer debt is a time bomb ticking away. At some date an explosion will occur a collapse in house prices, higher interest rates, recession in the economy, growing unemployment, debtors unable to pay off their loans, repossessions and increasing insolvencies. The other view is more sanguine and represented by the Bank of England and the Government

10 Cuts being proposed are draconian... People who had the least to do with the recession will pay the most Prof. David Danny Blanchflower speaking at David Hume Institute, Edinburgh, 18 th Oct. 2010

11 ...the current recession will hit the poorest, the oldest and those in social housing hardest IFS, March 2009

12 More month than money? 43% of social renters (UK) have no HCI (1% owners); 52% in Scotland have LLI, health problem or disability (19% owners); 63% single parents in Scotland live in social housing in Scotland (25% owners); 54% social renters earn under 10,000/year (10% owners); 20% of social housing tenants in Scotland have savings (62% owners); 53% of stock in most deprived 15% is social housing (39% owned); 2.5m people use Home credit (70% + social renters; 11% owners).

13 Brighthouse said it s customer base had proved largely resilient in the recession we re serving families in some of the most socially deprived areas of Britain. They re not worried about losing jobs because more than 50% of them are wholly or partly dependent on benefits Leo McKee, CEO, Bright House quoted in FT 6/7/09

14 Around 85% of BrightHouse customers purchase optional service cover and 90% purchase damage liability cover once cross-sales of insurance cover is included BrightHouse charge 100 per 100 borrowed Mainstreaming Affordable Credit (FI Taskforce) March 2010

15 Female; aged 25 to 45; with children; a household income of less than 18,000; and there is a good chance she is wholly or partly dependent on benefits; and she may be a lone parent; she probably lives within three miles of a store; and has no access to a car. The average shopper pays 23 a week and has an average of three and a half items out on loan through BrightHouse. [1] [1] Leo McKee CEO, BrightHouse quoted in Retail Week on 13 th November

16 Secured and unsecured lending (UK) since Sept Secured lending down 63% Unsecured lending down 13%

17 wks % APR 20% rise in 5 years

18 At least 200,000 customers in Scotland AB C1 C2DE We ve seen a quite significant increase in demand for our products in each of our businesses the level of mortgage holding now in the home collected customer base is down to 11% Peter Crook, Provident CEO, 31/07/08

19 Then: Sept p 45% of social landlords (85% of stock) offer HCI; and 12% of tenants take up that offer; Products from 5p (over 60yo) per day; to 8p (all ages) per day ; GHA (20% take-up) as many policyholders <35yrs as >85yrs. Now: Sept p There is a clear relationship between income inequality and health inequality. Ill health is both a cause and a symptom of poverty. It is critical that the solutions we develop target root causes in all their complexity 1 in 4 adults has a mental health problem 1 in 2 adults with debt has a mental health problem From October 2009 RBS reduced their bank charges from 38 for an unpaid Direct Debit to 5.

20 Big Issue Invest Fair Access report (2010) Detailed analysis of 50,000 rental a/c s + Experian data-mining 30% of sample had thin / empty files (UK: 15%) Not on voter roll: 3x greater amongst tenants than owners 13% of sample had active home credit account Consumer credit declines: owners 29%, renters 55% Credit Card declines: owned 38% & 42%; rented 85% & 87% Personal loan declines: owned 38% & 50%; rented 75% & 93% Current account declines: owned 37%; rented 68% 28,462 lettings made in Scotland in 2009/ % of all LA lettings made to homeless

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22 *13% average loan capital write off over 10 years **Dependent on securing additional funds and ***requires FSA approval o o o o o o 3m+ investment (DWP GF, RBS, HA s & Wates Giving). 10 year financial plan. Solvent & sustainable social business priced for risk*. 26 Housing Assoc. supporters. Regional spread. Loans, bank & savings accounts, money advice** & HCI***.

23 1.7m advanced 3106 loans (27 owners) Average 547 / 44 weeks 62% working age not working 74% women; 54% with children 59% income under 200 week 85% living in most disadvantaged areas CAB clients 4.3m debt + 1.7m cfg 42 credit union savings accounts with 42k saved 766 RBS accounts 124 evictions prevented

24 8m lent to 10,000 people; 64% under 40 years old; 42% lone parents; 57% social housing; 54% previous used HCC; Moneyline: 8 years

25 Location: Tamworth, Coventry, Worcester, Hereford o 4,200,000 adults across WM: o 447,000 in social housing; o 200,000 HCC (+400k refused); o 100,000 JSA claimants (18-49yrs (Oct. 09); Key Question: Do you want viability or sustainability? Erdington, Birmingham, Northfield, Dudley, Wolverhampton & Walsall

26 Not-for-profit a social business...you are committed to solving a social problem with no intention of making personal financial gains. You cover all costs through your operations so that your business is self-sustaining Muhammad Yunus, May 2010 Grameen Bank founder & Nobel Peace Prize Winner, 2006

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28 Lending at 25 per 100: before the cost of delivery is factored in. 0% Write off 100 Capital 25 Interest & fees 125 returned 10% Write off 90 Capital Interest & fees returned 14% Write off 86 Capital Interest & fees returned

29 Lending at : before the cost of delivery is factored in. 0% Write off 100 Capital 15 Interest & fees 115 returned 10% Write off 90 Capital Interest & fees returned 14% Write off 86 Capital Interest & fees returned

30 APRs: It s like looking at a thermometer to see if it s going to rain! Borrow 100 over 48 months repay at 2.50 a month = 120 that s 9.6% APR Borrow 100 over 36 months repay at 3.33 a month = 120 that s 13% APR Borrow 100 over 24 months repay at 5 a month = 120 that s 19.8% APR Borrow 100 over 12 months repay at 10 a month = 120 that s 41.3% APR Borrow 100 over 6 months repay at 20 a month = 120 that s 89.5% APR

31 Provident Financial CR report 2009, page 24

32 Income per loan officer Surplus / deficit 30 x11x48= 61,776 x1.95 2,020 Appts. per week (max) Loan officers / per office MHF income from loan Income after write off -20% 117* = 120,463 = 103,598 No shows Max income from loans Avg. loan amount Write off ,662 14% Customers per wk Avg. Staff costs per branch Loans written per week Wages + running costs 46% =11-33,916 =- 101,578 Loans approved Avg. running costs per branch *assumes loans at 35% + 5% arr. fee (typical APR 56% on 12 month term)

33 Customer ELM & Scotcash* & CU GF customer Female, 30-40, dependent children, low income, renting, not working, under 44, not working, renting, C2,D,E, lowincome, dependent children Female, 30-40, chaotic lifestyle, unemployed, credit Female, working, 40-50, no dependent children, owner, Home Credit* multiple debts, renting, dependent children. Credit Union* Loan Shark* Sources: Kempson, E & Collard, S: Affordable Credit The Way Forward (JRF) (2005); Competition Commission press release 27 April 2006; BMRB a detailed analysis of target group index (TGI) data prepared for the Competition Commission (2006); NOP World Home Credit Customer research report for Competition Commission (August 2005); Illegal money lending roundtable background paper Scottish Executive (2007); Evaluation of the illegal money lending pilots, PFRC & Policis DTI, (2007); Birmingham Trading Standards IML presentation (2010); Paul Jones, The strategic development of credit unions in Britain Interim Report Summary. LJMU (2008); Sharon Collard & Nick Smith, Membership Counts: Who Uses Credit Unions PFRC (2006); Peter Goth, Donal McKillop, Charles Ferguson Building Better Credit Unions Policy recommendations JRF (2006); Scottish Household Survey (2005/06); Information provided by Scotcash General Manager (Feb.2010); Information provided by ELM (April 2010)

34 the Chief Executive of the UK s biggest credit union trade association suggests that even a 60% APR would not be enough to cover all the costs of lending to Growth Fund customers, within a 10% default target Mainstreaming Financial Inclusion (3/2010) Financial Inclusion Taskforce 3% of Scotland s social housing tenants have a credit union account Source: SHS 2007 respondent or partner has credit union account by housing tenure

35 No financial return Below market return Market return Grants Recoverable grants Programme related investment Investment Plus Mainstream investments Advancing charitable / social enterprise purposes Esmee Fairbairn Social Investment Briefing reproduced in Understanding Social Investment (ACEVO) 2010

36 Summary It s a not-for-profit social business; Meets an acknowledged demand & need it won t go away; Small-sum, short-term, priced for risk ( 25 not 85 per 100); When other public subsidy (DWP GF) will be removed; Creating 38 jobs; Local social landlords are the route to market ; Providing a social return on investment by; Banking the unbanked; Encouraging savings and the take-up of HCI; Offering money advice earlier in the spectrum of debt; Fair loans at fair prices.

37 The first month 64% female; 64% unemployed; 36% under 30 years old; 58% under 40 years old; 86% HA or LA renting; No owners; 40% lone parents; 51% with children; 20% open saving account. In the 1970s 11% of households in social housing had no earner, by 2003/04 this had risen to 69% 2010 Comprehensive Spending Review Page 29

38 Perspective Provident alone will lend in 120 days the amount that My Home Finance projects to lend in 120 months!

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