Social Security (Claims and Payments) Amendment (No. 2) Regulations 2006

My Lords, I am very grateful for the opportunity to respond to this debate. I shall, of course, do my best to answer all the points that were raised. However, I start by taking the opportunity to explain the Government’s thinking in introducing these regulations as, given the tenor of the debate, I think that there is some misunderstanding. In doing so, I hope to reassure your Lordships about the relevance and value of the scheme that will be created by the regulations—which we have called the eligible loans deduction scheme. Many people on low incomes are unable to use the financial products and services that are taken for granted by most of us. They often cannot access mainstream bank accounts or low-cost loans; and that imposes real hardship on individuals and their families. In some cases, families turn to high-cost credit or illegal lenders and get locked into a vicious circle of unmanageable debt. The noble Lord, Lord Skelmersdale, in particular acknowledged that point. The regulations were made in the context of the Government’s determination to tackle financial exclusion. The case for doing so and the strategic approach were set out in the Treasury report, Promoting financial inclusion, which we published in December 2004. In total, the Government have committed £120 million to tackling the problem. One of three priority areas highlighted in the Treasury report was to improve access to affordable credit for people on low incomes. A number of measures were announced to support this objective. They included a growth fund of £36 million, which was allocated to credit unions and other third sector—not-for-profit—lenders, for them to provide additional affordable credit in areas of high financial exclusion. They also included the creation of a financial inclusion taskforce to support and monitor the provision of credit by third sector lenders. The deduction scheme was proposed in the same Treasury report. It is a scheme that allows third sector lenders to apply for deductions from benefit where normal loan repayment arrangements have broken down. When people have to borrow, it is important that they can do so at affordable rates from responsible lenders, but the costs of lending small, unsecured amounts to people on a tight budget can be high. Default rates in the third sector can be as high as15 per cent. One of the larger lenders in this sector calculated that a reduction in default rates from15 per cent to 5 per cent could save them up to£1 million a year. The deductions scheme could therefore considerably reduce the risks and costs of lending to people on low incomes. This in turn will help to keep interest rates at affordable levels and allow funds to be reinvested and lent to more people on low incomes. The issue of cost has been raised, and the impact of the scheme cannot be looked at in isolation. It is part of a package of measures that the Government are introducing to support third sector lending, including through the growth fund, additional training support, and more flexibility for credit unions in setting interest rates. I can confirm, however, that the level of interest from lenders in the deductions scheme in the few weeks since the regulations were made has been gratifying. By 31 January, we had received 60 requests for the application form to join the scheme, 37 had been returned, and 30 have already followed up by signing the required memorandum of understanding. That level of early interest reflects the potential value of the service on offer and suggests a higher take-up than we first anticipated. We have kept costs to a minimum. The total cost of setting up the scheme, including running costs until March 2008, is now expected to be £2.25 million. Most of this money was spent on changes to computer systems, but that investment means that future running costs will be small, probably between £100,000 and £150,000 per year. The financial inclusion taskforce will monitor the cost-effectiveness of this initiative in the context of the Government’s wider package of measures, and I have asked officials to ensure that a comprehensive evaluation framework is in place. The scheme needs a reasonable period to settle in; but in the unlikely event that our evaluation shows that the scheme is not achieving its objectives, we will revisit the policy. The issue of the impact of multiple deductions causing hardship to customers has been raised. In drafting the regulations, we balanced carefully the aims of the policy on the one hand with safeguards to the benefit claimant on the other. The deduction rates and limits set out in the regulations ensure that the claimant is left with sufficient money to live on after deductions are taken, although I acknowledge that the amount is not overly generous. The third party deduction scheme has been in place for about 30 years. Its main purpose is to safeguard the position of people receiving income-based benefits who fall into arrears with essential bills, but deductions can also be made for other purposes, for example to enforce payments for fines or to support children. The deductions scheme works well and we do not believe that a comprehensive review is needed at this time, although I acknowledge that the noble Lord, Lord Kirkwood, took a different view. I can assure your Lordships that we do not amend the scheme or introduce new deductions without careful consideration of the value and consequences of doing so. In fact, although we have previously changed some of the rules governing the scheme, this new eligible loans deduction is the first new type of deduction introduced by the Government since we came to power in 1997. This shows that we do not take such changes lightly. Concern has been expressed, particularly by the Social Security Advisory Committee, about whether this would encourage lenders to lend irresponsibly or to pursue recovery without taking account of potential hardships to the debtor. In response, the Government changed the regulations to extend the period of default to three months before a loan can be recovered. We extended the memorandum of understanding that all lenders in the scheme are required to sign. It sets out the good practices that lenders must follow in making loans and dealing with default. For example, lenders are required to carry out a risk assessment of a customer’s ability to repay before making a loan. They must handle cases of financial difficulty sympathetically and positively, offering rescheduling and money advice before submitting a case for deductions from benefit. That is in clear contrast to the market to which some poor people might be forced if these facilities were not available to them. Lenders need to demonstrate that they have a policy of following these good practices before they are accepted on to the scheme and must then show they have done so with each individual referral for benefit deductions. A number of noble Lords, including the noble Lords, Lord Skelmersdale, Lord Oakeshott, Lord Taylor and Lord Kirkwood, referred to the Social Fund. The Government have demonstrated their commitment to the Social Fund budgeting loan scheme. An additional £300 million has been invested over a six-year period from 2003-04 to expand the discretionary loans and grants budget, helping more people who claim income-related benefits to meet and budget for large and unplanned expenditure. We anticipate that byApril 2008 the Social Fund will be lending up to£800 million per year. Financial exclusion and inability to access mainstream borrowing does not just affect people on benefits, and the aim of the policy is to expand the supply of affordable loans to all those unable to access normal mainstream credit. I was asked about complaints regarding the Social Fund. Although none has crossed my desk in the past three weeks, the note that I have from officials says that we are not aware of any particular theme of complaints in that regard. The noble Lord, Lord Skelmersdale, asked if the scheme had gone live. Yes, the regulations came into force on 27 December 2006. The issue of the deduction rate was touched on by several noble Lords. We consider that the current rate of £2.90, in context, is modest and consistent with the amount taken to repay arrears of other debts that benefit deductions may cover, for example rent arrears and utility debts. Why did we reject the Social Security Advisory Committee’s recommendations not to proceed? We carefully considered its report and, as I outlined, made modifications to further protect the position of the benefit customer. My right honourable friend the Secretary of State for Work and Pensions made a full statement in response to the points raised when the regulations were laid before Parliament on 6 December. He noted calls for an overall review of the third party deduction scheme but, as I said, decided that it was important to the overall strategy to proceed with the proposals. The Government greatly value the contribution made by the Social Security Advisory Committee in all of its activities, including the scrutiny of regulations. We considered the committee’s views on these regulations very carefully and made modifications, but wecould not accept their overall recommendation not to proceed. The costs which I outlined of £2.617 million are considerably lower than the £10 million originally allocated from the financial inclusion fund, and we expect future costs to be lower. The noble Lord, Lord Kirkwood, asked what the Government are doing generally on high levels of debt. The strategic cross-government approach to consumer debt is set out in the Tackling Over-indebtedness annual report, which was published in August 2006. Our key objectives are to minimise the number of consumers who become over-indebted and to improve support and processes for those who have fallen into debt. As part of this strategy, £47.5 million has been made available to fund the recruitment and training of over 500 new debt advisers. Timely, well delivered money advice can reduce the costs of over-indebtedness to the benefit of the individual and of society as a whole. We need to keep this issue in perspective. The vast majority benefit from credit arrangements. However, a small minority experience difficulties, such as the4 per cent who are in arrears for more than three months on either consumer credit or utility bills and the 5 per cent of borrowers who consider their borrowing repayments to be a heavy burden. I have dealt with the point about calls for a review of the third party deduction scheme and the issue of multiple deductions in respect of benefit. The view that this is introducing a haphazard change to the system is unfounded. As I said, the scheme has been in place for 30 years and this is the first change of this type that the Government have made. I hope that I have addressed the individual points that noble Lords have raised. If not, I am happy to have another go; I am certainly happy to review the record and to write further if necessary. I hope that I have also addressed the concerns about these regulations. We are confident that the new eligible loans deduction scheme will help to increase access to affordable credit—that is its objective—and keep vulnerable people out of the clutches of loan sharks. It is a modest but important element in the Government’s wider strategy to promote financial inclusion by encouraging financial organisations to cater for the lower-paid. As I said, 60 lenders have already expressed an interest in joining the scheme by asking for application forms and 30 have already joined. To annul the regulations at this stage would take the service away from them before it has had a chance to prove itself. I commend the scheme to the House and urge the noble Lord, Lord Skelmersdale, not to press his Motion.