DWP and Financial Inclusion An Update Lindsay Watt

Topics Covered Scale of the problem What happens next Vision for the future What are DWP doing?

3 Department for Work and Pensions The Scale of the problem – 10 big numbers £1,280 – the poverty premium paid by low-income families each year 24 – the percentage of UK households now classed as fuel poor £8,064 – the average household debt in the UK 6.2 million – households CCCS classify as financially vulnerable 124 – the percentage debt to income ratio of CCCS clients receiving benefits 9,072 - new debt problems are dealt with by the CAB every day 1 - person is declared insolvent or bankrupt every 60 sec’s per working day. 6 million - people with no savings 1.5 million - working age people without access to a bank account 4.1 million – Pay Day Loans made each year valued at £1.2 billion

4 Department for Work and Pensions The Cost of Credit OrganisationTotal Cost of Credit per £100 borrowed Credit union£13 - £14 per £100 CDFI£20 - £35 per £100 Home Creditupwards from £82 per £100 The average low income consumer borrows between £300 and £600 any one time Typical APR for Credit Union 26.8%, for CDFI 36%, for Home Credit 272%

5 Department for Work and Pensions The Poverty Premium and Fuel Poverty The poorest families in the UK pay higher prices than better-off families for basic necessities like gas, electricity, credit and access to banking. The costs that poor families bear for obtaining cash and credit, and for purchasing goods and services can amount to a ‘poverty premium’ of around £1,280 pa – or 9% of the disposable income of the average family. 6.3 million, almost a quarter of all households in the UK are classed as fuel poor (uSwitch) The lowest income decile pays £11 per week for fuel (15.4% of income) compared to the highest income decile which pays £25 per week (but only 2% of income)

6 Department for Work and Pensions What happens next?

7 Department for Work and Pensions The Vision The new Money Advice Service targets free face-to-face money and debt advice in the most deprived areas of the UK. Credit unions/CDFIs move to sustainable business models and deliver low- cost financial products across the UK in partnership with the Post Office. Local authorities integrate financial inclusion within their broader poverty reduction strategies and maintain current funding levels. UK banks improve access to basic bank accounts and other services Utility companies subsidise the cost of a new budgeting account and widen access to social tariffs. Outcome: Previously financially excluded individuals have access to, and use low-cost financial products and services. This reduces their cost of living, and levels of indebtedness in low-income households fall.

8 Department for Work and Pensions What is DWP doing? Building on the Growth Fund, DWP support for credit unions is planned to continue for four years through the Credit Union Expansion Project The Growth Fund invested in the capacity of credit unions and CDFIs to tackle financial exclusion and increase local access to financial services and products. This enabled the provision of £175 million of affordable, low-cost loans between 2006 and 2011 and helped increase the numbers of credit union members from 554K to over 900k today. We now want to help credit unions/CDFIs expand and modernise their service through our £73M project so they are no longer reliant on grant funding. Credit unions/CDFIs will need to work with a broad range of partners to create access to a common range of financial services for a million more people on lower incomes. A Feasibility Study will report to Ministers in October on the best ways to secure sustainable expansion and modernisation.

9 Department for Work and Pensions Emerging Findings from the DWP feasibility study From 90 credit unions and CDFIs interviews: 89 demonstrated real appetite for growth All offer basic loans and savings products (CDFI’s offer savings accounts through partnership with their bank). Almost a third offer pre-paid cards and 10% offer the Credit Union Current Account. Over 40% raised sustainability and the end of DWP and other funding as key challenges. 58% were in favour of achieving sustainability through cost savings and developing more efficient processes, and a further 10% specifically raised centralised debt management and credit scoring as key to their future viability. From 4,624 consumer interviews: 60% had heard of credit unions/CDFIs but only 26% knew what they do. Low interest is by far the most important factor for people when deciding on a loan. Similarly, the interest rate or dividend remains the most important factor when people decide on a savings product. Financially excluded consumers are most likely to want a bill payment service as part of their financial/bank account. Only 14% had heard of jam-jar or budgeting accounts

10 Department for Work and Pensions The Future?