Consumer Focus

About Consumer Focus

Consumer Focus is the statutory consumer champion for England, Wales, Scotland and (for postal consumers) Northern Ireland.

We operate across the whole of the economy, persuading businesses, public services and policy-makers to put consumers at the heart of what they do.

Consumer Focus tackles the issues that matter to consumers, and aims to give people a stronger voice. We don’t just draw attention to problems – we work with consumers and with a range of organisations to champion creative solutions that make a difference to consumers’ lives.

The researchers

This report was prepared by Dr Chris Deeming, Sharon Collard and David Hayes at the Personal Finance Research Centre (PFRC), an independent social research centre based at the University of Bristol.

PFRC undertakes rigorous empirical studies across a range of personal finance issues.

Recent studies completed by the Centre include an evaluation of the Money Guidance Pathfinder for the Consumer Financial Education Body (CFEB), a review of international pension reform for the Department for Work and Pensions (DWP) and an age-seven evaluation of the Child Trust Fund for HM Revenue & Customs (HMRC).

We all borrow money at some point and the British propensity to do so is striking in comparison to our European neighbours. We borrow about twice as much as people in France and Germany with only Cypriots ahead of us in the European Union (See table 5 of the report).

This is not necessarily a ‘bad thing’. At the macro level it needs to be seen in the context of how the overall economy is performing and at the micro level many of us manage debt very well and sensibly. However, for those on the lowest incomes, borrowing is not always a discretionary activity and they can pay a high, sometimes crippling, price. The high cost of credit is not a subject which we can ignore.

1 Office of Budget Responsibility, March 2011, Household Debt Forecast

We asked the Personal Finance Research Centre to examine options for making better provision of affordable credit for those on low incomes, especially drawing on experience in other countries. The findings are timely as the Government is currently considering how it can reform the British consumer credit market to make sure it is fit for the future.

The report’s conclusions reflect the range of challenges facing private, third sector and public institutions and the necessary interrelationships between the players. There are no easy answers.

This is a complex area requiring innovative solutions and, despite the different regulations and financial climates and cultures of other countries, we feel there is considerable value in drawing on the ideas and experiences of other nations in trying to reach our own national solutions.

France, Germany and Australia were the countries chosen for comparison with the UK. France and Germany have interest rate caps and very little sub-prime lending. This results in lower interest rates, but more limited access to credit for low income groups.

Foreword

Australia’s system of financial regulation is nearer to the UK’s and Australian society is also currently caught up in a debate about whether a national interest rate cap should be imposed. Rate caps might deter high cost commercial lenders, but removing supply will not eliminate demand and could push people on low incomes into the arms of illegal lenders. Low income consumers often need credit to juggle competing demands on limited budgets or to manage emergency expenditure.

When faced with calls for caps on rates, the reason cited by many for high interest rates is the need to reflect the cost of lending. Our financial regulators have the duty to ensure that the credit market for all of us is working well, ie the interest rates we are charged are set in a competitive market and are reflective of the costs of lending.

This matters to us all but is particularly critical for those on low incomes.

Financial institutions have reduced the number of consumers without bank accounts by half in recent times but in itself this does not solve the problems of unaffordable credit as many of these accounts do not include credit facilities. There also remain about 1.75 million people without a transactional bank account. Growing support for Credit Unions has been an encouraging development. So while we welcome the progress made by financial institutions, more can be done and will need to be done if we are to support those on the lowest incomes in the interest of social cohesion.

Beyond the need to make sure the market is working properly, we need to consider providing affordable credit at below market rates, ie increased provision of low or no interest credit options through government, the financial services industry and third sector providers.

We must broaden the debate to include practical solutions that will provide access to affordable credit to low income consumers. Such solutions may involve partnerships between commercial, third sector and public bodies. For example in Australia, mainstream banks are working in partnership with charitable organisations to grant low cost loans to low income consumers.

We think the UK could learn from experience in other countries, and commissioned this report by the Personal Finance Research Centre to see how affordable credit in the UK could be changed. We hope this research will stimulate ideas that push the debate beyond interest rate caps and towards affordable credit solutions for the poorest in our society.

Table 1: Financial exclusion in the EU (25 countries rank ordered) .......................................... 5

Table 2: Levels of revolving credit and savings exclusion in the EU (25 countries rank

ordered) .................................................................................................................. 6

Table 3: Levels of banking exclusion in the EU (25 countries rank ordered) ............................ 7

Table 4: People likely to experience high levels of financial exclusion in the EU (EU15) .......... 8

Table 5: Total value of consumer credit in EU member states ................................................. 9

Table 6: Ranking of European sub-prime lending market by degree of ‘development’ ......... 10

Table 7: Household indebtedness in selected OECD countries ............................................... 12

Table 8: Consumer attitudes and views on financial products................................................ 15

Table 9: Regulation of the UK payday loans industry .............................................................. 16

Table 10: Office of Fair Trading review of high-cost credit ..................................................... 18

Table 11: The UK Social Fund and the UK Growth Fund .......................................................... 20

Table 12: State and territory regulation of high-cost credit .................................................... 30

Table 13: NAB’s No Interest Loan Scheme (NILS) .................................................................... 42

Table 14: Progress Loans from ANZ ......................................................................................... 42

APR Annual percentage rate

ASIC Australian Securities and Investments Commission (Australia)

BIS Department for Business, Innovation and Skills (UK)

CCD Consumer Credit Directive (European Council)

CCSF Comité Consultatif du Secteur Financier (French, independent economic research

institute)

CDFIs Community Development Finance Institutions (Australia)

DTI Department of Trade and Industry (UK) (now BIS)

ECRI European Credit Research Institute

FIT Financial Inclusion Taskforce

GDP Gross Domestic Product

IFF Institut für Finanzdienstleistungen (German, independent financial services research

institute)

IRR Interest Rate Restrictions

JRF Joseph Rowntree Foundation (UK, independent charitable trust)

NCCP National Consumer Credit Protection Act (Australia)

NILS No-interest loans scheme

OECD Organisation for Economic Co-operation and Development

OFT Office of Fair Trading (UK)

PFRC Personal Finance Research Centre (UK)

UCCC Uniform Consumer Credit Code (Australia)

ZEW Centre for European Economic Research (German, economic research institute)

i

Consumer Focus commissioned the Personal Finance Research Centre (PFRC) to examine and

report on how the UK can most effectively ensure the provision of affordable credit to people

on low incomes, particularly within the context of the available evidence on affordable credit

emerging from other major OECD economies of France, Germany and Australia.

The Conservative–Liberal Democrat coalition government is currently consulting on how it

might reform and strengthen the British consumer credit market to ensure it is fit for the

future (HM Treasury 2010). This review suggests tentative conclusions under seven broad

headings:

more needs to be done to improve levels of financial inclusion in the UK. The European

Commission’s measure of ‘financial inclusion’ is based on data from 2003, however, and

urgently needs to be improved and updated. Since 2003, banking inclusion in the UK has

increased considerably, although there remain concerns about the use that people on low

incomes make of their accounts.

deciding to take out a loan or other credit product. Information provided by lenders on

interest rates and fee structures needs to be clear, reliable and understandable.

The UK credit market would operate more efficiently if consumers had reliable documented

credit histories, and the OFT argues that new systems are required in the UK to achieve this.

The lending regime in Germany, for example, is underpinned by a comprehensive national

credit reference database with exceptionally wide coverage and social acceptance.

Financial capability is about managing money, making decisions and planning ahead. Greater

efforts are required to improve and measure the financial capability of consumers with

financial literacy programmes and the like which build on recent efforts to promote the

financial capability of consumers in the UK. A baseline survey was conducted in 2005 and a

follow-up survey is now required to track changes in people's financial capability within the

UK.

The credit industry in the UK could do more to establish clear and accepted codes of practice

among suppliers of credit; there is a clear role for better self-regulation by the credit industry.

There is also a good argument for improved monitoring of the credit sector in the UK; the OFT

or successor body is well placed to perform an expanded oversight and reporting role.

Whether the UK requires interest rate restrictions or caps is currently a matter for debate; the

ii

issue appears complex, the evidence that is available on the effects of caps in France and

Germany is openly disputed. Here we shy away from any straightforward answers. Clearly

there is a danger that the sub-prime credit market in the UK may suffer if caps are introduced.

However the evidence about the impact of interest rate restrictions on credit access for

people on low incomes is suggestive, drawn from other countries such as France and Germany

with very different credit histories and cultures, so that simply extrapolating alternative

models of credit to the UK context is far from straightforward. It is possible that interest rate

restrictions, if introduced in the UK, might reduce access to credit for low-income consumers

but many, such as the organisations under the Better Banking campaign umbrella, argue that

the quality of credit is not good if it is not affordable for low income consumers. There is a

need for more reliable information to help shape the debate on interest rate restrictions; this

could take a number of forms and could include more public debate about the (appropriate)

balance to be struck between the real risks and costs of credit for lenders and low income

consumers in the UK. Evidence on the strength of public views and opinion on high-cost credit

lending and the support for interest caps in UK is weak and inconclusive. New research could

objectively engage UK public opinion on these issues and public opinion surveys in particular.

street banks in the UK could do much more to make affordable credit available to those on

low and minimum incomes. In Australia, major banks have teamed up with leading charities,

and with the help of government funding they have been able to offer affordable credit loans

to low income families in Australia. The Australian experience offers valuable lessons for

thinking about how to promote affordable credit in the UK and a better dialogue with UK

banks is needed about the potential nature and scope of social responsibilities.

welcomed with the promise of investment in social innovation and the third sector. In order to

be a success, this is likely to require renewed commitment and investment from the British

government. The UK urgently needs continued and improved investment in social lending

through credit unions, community development finance institutions and other communitybased

organisations.

New third sector partnerships with government and industry are now required to offer

affordable credit and social banking options for low income families.

that families in Britain live above the minimum level of income that the British public finds

acceptable to maintain a decent standard of living. Ensuring that families receive a decent

income for healthy living may also help to reduce levels of credit dependency which we see

among low income families in the UK.

1

Consumer Focus commissioned the Personal Finance Research Centre (PFRC) to examine

and report on how the UK can most effectively ensure the provision of affordable credit to

people on low incomes, particularly within the context of the available evidence on

affordable credit emerging from other major OECD economies of France, Germany and

Australia.

‘Affordable credit’ has been defined as one of the key elements of ‘financial inclusion’ (see

Box 1) (Collard and Kempson 2005; Collard 2007). Along with access to banking and debt

advice, it was one of the three priorities for UK government policy from 2004 to 2011. It is

perhaps too early to comment on the position of the new Conservative–Liberal Democrat

coalition government which is currently consulting on how it might reform and strengthen

the UK consumer credit market to ensure it is fit for the future (HM Treasury 2010). It has

been estimated that at least 9 million people in the UK are excluded from mainstream credit

provided by banks and building societies and while there have been government initiatives

like the DWP Growth Fund in recent years, it is argued by campaigners that access to

affordable credit has not been tackled to the same extent as access to a bank account (NEF

2009; Pomeroy 2011). The Office of Fair Trading (OFT) warns that addressing the issues

relating to high-cost credit would require a fundamental rethink of policy in this area, which

will almost certainly require greater involvement of mainstream financial institutions in this

market and/or considerable investment in social lending (OFT 2010).

and debate and is characterised as a situation where a proportion of the population have limited

access to mainstream financial services (Devlin 2005; Collard 2007).

accommodated in the weekly or monthly budget, such as a washing machine or furniture. It may

play a significant role to smooth consumption and to protect against income shocks (European

Commission 2008). Those who cannot access credit either because it is unavailable or it is

unaffordable may be said to be excluded from credit.

for people on low and minimum incomes (Collard and Kempson 2005).

2

fixed administratively, by statute or court rulings as laws designed to prevent exploitation and unfair

competition with effects on credit cost.

Measuring ‘credit exclusion’ and the numbers excluded from credit at the population level is

fraught with difficulty; there are issues to do with structure and process in the finance

sector as well as issues to do with personal choice and preference to consider, the latter is

often referred to as ‘individual agency’. Information relating to credit applications,

rejections and exclusion is usually commercially sensitive and tends not to be in the public

domain. At the same time information systems are unlikely to be in place to capture and

record the full range of activities and practices that we see in the rapidly changing subprime

sector in Britain. There are also other nonbank forms of credit to consider, some of

which may be ‘invisible’ in the sense that, for example, mail order or moneylenders do not

operate out of local offices but rather they carry advertisements in newspapers, magazines

and the internet for credit without credit checks; these lenders are more embedded within

social and community networks of the sub-prime market.

Banks and building societies may exclude people from ‘mainstream’ credit loans because

they are perceived to be non-profitable high risk customers, a particular problem for people

on low incomes. There are also the customs and practices of individuals with regard to their

financial management; issues of ‘agency’ or personal preference often arise as individuals

themselves may choose to avoid involvement with lenders and may therefore exclude

themselves from the credit market out of choice. The ‘mainstream’ banking culture, for

instance, may alienate low income households or the formal credit-assessment procedures

may put off low income households who may just assume they will be rejected. On the one

hand then we have institutionally led processes of financial exclusion, and on the other

there is the individual or household perspective where cultural traditions, custom, and

practice govern the use of financial resources. When it comes to measuring credit exclusion

at the country level it is extremely difficult to separate out the underlying causes and

interplay between individual choices and financial structures and processes.

This report for Consumer Focus examines how the UK can take steps to most effectively

ensure the provision of affordable credit to people on low incomes. To achieve this we draw

upon the international research literature and consider in Section 2 some of the major

research priorities and issues relating to the provision of affordable credit which have

occupied researchers in recent years. There is a large international literature covering the

regulation of credit markets and numerous empirical studies focusing on the impact of

interest rate restrictions. In Section 2 we also consider relevant survey data collected by the

EU and OECD, especially that relating to levels of financial exclusion, the value of consumer

credit markets and consumer over-indebtedness. Section 3 examines the credit sector in the

3

UK and other selected OECD countries of France, Germany and Australia. In this section we

provide a review and appraisal (from the perspective of financially inclusive social policy) of

the consumer credit markets, the regulatory and public policy frameworks and social

innovation in the credit sector within our reference countries.

The European Commission has undertaken a number of opinion surveys and stakeholder

consultations relating to the provision of affordable credit, as have other agencies and these

are considered in Section 4. In Section 5 we report the results of a small number of

investigative interviews undertaken by PFRC with key stakeholders in the UK, France and

Australia. Finally, in Section 6, we consider proposals for improving the provision of

affordable credit to people on low incomes in the UK, and we identify areas where the

research evidence is weak and where there are particular gaps in our knowledge.

4

Numerous empirical studies have been devoted to examining and evaluating the provision

of affordable credit. Often, and especially in this literature, we need to be careful about

generalising from one context to another. A strand of work that is particularly relevant here

are studies looking at the impacts of interest rate restrictions on credit markets. Many of

the studies are idiosyncratic to particular times and/or country settings which can often

render generalisations to the UK context problematic as we shall see.

Levels of financial exclusion vary widely in EU countries as analysis by the European

Commission (2008) indicates (see Table 1). Drawing on Eurobarometer Survey data, which

was collected at the end of 2003, the European Commission considered people aged 18 plus

who lacked a bank account of any kind (transaction or deposit), a savings product or credit

(including overdrafts, credit and charge cards and loans) to be financial excluded. According

to the European Commission report, the UK experiences much higher levels of financial

exclusion compared to other major economies like France and Germany.

The figure based on the Eurobarometer data suggests six per cent of the UK population

were financially excluded at the time of the survey. More recent survey data indicates that

the number of adults living in households without a transactional bank account has

decreased in recent years, however, although issues around bank account usage remain a

concern (Financial Inclusion Taskforce 2010). It is important therefore to note that the

Eurobarometer data is useful to draft a broad picture and to be able to draw very rough

international comparisons but is now eight years old and needs to be updated. For instance,

some of the experts who responded to a recent European Commission consultation on basic

bank accounts believe that the current financial crisis has resulted in many people becoming

accentuate levels of financial exclusion.

5

% financially excluded

Luxembourg

Belgium

Denmark

Netherlands

Sweden

Austria

Finland

Slovenia

Spain

Ireland

Italy

Estonia

Portugal

Czech Rep

Cyprus

Malta

Slovakia

Greece

Hungary

Poland

Lithuania

Latvia

<1

1

1

1

2

3

6

6

8

12

16

16

17

17

18

21

26

28

34

40

41

48

Source: European Commission (2008: 20, using 2003 data).

The UK, France and Germany represent the EU countries with the largest national consumer

credit markets; we also include another comparable OECD country in this study: Australia

(see Section 3.5). Germany and France have very different consumer credit regulations to

the UK, in that they have interest rate restrictions. The UK market is comparable to that of

Australia and, like the UK, Australia does not currently have (national) interest rate

restrictions. Like the UK, Australia also finds itself grappling with issues to do with affordable

credit. Scandinavian countries offer very different systems of welfare capitalism and are not

well placed for drawing comparisons with the UK on the issue of affordable credit (Esping-

More detailed results from the Eurobarometer survey are provided in Table 2, which covers

credit exclusion and Table 3, which reports the proportions of people who do not have a

basic bank account at all (i.e. the unbanked), those who do not have transaction banking

services and those who are ‘marginally banked’ (i.e. covering those with deposit accounts

but with no payment card or cheque book).

6

No revolving

Credit %

Have a

loan(s) %

No savings %

Luxembourg

Belgium

Denmark

Netherlands

Sweden

Austria

Finland

Slovenia

Spain

Ireland

Italy

Estonia

Portugal

Czech republic

Cyprus

Malta

Slovakia

Greece

Hungary

Poland

Lithuania

Latvia

18

37

18

21

33

36

48

36

46

51

56

80

75

62

54

70

81

76

78

73

86

80

35

17

35

11

22

16

21

23

23

16

34

13

7

12

14

33

9

13

9

11

11

6

8

28

13

15

28

7

11

34

32

25

21

50

67

62

35

24

30

40

41

58

60

61

76

Source: European Commission (2008: 27, using 2003 data).

Analysis carried out for the European Commission (2008) showed that 30 per cent of British

adults had no credit facilities, which is broadly consistent with other research reporting 26

per cent of households had no credit facilities (Kempson 2002).

The number of British adults living in households without a transactional bank account has

decreased in recent years. The most recent figures for 2008/09 indicate that three per cent

of the adult population in Britain are unbanked (Financial Inclusion Taskforce 2010); less

than half of the figure reported by the European Commission (nine per cent). This is an

encouraging finding. It suggests that work by industry to make basic accounts available

continues to drive reductions in adults without access to banking, as the Financial Inclusion

Taskforce (2010) observes.

7

No transaction bank

account %

Marginally banked % Unbanked %

Luxembourg

Belgium

Denmark

Netherlands

Sweden

Austria

Finland

Slovenia

Spain

Ireland

Italy

Estonia

Portugal

Czech Rep

Cyprus

Malta

Slovakia

Greece

Hungary

Poland

Lithuania

Latvia

11

5

11

2

17

20

18

13

42

41

26

35

20

40

48

51

48

78

49

58

65

65

6

3

7

<1

9

11

6

2

30

21

7

8

2

11

19

27

12

42

6

2

12

3

6

3

5

2

8

9

11

11

11

19

19

27

18

29

29

25

37

36

43

56

53

62

Source: European Commission (2008: 22, using 2003 data).

We know certain sections of the population are more at risk of financial exclusion of which

credit exclusion is part. Research by the European Commission (2008) shows that women in

Europe are more likely to be completely financially excluded than men (see Table 4). Young

people (aged 18-25) and adults aged 65 and over are most likely to be financially excluded.

Younger people are the group most likely to be excluded in EU 15 countries, while in new

member states it is most common among older people. Lone parents and single people

(who tend to be either quite young or quite old) include a greater proportion of who are

financially excluded. There is a strong link between financial exclusion and level of education

received and also with income. Less well-educated and lower income households are more

likely to be excluded from all forms of financial services.

8

High level of financial

exclusion %

All

Lone parent

Couple with children

Single no children

Couple no children

Self employed

Employed

Looking after home

Student

Unemployed

Retired/unable to work

up to 15

16-19

20+

Still studying

Male

Female

18-25

26-44

45-64

65+

Rural area or village

Small or middle sized town

Large town

Lowest income quartile

2nd lowest quartile

2nd highest quartile

Highest income quartile

18

24

10

22

17

8

8

30

38

33

20

24

13

7

38

14

21

33

12

12

25

20

17

16

32

13

14

8

Source: European Commission (2008: 32).

‘Financial capability’ is about managing money, making decisions and planning ahead. A full

national survey to measure levels of financial capability in the UK was conducted between

June and September 2005 and this found clear indications that individuals may be

particularly capable in one or more areas of financial capability, but lack skills or experience

financial capability were identified as ‘managing money’, ‘planning ahead’, ‘choosing

products’ and ‘staying informed’. A follow-up survey is needed to track changes, and

progress, in people's financial capability within the UK. Unfortunately, there is no

comprehensive data at present that allow us to examine financial capability across the EU or

against our selective reference countries of France, Germany and Australia.

9

Table 5 shows the total value of consumer credit in EU member states in 2008. These statistics cover consumer credit advanced to all types of households including credit card loans and overdrafts. The UK has one of the largest credit markets in the EU with a vast range of financial products available to consumers. The value of this market is estimated at 16 per cent of GDP; in comparison the French credit market is valued at eight per cent of GDP and the German markets nine per cent of GDP.

Member State Consumer Credit as a % of GDP Consumer Credit

(billions of Euros €)

Cyprus

Romania

Bulgaria

Hungary

Greece

Poland

Ireland

Portugal

Spain

Austria

Denmark

Slovenia

Italy

Finland

Malta

Belgium

Estonia

Latvia

Sweden

Czech republic

Netherlands

Lithuania

Luxembourg

Slovakia

25.1

14.6

13.9

12.9

12.9

10.8

9.8

9.3

9.3

8.4

8.1

7.8

6.5

6.5

5.8

5.5

5.3

4.9

4.6

4.6

4.0

3.9

3.2

2.5

4.3

18.3

4.7

12.9

31.4

32.8

18.2

15.5

102.3

23.84

19.0

2.9

101.8

12.1

0.3

19.0

0.8

1.1

13.3

6.3

23.8

1.3

1.2

1.7

Source: OFT (2009a: 26).

The OFT, drawing upon survey data for 2007, has also ranked European sub-prime lending

markets. Accordingly, the UK has one of the most ‘developed’ sub-prime credit markets in

the EU; the French and German markets appear relatively less ‘developed’ in comparison

(see Table 6). In this context the terms ‘developed’ and ‘underdeveloped’ are simply used to

refer to the size of the credit market with little assessment of the quality of the products

being offered in the market. The ‘sub-prime sector’ tends to refer to lenders who operate in

the riskier end of the borrowing spectrum, and sub-prime borrowers often include those

who have previously been rejected by mainstream lenders for a variety of reasons such as

poor credit history.

10

Member State

Ireland

Spain

Netherlands

Belgium

Portugal

Finland

Sweden

Denmark

Norway

Italy

Greece

Austria

Highly developed

Somewhat developed

Undeveloped

Source: OFT (2009a: 27).

There is a large literature on regulation and interest rate restrictions and numerous

empirical studies have been devoted to determining the economic impacts of rate caps. For

example, natural experiments comparing different states in the US date back to the 19th

century (e.g. Bodenhorn 2007). The findings of these studies tend to suggest that tighter

interest rate restrictions result in lower credit access for low-income consumers as well as

reducing the total amount of consumer credit available. Caps in the US tend to be set at low

levels, while typical caps in the EU are higher, making it hard to extrapolate from the US to

the European context (iff/ZEW 2010).

Drawing firm conclusions on the effects of interest rate restrictions from EU Member States

such as France and Germany is much more challenging as we shall discover in Section 3.

Credit markets are determined by a multitude of other economic and regulatory factors

making it hard to draw firm conclusions. The evidence on the effects of interest rate

restrictions in France and Germany is fiercely contested, not helped by the lack of reliable

information on the availability of and use of affordable credit (e.g. NEF 2009; Gloukoviezoff

2011). Policy oriented reports and recommendations which draw on the experience of

France and Germany are usually more theoretically-inclined than empirically driven; in the

absence of clear evidence positions tend to diverge and are often value laden. To a large

extent what various stakeholders are left arguing about in the contemporary context is

whether the credit that is available to consumers is right for them. This is of course

ultimately a moral question, as well as a question for consumers and the public, a point that

unfortunately gets lost in the technical policy debates about credit models and interest rate

caps.

11

Numerous surveys and stakeholder consultations on issues relating to financial inclusion and

affordable credit for low income consumers have already been conducted in EU countries

and indeed across the EU (e.g. European Commission 2009). The European Commission is

currently consulting on interest rate restrictions and we consider this and other

stakeholders consultations in Section 4. Some preliminary investigative interviews with

stakeholders from the reference countries were also undertaken for this study and the

findings are discussed in Section 5. Although a considerable amount of consultation work

has already been completed, we note that there has been little appeal to public opinion in

the UK on the issue of interest rate restrictions. If we accept that the issue of interest rate

restrictions is a moral issue, at least in part, then it would appear prudent to gather UK

public opinion in an objective way to inform this debate and future policy relating to credit

market regulation within the UK. More work could be done to test general public opinion in

this field, particularly the extent to which government should play a crucial role to address

problems of access and use regarding credit and the strength of public opinion on this.

Over the past decade, household debt has risen to record levels in many OECD countries.

The latest comparable data on household indebtedness comes from the OECD and relates to

2008 and 2009. In the UK, household debt (i.e. all household liabilities) appears relatively

high, with a debt to income ratio around 171 per cent of disposable household income in

2009, of which mortgages accounted for the bulk (133 per cent) of the household debt (see

Table 7). By comparison, household debt in the major economies of France and Germany is

relatively low. France has a debt to income ratio at 107 per cent of disposable household

income (mortgages accounted for 77 per cent of this) and in Germany household debt

stands at about 99 per cent of disposable income (of which mortgages accounted for 67 per

cent. It is difficult to comment on how low income families fair in relation to levels of

household debt under the various systems of credit regulation, with interest rate

restrictions and restricted access to credit, as household debt levels are not reported by

household income level in this dataset. This should be a priority for future research and

development as it help to shed further light on the impact of consumer credit market

regulation in different countries (see Section 6.3).

12

UK Liabilities1

109.4 113.7 117.1 121.4 134.0 145.0 160.0 162.3 176.0 183.6 177.6 170.6

of which:

Mortgages

79.4 82.7 85.4 88.5 97.1 106.8 119.0 121.2 130.1 138.2 135.6 132.8

France Liabilities1

72.5 75.4 76.8 78.0 75.6 79.7 83.7 91.0 96.5 100.3 102.3 106.6

of which:

Long-term

loans2

51.5 53.8 53.4 53.6 54.6 57.1 60.2 65.3 69.5 73.2 76.6 ..

Germany Liabilities1

109.4 114.2 114.5 111.8 112.1 110.9 109.6 107.1 104.8 101.7 97.5 98.6

of which:

Mortgages

67.1 71.0 71.7 71.2 72.3 72.2 71.8 71.0 70.8 68.9 66.1 67.1

Italy Liabilities1 45.5 48.8 52.8 52.3 58.3 62.3 66.7 71.9 75.7 79.2 79.8 ..

of which:

Long-term

loans2

24.6 27.3 28.5 28.3 33.6 36.3 39.9 43.7 46.2 48.6 48.6 ..

Canada Liabilities1

112.0 114.1 112.6 114.1 117.1 120.6 124.3 129.4 131.8 137.3 141.7 148.4

of which:

Mortgages

71.8 71.8 69.6 69.6 71.2 73.2 75.9 79.1 80.7 84.7 87.9 92.3

Japan Liabilities1

132.5 133.4 134.5 135.9 133.6 133.6 131.4 131.8 130.4 127.4 127.2 ..

of which:

Mortgages

56.0 58.9 61.0 63.1 62.8 63.9 63.4 64.1 65.2 64.9 64.7 ..

US Liabilities1

95.4 99.6 100.7 104.7 109.9 117.8 124.1 131.3 135.6 137.8 130.3 127.5

of which:

Mortgages

63.8 66.6 67.2 71.3 77.2 84.2 90.2 97.7 101.7 103.4 98.1 95.9

Notes:

Source: OECD Annex Table 58: Household wealth and indebtedness.

In Australia, the overall picture of household indebtedness is comparable to the UK, at 173

per cent of annual disposable income in 2005 (OECD 2006). Questions about overindebtedness

and ability the country/households to service this debt are complex and are

beyond the scope of this project; such issues are discussed elsewhere (e.g. OECD 2006).

There is a long history of research in the UK establishing the monetary costs of minimum

living standards (e.g. Deeming 2010). In recent years pioneering work has looked at what

members of the public think is a minimum acceptable standard of living in Britain (Bradshaw

According to recent research there have been falls in living standards for those on low-tomiddle

incomes in recent years and prospects do not look good going forward for such

households, with the UK government committed to deficit reduction (Resolution Foundation

2010, 2011).

13

Many argue that the government should do more to raise the living standards of the

poorest sections of society (e.g. NEF 2009; Dowler 2010), to ensure that families are living

above the minimum level of income that the British public finds acceptable to maintain a

decent standard of living. Such a move may also help to reduce levels of credit use among

low income families in the UK although there appears little attempt by researchers to

quantify this. If families are living with inadequate incomes and managing on the edge of

their financial budget, they will turn to the sources of borrowing available to them.

14

The UK, France and Germany represent the EU countries with the largest national consumer

credit markets. However, France and Germany have different consumer credit regulations

to the UK and, in particular, different levels and forms of interest rate restrictions. The UK

government does not impose interest rate restrictions on commercial lenders, but allows

the credit industry more scope to regulate itself. In contrast, interest rate restrictions have

been in place in France and Germany for a long time which makes them ideal for inclusion in

this comparative study of affordable credit.

Another comparable OECD country with a significant credit market is Australia. Historically

the Australian Federal (Commonwealth) Government has been reluctant to impose interest

rate restrictions, preferring instead to devolve responsibility for regulating the credit market

down to each of the states and territories. However in recent years the Federal

Government has found itself grappling with the issue of market regulation as it attempts to

make affordable credit more widely available. There is growing pressure for the Federal

Government in Australia to take tougher action on high-cost short term lending practices

and the government is currently reforming the sector. We consider the design and

architecture of the consumer credit systems currently operating in the four countries in

more detail below.

The UK has a strong economy with a GDP per capita of US$35,630, a figure comparable to

France, Germany and Australia (see Appendix 1). The UK population is 61.4 million. The total

value of the consumer credit market was estimated at 16.2 per cent of GDP in 2008, valued

at €245.2 billion (Table 5). The high-cost credit sector remains a significant and valuable

sector of the economy; it includes pawnbroking, payday lending and other short-term small

sum loans, home credit and rent-to-buy credit. In 2008, high-cost credit loans to consumers

totalled £7.5 billion (OFT 2010b). Household debt in the UK is relatively high, the debt to

income ratio stood at 170.6 per cent of nominal disposable income in 2009, of which

mortgages accounted for 132.8 per cent of nominal disposable income (see Table 7).

15

The European Commission (2008) found that six per cent of the UK population were

financially excluded in 2003; although recent data suggests that the UK has made significant

progress in relation to the adult population in Britain who are unbanked. The figure now

stands at three per cent of the population (Financial Inclusion Taskforce 2010), and this

figure is comparable to the proportion of the adult population in France and Germany who

are unbanked.

An innovative consumer credit market has developed rapidly in the UK over the last 30 years

and this market is now one of the largest in the world (OFT 2010b). The UK sub-prime credit

market remains one of the largest in the EU. A survey of consumers by the OFT (2010a)

found that users of home credit are substantially overrepresented in lower social classes,

have markedly lower income, lower levels of final educational achievement, a much higher

proportion of single parents, and are substantially more likely to be unemployed or not in

paid employment. Payday lending customers are more concentrated in the younger and

middle year groups, they tend to be heavily concentrated in the range below median

income but generally above the lowest income bands. Consumers who use payday loans and

pawnbrokers find that this form of credit is not cheap, although they report a number of

advantages such as quick and easy access (see Table 8).

Form of Finance Quick to

get

Easy to

access

Easy to

understand

Cheap Trust

myself/gives

me control

Want to

help me

Car manufacturer

Loan from friends

Key:

     

Strongly Agree Strongly disagree

Source: Burton (2010: 31)

For the most part, the UK credit industry acts in a responsible manner. The experience of

some short-term ‘payday’ borrowers can be a positive one, provided the loan is paid off

when it becomes due and is used on a one-off basis only (e.g. Burton 2010). However, there

16

has been a longstanding concern in the UK that some lenders are engaged in unfair practices

to the detriment of consumers, the credit industry, and society as a whole (Secretary of

State for Trade and Industry 2003; Consumer Focus 2009). There are concerns that

consumers of high-cost credit, including many on low incomes, suffer from a lack of options

when seeking credit, and that the price they pay for credit is too high. People on low

incomes are especially vulnerable and susceptible to exploitation. Regulators such as the

OFT and the Advertising Standards Authority (ASA) have been called upon to investigate

business practices (see Table 9).

In April 2008, the ASA upheld a complaint against the payday lender, the Money Shop for using

advertising which suggested that the use of high rate, short-term credit was suitable to fund

aspirational, non-essential purchases such as a party, a shopping trip or a holiday. The ASA ruled that

this was likely to be seen as encouraging carefree, impulsive and frivolous spending on credit and

concluded that the advertisement could encourage consumers to spend borrowed money

irresponsibly.

In October 2009, the ASA upheld a complaint against the online payday lender Quickquid, for failing

to include the APR of 2,000% in its TV advert. The ASA ruled that the APR had to be disclosed as the

advert emphasised the speed of the loan process and that this constituted an incentive for people to

take up their offer.

In July 2010, the ASA upheld a complaint against online payday lender Wonga.com Ltd for portraying

the act of taking out a loan in an overly whimsical fashion, including using laughter when the

suggestion was made that a bank may offer a better alternative. The failure to give greater

prominence to the APR than other information presented in the ad concerning the cost of borrowing

also caused it to breach the Consumer Credit (Advertisements) Regulations 2004.

Source: www.asa.org.uk/ASA-action/Adjudications.aspx

One of the most recent requests to the OFT follows a complaint from Citizens Advice about

firms cold-calling consumers by telephone and text to promote consumer credit products

(OFT 2011).

The UK government has thus far resisted pressure to impose interest rate caps on for-profit

lenders, preferring instead to promote responsible lending practices. Legislative reforms

under the Consumer Credit Act were intended to make it easier for consumers to challenge

agreements deemed to be unfair in the courts; however there is little evidence to suggest

that consumers are better protected from abuses in the credit market nor have the reforms

achieved their stated aims of providing a better mechanism for borrows to challenge

Those who face payments which are grossly exorbitant or

otherwise grossly contravene ordinary principles of fair lending have sought redress in law,

but some critics argue that existing provisions have not operated effectively (e.g. NEF 2009).

17

In recent years the government has come under increased pressure to take tougher action

on extortionate credit. For instance, the Better Banking campaign, which is lobbying for fair

and affordable banking for all, has brought together some 500 organisations to call for

fundamental reform of the banking system, and this includes a call for interest rate caps to

The UK government is currently consulting on the matter and considering a range of options

for reforming the UK consumer credit market (HM Treasury 2010). Whatever the final

outcome of the government consultation, the UK Coalition government under David

Cameron has set out a vision for a ‘Big Society’,

The Better Banking campaign argues that banks should

do much more to deliver a genuine social return to the people and communities they serve;

the Better Banking campaign recommends that banks reinvest one per cent of their profits

for social benefit. Recently, Stella Creasy MP has called for a total cost of credit cap and

there was cross-party interest in the measure proposed (Creasy 2011). Still others strongly

argue against such measures which they claim may damage the credit industry and

therefore reduce access to credit for low income consumers (e.g. Policis 2004a; OFT 2010b;

Friends Provident Foundation 2011). They are concerned that a cap on credit will lead more

vulnerable consumers to resort to borrowing from illegal lenders (‘loan sharks’), it is

estimated that six per cent of residents in some of the most deprived areas borrow from

manage and result in spiralling debt, due to penalty charges and fees for default. Instead

they call on the credit industry to do more, and regulate itself better by establishing clear

and accepted codes of practice and making available better information to consumers on

the costs and risks of using high-cost credit. The OFT, for example, has made a number of

recommendations (see Table 10), which they suggest would lead to incremental

improvements in the UK’s high-cost credit sector. The OFT warns, however, that addressing

the issues relating to high-cost credit would require a fundamental rethink of policy in this

area, which will almost certainly require greater involvement of mainstream financial

institutions in this market and/or considerable investment in social lending (OFT 2010).

3

which means that we are likely to see a

much greater role for social innovation and an expanded third sector, and possibly renewed

efforts to boost the social banking sector in the UK which we turn to next.

18

The recent review of high-cost credit in the UK by the OFT reported that the sector in the UK worked

reasonably well but made a number of key recommendations:

improve the financial capability of consumers with financial literacy programmes and greater

efforts by industry working with others (including government) to provide better information to

consumers on high-cost credit.

credit.

Importantly, the OFT rejected the case for price controls for pawn-broking, payday loans, home

credit and rent-to-buy credit; concluding that they would not be an appropriate solution to the

particular problems found in the UK credit market (OFT 2010).

The UK has a well developed sub-prime credit sector, including a wide array of lenders and

institutions that provide credit to those customers that mainstream lenders (such as the

high street banks) would likely reject. These lenders are a major source of credit for those

managing on low incomes who often take out loans to help make ends meet (Burton 2010).

Many lenders are well established and reputable but there has been a longstanding concern

in the UK that some lenders engage in unfair practices and news stories about poor families

trapped in a cycle of debt often make headlines in the media. The Zacchaeus 2000 Trust, an

independent UK charitable trust campaigning for social justice, has represented many

vulnerable debtors with multiple problems to ensure that they are dealt with fairly and

There is an argument that high street banks in the UK could do much more to make

affordable credit available to those on low and minimum incomes. The New Economics

Foundation (NEF), for example, argues that those on low incomes in France and Germany

have much greater access to mainstream credit through the banking system than their

counterparts in the UK (NEF 2009). We consider the credit markets of France and Germany

in Sections 3.3 and 3.4. While in Australia, major banks have teamed up with leading

charities, and with the help of government funding they have been able to offer affordable

credit loans to low income families (albeit often with restrictions on the purpose of the loan,

as we discuss in Section 5). The Australian experience offers valuable lessons for thinking

about how to promote social banking in the UK and this is discussed in Section 3.5.

19

The British government has set out a vision for the ‘Big Society’ and with this we are likely to

see a much greater role for social innovation and third sector provision (Cabinet Office

2010). As Shanmugalingam et al. (2011) observe, a new social investment industry is steadily

taking shape in the UK, often referred to as social finance or the social economy. It fuses

together two relative UK strengths, skills in finance and skills in civic action, organisation and

delivery. The UK can expect to see a much greater role for social innovation and an

expanded third sector, and possibly renewed efforts to boost social banking sector. As

Consumer Focus recently noted, the UK urgently needs continued and improved investment

in social lending through credit unions and community-based initiatives (Burton 2010). Low

income families and consumers are increasingly likely to need opportunities to save small

sums of money against future financial difficulty and borrow at affordable rates in times of

crisis, particularly in the current tough economic climate characterised by falling living

standards (Resolution Foundation 2010, 2011).

The UK government established the Social Fund over twenty years ago to provide interestfree

loans and grants, mainly to people in receipt of income-related benefits (see Table 11).

It makes provision for low income families to help them spread the costs of one-off

expenses such as white goods and furniture, moving back to the community and

unexpected crises. The government recently reviewed the role and design of the Social Fund

in an attempt to better maximise its impact (DWP 2010) and the 2011 Welfare Reform Bill

proposes significant changes including the abolition of community care grants and crisis

loans, to be replaced by ‘locally-administered assistance’. The charity Family Action warns

that localising the Social Fund could lead to a post code lottery of provision and leave

Another important source of government provision for low income families has been the

DWP Growth Fund, financed through the Financial Inclusion Fund. The Growth Fund, which

operated from 2006 to March 2011, was co-ordinated by the Department for Work and

Pensions and aimed to improve access to lower-cost credit in deprived communities (see

Table 11). A recent evaluation concluded that the scheme overwhelmingly met its objective

of providing access to affordable credit in low income communities. The evidence also

suggested that it was effective in reaching its target audience; eight in ten borrowers were

from the two lowest income quintiles as Collard et al. (2010) report.

According to

Barnardo’s (2009) the government needs to do more to allow low income families quick

access to small amounts of credit from the Social Fund. Barnardo’s argues that this is

precisely the sort of need that home credit or hire purchase arrangements are used to fill,

and it is these smaller amounts that attract the highest interest rates in the sub-prime credit

market. Barnardo’s also argues that the government could do more to meet the needs of

low income families by linking various sources of information and advice to families through

the Social Fund scheme.

20

Consumer Focus was just one of many organisations that strongly recommended the

continuation of the Growth Fund which came to an end in March 2011 (Burton 2010).

Following on from the Growth Fund, the government has recently announced a further £73

million investment to continue the expansion and modernisation of credit unions and other

community lenders over the next four years, including the development of credit services

ways: through Budgeting Loans, Crisis Loans and Community Care Grants. Budgeting Loans are

available to claimants of Income Support or Income-Based Jobseekers Allowance who have been

claiming for more than 26 weeks. Crisis Loans are available to any household in a position of extreme

need. Community Grants are available to particularly vulnerable individuals meeting some restrictive

conditions. Government spending on the social fund has increased steadily in recent years and net

expenditure currently stands at £269.6 million for 2010/11; the latest breakdown shows £138.9m

allocated to community care grants, £26m for budgeting loans and £104.7m given to crisis loans

(DWP 2011). The government is currently reforming the Social Fund. It plans to abolish the

discretionary Social fund, which provides crisis loans, community care grants and budgeting loans.

Budgeting loans will be replaced with payments on account through the Universal Credit payment.

Crisis loans and community care grants will cease, in order to be replaced with local provision.

source of concern for government and community-focussed organisations. The DWP Growth Fund

was targeted at communities in Britain where there was evidence of a mismatch between the

demand for and supply of affordable credit. Third sector (not-for-profit) lenders such as credit

unions and community development finance institutions delivered the Growth Fund (affordable

personal loans) service. Part of the aim was to disrupt the use of high-cost credit in these areas.

Some 317,798 Growth Fund loans were made available between July 2006 and September 2010,

with a total value of over £137 million. An additional 12,090 loans were made in October 2010.

Analysis indicated that 79 per cent of recipients were in the two lowest income quintiles, while one

Fund ended in March 2011.

People living in Growth Fund catchment areas were recently surveyed for their views on

access to affordable credit. The survey was commissioned by the Financial Inclusion

Taskforce (2007) and the fieldwork was undertaken by GfK NOP (a market research

company); 2,805 people were interviewed. The survey reported:

community

21

of buying things. 51 per cent of those questioned said that borrowing is never a good

thing

per cent experienced difficulty with repayments, however the figure rose to around one

in five (17 per cent) of those when borrowing was greater than £500 of high-cost credit

Summing up, the Financial Inclusion Taskforce concludes that people on low incomes are

generally more ambivalent about credit use than those on higher incomes. The Taskforce

also notes that in many cases this attitude has not actually prevented people from using

credit products. This suggests that many people in these areas are using credit as a

necessity even though they would naturally prefer not to. The 2007 survey was intended as

a baseline of credit use among people in deprived areas, against which future waves of the

survey will be measured. It remains unclear whether the survey will be repeated,

There is general agreement in the UK on the need for reform in the credit market and the

government has been considering the options. There also appears to be a broad level of

consensus among many experts and research organisation on what needs to be done and

the way forward:

When it comes to interest rate restrictions however, opinions diverge. There is, on the one

hand, 500 organisations under the Better Banking campaign umbrella calling for:

all communities

monitor and evaluate progress on its financial inclusion goals.

22

The New Economics Foundation (NEF) has reached similar conclusions, but it also notes that

it is not only banks who should be compelled to disclose their lending patterns, but also subprime

and third sector lenders as well (NEF 2009). It also proposes that the exact level of

any cap, if introduced in the UK, needs to be investigated as there is a need to establish the

real risk of default and for the cap to be set accordingly. It also urges the government to do

more to abolish credit dependency by ensuring people have sufficient income to maintain

an accepted standard of living.

On the other hand there is a counter view, held by many in the sub-prime credit industry,

but also the OFT (which enforces consumer credit protection in the UK), some research

centres and academics, and charity and voluntary sector organisations. They argue that

interest rate caps are not warranted in the UK; they believe such measures would have a

negative impact on the UK sub-prime credit market which would likely go into a decline,

adversely affecting low income families as the supply of credit providers and products dries

up.

France has a strong economy with a GDP per capita of US$33,090 and a population of 61.8

million, figures which are comparable with the UK (see Appendix 1). The total value of the

consumer credit market in France was eight per cent of GDP in 2008 or €155.7 billion (Table

5). Household debt in France is relatively low for a major economy, with a debt to income

ratio at 102.3 per cent of nominal disposable income in 2008 and 106.6 in 2009, of which

mortgages account for 76.6 per cent of nominal disposable income in 2008 (see Table 7).

Financial exclusion, as conventionally measured by the European Commission (2008), is low

in France with just two per cent of the population experiencing exclusion in 2003 (shown in

Table 1). Access to banking in France is near universal; four per cent of the population have

no transaction bank account, one per cent of the population are marginally banked and

three per cent are completely unbanked (shown in Table 3). Jauneau and Olm (2010) report

that about a third (31 per cent) of those living below 60 per cent of the median income (atrisk

of poverty) in France have a loan, which suggests that access to credit may be a

challenge for some low income families as Gloukoviezoff (2011) argues.

The consumer credit market in France is mainly characterised by the major retail banks (e.g.

BNP Paribas), and consumer credit providers (e.g. supermarkets, car dealers). The value of

credit advanced to consumers in France totalled just over €155.7 billion in 2008, equivalent

to about 8 per cent of GDP (Table 5). In contrast to the UK, the French sub-prime market

remains underdeveloped however, with evidence suggesting that low income families may

23

find it difficult to access credit. There is little evidence to suggest illegal lending markets

operating in France although this may, at least in part, reflect a lack of research intelligence

(Buckland 2009). Historically, there has been a strong co-operative banking tradition in

France but as Gloukoviezoff (2010) reports, this sector has been in steady decline over the

years.

In France there is a strong regulatory framework with interest rate restrictions. The French

system places strict rules on the banks; the components of APR are tightly specified by the

Banque de France which only allows limited flexibility when setting interest rates for loans

and other credit products (Policis 2004a; Jauneau and Olm 2010). The current usury

framework dates back to 1966, with both usury and consumer protection frameworks

subsumed in the Code de la Consommation. Usury rates are set every quarter at one third

above the average market rates as assessed by the Banque de France. In the past there

were different rates for personal instalment loans, revolving credit loans and overdrafts.

However, this was recently reformed so that the cap now varies depending on the amount

borrowed. When the amount borrowed is below 1,524 Euros, the ceiling for APR is 21.15

per cent (July 2010), if the amount is above this and there are no fixed payments, then the

rate is 19.27 per cent and the rate is 8.61 per cent if there is a monthly payment plan in

place. It is worth noting that these rates are lower than current caps on credit union loans in

the UK at 26.8 per cent APR.

Quality access to consumer credit has been a longstanding priority for the French

government. Laws, such as the Scrivener law from 1978, promote quality of information,

meaning borrowers should be better informed, so much so that most of the conditions of

the European Consumer Credit Directive (CCD) were already in place in France when the

European Council adopted this in May 2008.

There are a number of loan programmes for low income consumers in France, and Gloukoviezoff (2007) provides a general overview. The main one appears to be the Fonds de cohésion sociale (Social Cohesion Fund), a government programme of loan guarantees which began in January 2005 (Ministére de l'emploi de la cohésion sociale et du logement 2006). The loan guarantees are meant to encourage co-operative and postal banks and specialized financial institutions (including some credit card issuers) to provide credit to people who otherwise lack access to mainstream bank credit. The loans provided are in the region of €300 to €4,000 (and up to €12,000 for emergencies and accidents), and are repaid over a maximum period of 48 months (although they may be extended to 60 months).

The Banque de France reports that, as at 31 December 2009, 11,529 personal loans had been guaranteed by the Social Cohesion Fund, which were delivered through a range of partner organisations. The average loan amount was €2,263. A European Commission study indicates that the APR for these loans is usually between four and eight per cent; loans are mainly extended for expenses such as buying a car, paying for training, and unexpected expenses (European Commission, 2008).

The Crédit Solidaire (Solidarity Credit) is offered by the Caisse Régionale de Crédit Agricole

du Nord-est (Beaujouan 2006). It is a consumer micro-loan that is available to vulnerable

people in North-eastern France. The loan is available to people who face acute financial

challenges due to some unforeseen event such as family illness or the loss of a job. Crédit

Mutuel (social microcredit) and Secours Catholique (Caritas France) have also developed

loans to support victims and families involved in unforeseen events.

As with other European countries, France has a system of public pawnshops (Prêt sur gage)

are approximately 15 public pawnshops across France including, Paris, Lyon, Marseille,

Bordeaux, Nantes, Toulouse, and Dijon, interest charges for loans are generally around 10

per cent APR (Gloukoviezoff 2007).

Gloukoviezoff notes that financial cooperatives once played an important role in French

society which led them to become the main banks of today. In more recent times there has

been a decline; the new innovative schemes and pilots providing small-sum loans for low

income families facing financial difficulties are mainly on a small scale (2010).

‘Co-operative banks are still able to be innovative in relation to financial inclusion

through the provision of appropriate services which meet the needs of people with

low income. However these services remain limited. They reach very few customers

and they have almost no impact on the great majority of people facing banking

difficulties even when they are customers of these co-operative banks (2010: 15)’.

Experts who have examined the French system conclude that access to credit remains a

problem for low income households (e.g. Policis 2004a). They pinpoint the underdeveloped

sub-prime market, which they argue is a result of interest rate caps imposed on the financial

sector. It has been argued that the research evidence from France suggests that high risk

borrowers often use credit vehicles designed for lower risk borrowers, the inappropriate

nature of which causes problems. Accordingly, this pushes up the cost of consumer credit

meaning minimum loan values are set high and thus out of scale to the funds that lowincome

households require and are able to service. High-risk borrowers can find themselves

unable to pay down balances and thus become trapped in a cycle of debt. The investigative

interviews conducted for this study highlighted some of these same issues (see Section 5 for

details).

Others, notably campaginers for interest rate restrictions, reject this picture (e.g. NEF 2009).

Gloukoviezoff (2011) acknowledges the absence of a sub-prime market due to the interest

25

rate cap, but also reports that no scientific study has been carried out in France analysing

the impact of interest rate caps on financial difficulites. So, on the downside there are lower

levels of access to credit in France and this can make life difficult for more high risk

borrowers on a low income, particularly compared to the UK. On the upside, households

overall seem to experience less debt (Table 7) and lower levels of financial difficulties

(although we do not have separate figures for low-income households). There is little

evidence that suggests higher levels of financial difficulties specifically due to interest rate

caps. In the French system we may conclude that increased access to credit is not seen as

positive if the quality of this access is poor.

Germany has a strong economy with a GDP per capita which is similar to the UK at

US$35,432 (see Appendix 1). The population of Germany is 82.772 million. The value of

credit advanced to consumers in Germany totalled just over €224 billion in 2008, equivalent

to about 9 per cent of GDP (Table 5). Consumer credit per capita in Germany amounted to

€2,700 in 2008, a much lower level than the UK (OFT 2009c). Household debt in Germany is

relatively low and comparable with France, with a debt to income ratio at 99 per cent of

disposable income in 2009, of which mortgages account for 67 per cent of disposable

income (Table 7).

Access to banking is near universal in Germany. The European Commission (2008a) found

only three per cent of the population were financially excluded in 2003 (Table 1); some

seven per cent had no transaction bank account, two per cent were marginally banked and

five per cent completely unbanked (Table 3).

The value of credit advanced to consumers in Germany totalled just over €224.1 billion in

2008, equivalent to about nine per cent of GDP (Table 5). Germany has a long tradition of

self-regulation of financial services. Legislative protection of private borrowers was achieved

in Germany in 1991 with the 1990 Consumer Credit Act (Verbraucher-Kreditgesetz), later

amended in 1993. The Act has a very broad coverage and basically protects all private

borrowers (who have not taken loans for investment, commercial or professional purpose).

The German Consumer Credit Act does not contain any limitation on price elements and no

limit on interest rates. The only safeguard is the general clause of the German Civil Code 138

declaring unconscionable contracts void. However, the Act has been interpreted by the

Courts, so that a credit agreement is ‘extortionate’ and thus subject to prosecution if the

interest rate agreed upon exceeds twice the average lending rate for a given loan type

(published every month by the Bundesbank). The major legally binding guidelines relate to

two ceilings: first, the maximum interest rates on consumer credit (covering consumer loans

26

and overdrafts) and a second legally binding guideline relates to the default interest rate.

The latter is set lower than most rates as an incentive for lenders to avoid default.

The lending regime in Germany is underpinned by a comprehensive national credit

reference database with exceptionally wide coverage. The main organization responsible for

maintaining credit history information is Schufa (Schutzgemeinschaft für allgemeine

Kreditsicherung), an organisation of credit granting organizations in Germany. Schufa is not

the only credit reference institution in Germany, but it is the largest (in terms of staff,

collected information, market share for example) and the most used (OFT 2009a).

Mainstream commercial profit-oriented providers and socially orientated co-operative

banks in Germany have developed simple, low cost transaction bank accounts to meet the

needs of people on low and unstable incomes (European Commission 2008). Examples of

co-operative banks operating throughout Germany include DZ Bank (Deutsche

Zentralgenossenschaftbank), Volksbank and Raiffeisenbank. Salaries tend to be paid directly

into bank accounts and a range of financial products (such as overdrafts) are made available

automatically on the basis of income.

In terms of credit provision, Sparkassen, a national network of savings banks, is a primary

source of credit for those on low incomes. It has minimum loan values set at €2,500 in 2010

or in some cases the value may be extended to €5,000, and applicants usually need at least

According to the OFT inquiry, the sub-prime lending sector in Germany remains rather

limited, with a very small number of lenders operating in the market (OFT 2009a). Research

carried out for the European Commission indicated that the options available to consumers

turned down for credit by the banks were to borrow from a pawnbroker or use a private

credit broker; concerns have been expressed in Germany about how some credit brokers

operate (European Commission, 2008).

The OFT (2009a), in its review of the

German credit system, observed that the Sparkassen, while still the most important source

of credit for those on low incomes, was increasingly focusing on lending to people in work

and those with a minimum history of contracted permanent employment. The OFT also

noted that overdraft facilities for German bank customers on low incomes are increasingly

being limited, while the minimum loan values set by Sparkassen effectively exclude those on

the lowest incomes.

A survey by Datamonitor (2007) uncovered a general lack of awareness about the sub-prime

sector among the traditional German banks and lenders, all of which presents issues for

consumers who are refused credit from the mainstream providers. Certainly compared to

27

the UK, Germany does not have a distinct sub-prime sector leading some to conclude that

the German credit system excludes low-income families as a result (e.g. Policis 2004a,

2004b). In a review of the German credit market, which was conducted for the then UK

Department of Trade and Industry (DTI, which is now BIS), it was reported that lenders in

Germany have responded to interest rate ceilings by raising access hurdles to high risk

borrowers (Policis, 2004a). The report suggested that the German system provides a good

example of how an interest rate ceiling can result in highly risk averse lending policies,

particularly when combined with disincentives to default. The same report notes that credit

scoring thresholds are set at levels likely to exclude higher risk groups.

More broadly, Policis suggests that there is a consistency of demand for credit in major

economies like Germany but the issue for low-income consumers in the German context is

the lack of credit availability. They argue that low credit use among the poorest German

households is more a function of lack of supply rather than any cultural resistance to

borrowing or lower incidence of need. In practice this means that families in Germany who

feel they are unable to get credit have few means of managing cash flow crises or little

chance of acquiring items that they need but are unable to afford.

The distinguishing principles of German legislation are self-regulation, transparency and

avoidance of default. Germany provides a case study which throws light on the effects of

regulation and, in particular, interest rate restrictions and disincentives to default on the

shape and development of the mainstream and the sub-prime consumer credit sectors (OFT

2009a). According to the OFT, most people excluded from credit either do without credit or

may consider informal or illegal lending (OFT 2009c). It is difficult to get clear measures of

this but illegal lending does occur in Germany; principally in the fragmented credit broker

sector which is seen as a last resort for subprime borrowers with negative credit reports (OFT 2009a).

Australia has a strong economy with a GDP per capita of US$38,637; the population, at 21 million, is a third of that in the UK and France and a quarter of Germany’s (see Appendix 1).

The financial sector is one of the largest contributors to GDP in Australia. The overall picture of household indebtedness is comparable to the UK, at 173 per cent of annual disposable income in 2005 (OECD 2006). Australia has a parliamentary system of democracy with a federal system of government. The federal government is the national government with certain legislative powers and responsibilities under the Constitution; remaining responsibilities are allocated to the States and two territories (Australian Capital Territory, New South Wales, Northern Territory, Queensland, South Australia, Tasmania, Victoria, Western Australia). Each State has its own constitution, so that Australia has seven sovereign Parliaments, none of which can encroach on the functions of any other. A basic understanding of the federal system of government is necessary for understanding the regulation of the credit market.

According to some charities and not-for-profit organisations, such as the influential Brotherhood of St Laurence, Australia lacks a vision for financial inclusion in government policy (Arashiro 2010). There is also a lack of good robust comparative data on levels of financial exclusion. One recent national survey found that 97 per cent of people had an ordinary everyday banking account, which suggests that financial exclusion may be low in Australia, at least according to this headline indicator (ANZ and Social Research Centre 2008).

The use of consumer credit has grown rapidly in Australia over the past 20 years. Australia now has one of the largest credit markets in the world. The exact size of the short term lending market in Australia has not been quantified with any degree of precision in recent years. However, a recent estimate by the National Financial Service Federation (NFSF), in 2008, reported payday lending and micro loans to be worth approximately $500 million per annum in Australia (National Financial Service Federation 2008). It is likely that there has been a significant increase in the size of the market since the NFSF estimate in 2008.

Like the UK, Australia has maintained a fairly liberal credit market, certainly compared with the other more regulated markets in France and Germany. Australian consumers have significant levels of household debt, and like the UK there has been a major long-standing debate over responsible lending and the appropriate roles and responsibilities of government (at State and Federal levels) in regulating this market (e.g. Wilson 2002; Government of South Australia 2006; Gillam 2010).

Australia’s various state and territory governments have traditionally regulated high-cost short-term lending as part of their general regulatory responsibility for consumer credit. In 1996 the Uniform Consumer Credit Code (UCCC) came into legal effect in most Australian states and territories. The agreement had been reached by state and territory governments in 1993 under the Australian Uniform Credit Laws Agreement; Tasmania and Western Australia, however, both chose to retain a degree of legislative independence.

States and territories agreed a co-operative scheme for uniform regulation of consumer credit. However, under the agreement, certain matters were reserved for individual states and territories providing for variation on matters not covered by the UCCC regime. These ‘non-uniform matters’ included the licensing and registration of credit providers and also the fixing of maximum interest rates or caps. This legislation resulted in a ‘patchwork’ of regulation for the industry at the state level (see Table 12).

29

30

State or Territory Approach

Australian Capital Territory

New South Wales

Northern Territory

Queensland

South Australia

Tasmania

Victoria

Western Australia

48 per cent APR comprehensive cap

48 per cent APR comprehensive cap

No regulation beyond UCCC

48 per cent APR comprehensive cap

No regulation beyond UCCC

No regulation beyond UCCC

48 per cent APR interest rate cap

Licensing required but no cap

Source: Gillam (2010: 17).

This was the regulatory framework that the UK’s OFT found and reported on in late 2009 (OFT 2009b). However, the situation in Australia has changed dramatically since this time.

Clearly the UCCC did not achieve the uniformity of credit regulation which had been hoped and the Federal Government set out plans for further reform (Commonwealth of Australia 2008). In July 2010 the Federal Government assumed responsibility for the regulation of consumer credit in Australia (Commonwealth of Australia 2010). The National Consumer Credit Protection (NCCP) Act and Reform Package provides a new and uniform national law for consumer credit in Australia, including provision relating to the high-cost of short-term loans.

Phase One of the reform package included:

The new responsible lending obligations require lenders to obtain a Money Lenders licence (already the case in Western Australia) and to join an approved external dispute resolution scheme (Australian Securities and Investments Commission (ASIC)). Lenders are also required to make an assessment of whether the loan product they are offering is suitable for the consumer. The issue of interest rate caps was hotly contested during the Phase One consultation process (Commonwealth of Australia 2010). Consequently the Federal Government agreed that jurisdictions with interest rate caps in place would retain them, those without caps would not introduce them, and the issue of interest rate caps would be considered during the course of 2011 (Phase Two). Legislation for Phase Two is still being developed and is expected to be in place by mid-2012.

Academics and third sector organisations have voiced concerns. The Consumer Action Law Centre, an independent, not-for-profit organisation with a long-standing interest in consumer credit and debt issues, has welcomed the reforms but warns they may not have a significant effect on the industry (Gillam 2010). The Centre is campaigning for a comprehensive interest rate cap; it argues that the present case by case approach to regulation (i.e. each case being litigated separately to decide whether or not the interest rate is extortionate) is costly and labour intensive. In contrast, researchers at the University of Queensland have been more critical of the broader system, arguing that for-profit providers have filled the gap left by inadequate public services in Australia and the historical withdrawal of mainstream credit services from low-income families (Marston and Shevellar 2010).

Australia appears to have a growing and innovative social lending sector, aided by Federal Government with industry support and backing (further details are given in Section 5.4).

Australians who are excluded from mainstream banks and services are being assisted to access fair and appropriate financial products and loans. Certainly Australia appears to be one of the leading economies from which to learn important lessons about the potential and development of social banking.

The social lending sector has benefited from the hard work and national campaigning of the leading charities such as the Brotherhood of St Laurence, and the Good Shepherd Youth and Family Service and Community Co-operatives working in partnership with government and industry, including some of Australia’s leading banks. The social banking cause in Australia has attracted support and funding from the Federal Government (Macklin 2009) and from the big banks, NAB and ANZ (see Table 13). Australia perhaps offers a case in point for learning lessons on how to engage business and foster a culture of the ‘Big Society’, with access to affordable credit for some of the most vulnerable people in society. Corporate sectors have partnered innovative microfinance programs to assist financially disadvantaged groups, such as the first Australian matched savings program Saver Plus (initiated by the Brotherhood of St Laurence/ANZ), microloans such as Step Up (Good Shepherd Youth and Family Service/NAB) and Progress Loans (Brotherhood of St Laurence/ANZ), and the no interest loans scheme (NILS), introduced by the Good Shepherd Youth and Family Service.

On 17 February 2011, the Federal Government announced major new funding for the social banking sector (Macklin 2011). The Government announced AUD$6.27 million of support, as part of a pilot program, for five Community Development Finance Institutions (CDFIs) that have all demonstrated a commitment to supporting vulnerable Australians to get access to financial services. One of the CDFIs, Foresters Community Finance (2009), has set out Foundational Principles for CDFIs in Australia (see Appendix 2).

Australia is comparable to the UK in many ways; the financial sector provides a significant contribution to GDP and the high-cost credit sector is a valuable sector within the economy.

Importantly this sector helps to provide low income families with access to credit although there has been growing concern about the quality of access, and provision. Increasingly, questions of affordability of credit and interest rate caps have often arisen in policy debates.

Stories of low income families being trapped in a spiral of debt often make the headlines, as they do in the UK. The Federal Government has been reluctant to impose interest rate restrictions on the credit market, however in recent years the Federal Government has found itself grappling with the issue of affordable credit and market regulation. There is growing pressure for the Federal Government in Australia to take tougher action on high cost short term lending practices in Australia and the government is currently considering national interest rate caps.

Interestingly, Australia appears to have fostered a growing social banking sector in recent years with the support of the Federal Government, industry, including some of the major Australian banks (ANZ, NAB), and various charities who have been effective in their campaigning for affordable credit provision to help low income families in Australia to make ends meet. With Big Society initiatives planned in the UK, emerging lessons from Australia on the provision of affordable credit and financial inclusion more generally will be valuable for UK policy makers interested in tackling financial exclusion and credit exclusion in particular.

33

Numerous surveys and stakeholder consultations on issues relating to financial inclusion and

affordable credit for low income consumers have already been conducted in EU countries

and indeed across the EU. The European Commission consultation on basic bank accounts,

for example, touched on issues relating to financial inclusion and affordable credit for low

income consumers (European Commission 2009). The EU invited responses from key

experts across the EU within seven main categories (public agencies and authorities,

consumers/users, financial services industry, trade unions, civil society organisations,

academics/think-tanks and individuals). The European Commission has recently consulted

on interest rate restrictions; a recent report by Institut für Finanzdienstleistungen (IFF)

highlighted the different attitudes of many member countries to interest rate restrictions

(iff/ZEW 2010). In this section we review the findings from these recent studies, particularly

in relation to corresponding views about basic bank accounts and credit, and interest rate

restrictions and policies on financial inclusion from major stakeholders in the UK, France and

Germany, along with organisations taking a pan-European view.

The existing body of work also informed our own guide for investigative interviews with key

stakeholders in the UK, France, Germany and in Australia, which aimed to add to this body

of knowledge. The standard interview schedule and the organisations consulted for the

study are given in Appendix 3. The main findings from the interviews are reported in

Section 5.

Most stakeholders seem to agree that the role of alternative commercial and not-for-profit

financial service providers in addressing financial exclusion can be enhanced (European

Commission 2009). Lack of appropriate information about products, rather than availability,

often exacerbates financial exclusion. Stakeholders in the consumer groups felt that banks

can make profits, while at the same time being socially obligated to contribute to financial

inclusion. Many experts felt that access to a basic bank account was a key goal; while access

to credit was a second order priority for financial inclusion. But this may relate to the extent

to which the lack of a bank account is an issue for the EU countries a whole; this may be less

of a priority in UK, Germany and France where banking exclusion is relatively low in

comparison to many other EU countries. The following selected quotes capture the

positions and are used judiciously to illustrate:

34

transaction banking services is different in each Member State due to cultural habits.

Financial inclusion is closely linked with social inclusion. Co-operative banks, as socially

committed banks, are continuously at the forefront in the fight against financial

exclusion. The notion of social inclusion is enshrined in the very core of their cooperative

governance model’ (European Association of Public Banks (EAPB), Industry

group, EU Level).

different financial customs across the 27 member states and the subsidiarity principle

suggest that this is best approached at member state level’ (British Banker’s Association,

Industry Group, UK).

All stakeholders welcomed the European Commission’s initiative on basic banking as an

important element of promoting financial inclusion (European Commission 2009). Many

stakeholders however saw that financial exclusion extended beyond basic banking services

and included other financial services, such as credit and savings. Some of the stakeholders

argued that credit unions and social banking should have an enhanced role in addressing

financial exclusion mentioned. The following selected quotes capture the positions and are

used judiciously to illustrate:

Group, UK).

and use the most appropriate product features’ (Financial Services Consumer Panel,

Consumer, UK).

but should be a general public service. Second, the individual bank is allowed to raise

often best placed to deliver services to financially excluded people’ (Leeds City Council,

Public Authority, UK).

35

accounts’ (Age Concern and Help the Aged, Civil Society Organisations, UK).

Stakeholders in the consumer groups felt that banks can make profits, while at the same

time being socially obligated to contribute to financial inclusion. Public authority groups,

academics, think-tanks and civil society organisations took a similar view. A trade union

group thought that universal access and affordable credit for all was a necessity.

A 2009 study by Institut für Finanzdienstleistungen (IFF) aimed to provide the European

Commission with comprehensive information on the types of interest rate restrictions (IRR)

that exist in the EU Member States, as well looking at their impact on both credit markets

and consumers (iff/ZEW 2010). The study comprised a review of the literature and a

consultation exercise with national providers of both secured and unsecured consumer

credit. The list of contacted providers included commercial banks (mainstream), non-bank

mortgage lenders, non-bank point-of-sale lenders, credit card companies, moneylenders

such as payday lenders and door-to-door lenders, and pawnbrokers.

There was a poor response to the research consultation, however. From a total of 137 credit

providers contacted there were only 18 responses and three submitted written comments.

There were 31 explicit refusals and no reply from the rest. Despite these limitations, many

of the submissions and comments received are relevant to this project, particularly those

around the effects of interest rate restrictions, and reflect a range of positions and views

held by credit providers, government officials and consumer organisations in the UK, France

and Germany.

In particular, the report highlighted the different attitudes of many member countries to

interest rate restrictions. In some Member States strict interest rate caps were defended on

the basis that credit at a high price may increase consumer insolvency and reflected the

malfunctioning of markets, especially for small amounts of credit. In others, the absence of

such regulations is justified primarily on the basis that caps would reduce access to credit,

especially for people with moderate means.

Perhaps unsurprisingly, many credit providers in the UK, France and Germany were not in

favour of interest rate restrictions. Many thought that interest rate restrictions result in a

reduction in supply and therefore serve to limit consumer choice and could lead more

consumers into debt or force them to borrow from unscrupulous lenders. The following

selected quotes capture the positions and are used judiciously to illustrate:

36

debt or force them to borrow from unscrupulous lenders (Commercial bank, UK).

selective and offer longer term products which would make credit difficult to obtain for

anyone wanting a short term product to help them with an unforeseen short term cash

research by POLICIS for the UK Government said that France and Germany (with price

caps) had higher levels of illegal lending than the UK’ (Home credit provider, UK).

increasing the market share of illegal moneylenders’ (Home credit provider, UK).

balance, benefit to UK consumers’ (Consumer Organisation, UK).

(Provider Association, UK).

because banks are not able to cover the actual costs of credit for those consumers due

to IRR’ (Provider Association, Germany).

and one-sided influence on pricing as market rules do not or do not adequately apply’

(Consumer Organisation, Germany).

France).

was introduced. Still, the financial crisis led the French government to consider that

37

interest rate restrictions are an effective protection against excessive risk-exposure by

hand, this ensures that money-lenders will not use their market power to enforce

abusive interest rates. On the other hand, it does prevent the riskiest consumers from

accessing the credit market’ (Government Official, France).

Commission found that interest rate restrictions were supported by consumer interest

groups and were opposed by industry. At the state level the picture was more mixed

with some countries favouring them and others opposing them. The Commission notes

that the findings, as well as the comments received during this consultation, will be

taken into account by the Commission services when developing any future position on

This review of recent consultation responses highlights a number of areas of consensus, but

also a degree of divergence in stakeholder’s views about consumer credit regulation.

financial service providers in addressing financial exclusion can be enhanced.

exclusion.

time being socially obligated to contribute to financial inclusion.

a second order priority for financial inclusion. But this may relate to the extent to which

the lack of a bank account is an issue for the EU countries a whole; this is less of a

priority in UK, Germany and France where banking exclusion is relatively low in

comparison.

were not in favour of interest rate restrictions. Most favoured self regulation by

industry, and the strengthening of voluntary codes of conduct but many consumer

groups felt that voluntary codes were ineffective.

Commission’s website, will provide new, up-to-date stakeholder opinions on interest

rate restrictions.

38

This section draws upon eight telephone interviews conducted with the financial services

industry, public authorities, consumer and civil society organisations, academics and thinktanks

within our reference countries. These findings are intended to give an indication of

the contemporary issues and debates in each of these countries; a comprehensive

exploration of stakeholder views was outside the scope of this project.

It is worth noting that, particularly in France, respondents considered the problems of credit

use among low income people to be poorly researched. In Australia, while there has been

research in this area, the main sources of evidence concerning the impact of the

introduction of rate caps seemed to come from consumer debt advice services and industry

information.

Two main issues were raised across the three countries:

concern), because of the existence of the long-established interest rate caps described in Section 3, which had inhibited the growth of a sub-prime credit market. However,

respondents noted that the risk assessment processes used by lenders (such as banks)

excluded low-income borrowers, who in turn had few options for obtaining small-sum loans.

As a result, there has been a growth in the use of revolving credit (such as credit cards) by

people on low incomes to meet the need for small-sum credit.

39

respondents raised concerns about people on low incomes struggling to keep up with their

payments on revolving credit, resulting in penalty charges. Another concern was that credit

limits were often too high for the needs of low-income borrowers, resulting in a greater risk

of over-indebtedness.

used for purposes such as education and training or white goods, and credit that is used for

consumption. Put simply, they encouraged the former and wanted to see a regulatory

clamp-down in relation to the latter, in the form of a national comprehensive interest rate

cap of 48% (currently being debated, as outlined in Section 3). They viewed high-cost shortterm

loans (such as payday loans) to be detrimental to consumers, because of the risk of

borrowers getting into a cycle of debt through rollover loans. In this respect, they

considered these types of loans to be more akin to revolving credit than one-off loans.

regarded as a means to alleviate problems of poverty, which required a completely different

policy response from governments. For this reason, respondents in Australia did not

believe that social lenders should lend for recurrent everyday needs such as utility bills (see

below).

Respondents mentioned a range of different ways that these issues could be addressed

(other than interest rate restrictions, which are discussed below). These included exploring

be introduced, with the aim of stimulating competition and through greater data sharing

between lenders. One respondent mentioned the work of some Spanish savings banks to

develop knowledge and understanding of how best to provide financial services (including

credit) to Latin American migrant communities.

uses revolving credit should be required periodically to clear their credit balance completely

(for example after three or five years depending on the balance), to avoid the problem of

‘never-ending’ credit. The details of this proposal have yet to be agreed.

The need for good advice and guidance for consumers was mentioned by respondents in the

borrowing. The possible development of a low credit-limit credit card with reasonable

charges was also mentioned by respondents from the UK and Australia.

40

regulated, with long-established caps on interest rates. Respondents highlighted the

difficulty of drawing comparisons between this type of credit environment and the very

the idea of removing the cap on interest rates would be considered morally and culturally

unacceptable among the general public.

had undoubtedly been to reduce access to credit, by regulating the amount of risk that

lenders could take. They felt strongly that this reduction in credit access had to be

considered in the context of levels of public assistance (i.e. social welfare payments), public

services (such as widespread access to free education and health services) and wage levels.

So in France, which has relatively high levels of public service provision and public assistance

as well as a higher national minimum wage rate, access to credit may be less of an issue for

people on low incomes than in the UK, where levels of public assistance are lower (see

Appendix 1).

cap was the potential detrimental impact on low-income borrowers, who they feared would

face greater credit exclusion than already existed. This concern was heightened by the

proposed changes to the discretionary Social Fund, which could further limit access to loans

and grants for people on low incomes. They questioned how an interest rate cap would

work in practice, for example in relation to credit linked to the sale of goods (would price

regulation have to be introduced for these goods?). For one respondent, the wider question

was how to ensure effective credit regulation and a properly-functioning competition

authority, with a greater focus on specific areas of consumer detriment rather than a

narrow debate on interest rate restrictions.

introduction of a national rate cap, as described above, as a means of reducing the

availability of high-cost short-term loans and thereby protecting consumers. They regarded

a rate cap as the only effective means of regulating this part of the credit market.

Where rate caps had been recently introduced in New South Wales, respondents reported

that some lenders had complied, while other lenders had left the market (either voluntarily

or following regulatory action). In their view, enforcing the new legislation was much more

straightforward and as a result cheaper (for regulators and debt advice providers). The

regulator had intervened to tackle avoidance practices among some lenders, and from their

own experience there were fewer debt cases being reported to advice centres. In the

absence of high-cost loans, respondents considered that borrowers would go back to using

41

the strategies they had used in the past – such as borrowing from friends or family, going

without, or getting help from charities.

Across the three countries, the view was that social lending was relatively small-scale and

under-developed, with the potential for both governments and the financial services

without further (government) investment credit unions and other not-for-profit lenders

were only able to ‘scratch the surface’ of the need for affordable credit among people on

low incomes. There was a strong feeling that the industry had a greater role to play, if not as

a direct provider (which seemed unlikely in the case of mainstream banks and lenders) then

to support the provision of lower-cost credit to people on low incomes, possibly through

partnership working. Central government was regarded as a key driver for greater industry

involvement; views differed about the extent to which corporate social responsibility was an

effective vehicle for delivering changes in social lending provision.

government, the banking industry and not-for-profit organisations. For example, public

authorities guarantee funds for social lending through the Social Cohesion Fund (as

described in Section 3). It was reported that co-operative banks were much more heavily

involved than commercial banks, with a view that there was certainly more scope for

commercial banks to play a role.

as NAB’s No Interest Loan Scheme (NILS) (see Table 13), the Step Up loan scheme and

Progress Loans from ANZ (see Table 14). In a model similar to that described in France, both

these schemes are delivered by charitable organisations with financial support from major

banks and the government.

It was striking that the consumer organisations we talked to in Australia did not regard these

social lending schemes in any way as a substitute for high-cost lending. Rather, the

conditional nature of the loans (with decisions at least partly based on the purpose of the

loan) meant that these schemes were seen as ‘productive’ forms of credit. Respondents

considered that it would be unacceptable (and irresponsible) for these social lending

schemes to extend loans for the purpose of everyday needs such as bill payment or to pay

42

The No Interest Loan Scheme (NILS) was developed by Good Shepherd Youth & Family Service nearly

30 years ago; today the Good Shepherd Youth & Family Service accredits organizations to be NILS

providers in Australia. The National Australia Bank (NAB) is one of the main providers of NILS. NAB

offers small, no interest loans for people on low incomes for the purchase of essential household

goods. Loans are safe, and affordable – in the region of $800 to $1,000 – and are completely free of

interest and fees. NAB has provided $15 million to expand NILS across Australia, as part of NAB’s

$130 million capital boost to support lending to low-income groups. Over time, NAB’s support of the

NILS network is expected to treble the number of interest-free loans currently offered to Australians

living on low incomes. With NAB's investment, the NILS program’s expansion will also focus on

communities experiencing increasing disadvantage including Aboriginal and Torres Strait

communities. The NILS capital supplied by NAB, will essentially become community funds lent on an

ongoing basis for continual ‘recycling’ by community-based no interest loans providers.

Progress Loans give people in Victoria on low incomes access to loans of between $500 and $3,000

to pay for essential household items (or up to $5,000 for a car). This is a joint program between the

Australia and New Zealand Banking Group (ANZ) and the Brotherhood of St Laurence. An interest

rate of 12.7% applies and the loan repayment term is flexible to suit the borrowers’ needs and can

range from a 1 year to a 3 year period (Wilson 2008).

ANZ with partner organisation Brotherhood of St Laurence has taken the decision to tackle the issue

of ‘safe and affordable credit’ by offering Progress Loans to those on low incomes who may not

otherwise get a loan from a bank. The Brotherhood of St Laurence was granted $1 million from the

Commonwealth Government to help establish the Progress Loan scheme with ANZ. The aim is to

help low income earners and those ‘underserved’ by banks who often have little or no experience

with banks and credit. This approach to credit involves active recruitment of customers and the

government grant has been used to help pay for the administration of the Progress Loans scheme.

The Brotherhood of St Laurence employs ‘product champions’ who work in the community to

promote the Progress Loans. ANZ retain the right and responsibility for risk assessment for Progress

Loans and carry out risk assessments on applicants.

The Progress Loan scheme has been operating for a number of years and 1,400 loans have been

granted, and ANZ has loaned around $3.5 million in total to date. Progress Loans are set at a

commercial rate and so they are viable from the ANZ business perspective, however this model of

credit is costly to administer and has been dependent on government funding which will end in June

of this year. It is too early to judge the long-term viability of Progress Loans, ANZ and the

Brotherhood of St Laurence are still establishing and developing the model which has been labour

intensive and costly to date. Future development will see ANZ looking to distribute Progress Loans

and recruit through other channels and a dedicated phone line has now been set up for people to

enquire about Progress Loans. The progress loan scheme needs to build scale and capacity to reduce

costs which are labour intensive if the model is to succeed in the future, growing the volume of

lending will be key to success.

43

The small number of investigative interviews we carried out for this study provided a range

of perspectives on the issue of credit provision for people on low incomes. Concerns were

expressed not only about the cost of credit but also the difficulties that people on low

incomes could experience using some forms of credit that were not appropriate to their

circumstances or needs, such as revolving credit facilities.

The interviews also highlighted the importance of taking the wider social environment into

account in any discussion about interest rate restrictions. Factors such as the levels and

nature of welfare benefits and public services have to be considered when thinking about

the resources available to people on low incomes and their possible need to borrow. In the

UK, for example, proposed changes to the discretionary Social Fund may have significant

implications for people on low incomes in terms of the options they have for obtaining

money for larger expenses or in an emergency.

All the respondents we spoke to described the small-scale nature of social lending in their

respective countries. The involvement of the financial services industry in supporting social

lending was clearly welcomed, but it was generally felt that the industry could (and should)

do more, either as part of their corporate social responsibility strategies or (preferably) as

part of their core business. It was notable that, in Australia, social lending was not in any

way regarded as a substitute for high-cost commercial credit (at least by the organisations

we spoke to). Rather, social lending was largely restricted to purposes that were considered

productive, such as to purchase large items or for education or training. The ability to

afford everyday expenses such as utility bills or rent was considered to be a separate policy

issue which social lending was not best-placed to address.

44

The economies of France and Germany are comparable to the UK, but both have managed to secure greater levels of financial inclusion compared to the UK, as has Australia, another comparable OECD country.  France and Germany have lower levels of household debt, and the consumer credit market is more tightly regulated compared to the UK; through the application of interest rate restrictions. There are some concerns that low income families in France and Germany may not be able to access certain goods and expenditures that cannot be accommodated in their weekly or monthly budget because of poor access to credit. This view is often disputed in the literature, however, and the evidence is not clear as the data available on access and use of credit is limited, particularly in relation to low income families. The available evidence does suggest that the sub-prime sector in France and Germany is small, at least in comparison with the UK sub-prime market, suggesting that the credit industry in France and Germany may struggle to innovate and design financial products for the sub-prime market in the face of interest rate restrictions.

In contrast, in Germany and France regulations of consumer credit interest rates have been in effect for a long time. There is some evidence to indicate that access to credit can be difficult, particularly for low income households, but access to credit is not seen as positive if the quality of this access is poor and results in extortionate lending. This is a trade-off that appears to be accepted in France and Germany.

Issues over ‘affordable’/‘extortionate’ credit are often left to the local courts to decide what is acceptable (or unacceptable) when it comes to settling debt with creditors. In recent years there has been growing pressure on the UK government to better regulate the credit market, and there continues to be a heated debate about possible interest rate restrictions.

A similar picture emerges in Australia, which is also presently engaged in reform of its credit markets.

and charges are applied (e.g. unauthorised overdrafts).

45

This comprehensive review of literature suggests tentative conclusions under seven broad headings:

The comparative evidence on financial inclusion in the EU suggests that more needs to be done to improve levels of financial inclusion in the UK. The European Commission’s measure of ‘financial inclusion’ is based on data from 2003, however, and urgently needs to be improved and updated. Since 2003, banking inclusion in the UK has increased considerably, although there remain concerns about the use that people on low incomes make of their accounts.

Consumers need good reliable information to make informed decisions when deciding to take out a loan. Information provided by lenders on interest rates and fee structures needs to be clear, reliable and understandable.

The UK credit market would operate more efficiently if consumers had reliable documented credit histories, and the OFT argues that new systems are required in the UK to achieve this (OFT 2010b). The lending regime in Germany, for example, is underpinned by a comprehensive national credit reference database with exceptionally wide coverage and social acceptance.

Financial capability is about managing money, making decisions and planning ahead (Financial Services Authority 2005). Greater efforts are required to improve and measure the financial capability of consumers with financial literacy programmes and the like which build on recent efforts to promote the financial capability of consumers in the UK. A baseline survey was conducted in 2005 but a follow-up is now required to track changes in people’s financial capability within the UK.

The UK needs to foster a culture of fair and responsible lending. The credit industry in the UK could do more to establish clear and accepted codes of practice among suppliers of credit; there is a clear role for better self-regulation by the credit industry.

There is a good argument for improved monitoring of the credit sector in the UK; the OFT or its successor body is well placed to perform an expanded oversight and reporting role.

Whether the UK requires interest rate restrictions is currently a matter for debate; the issue appears complex, the evidence that is available on the effects of caps in France and Germany is openly disputed. Here we shy away from any straightforward answers. Clearly there is a danger that the sub-prime credit market in the UK may suffer if caps are introduced. However the evidence about the impact of interest rate restrictions on credit access for people on low incomes is suggestive, drawn from other countries such as France and Germany with very different credit histories and cultures, so that simply extrapolating alternative models of credit to the UK context is far from straightforward. It is possible that interest rate restrictions, if introduced in the UK, might reduce access to credit for low income consumers but many, such as the organisations under the Better Banking campaign umbrella, argue that the quality of credit is not good if it is not affordable for low income consumers. There is a need for more reliable information to help shape the debate on interest rate restrictions; this could take a number of forms and could include more public debate about the (appropriate) balance to be struck between the real risks and costs of credit for lenders and low income consumers in the UK. Evidence on the strength of public views and opinion on high-cost credit lending and the support for interest caps in UK is weak and inconclusive. New research could objectively engage UK public opinion on these issues and public opinion surveys in particular.

There is a strong and credible argument that high street banks in the UK could do more to

make affordable credit available to those on low and minimum incomes. In Australia, major

banks have teamed up with leading charities, and with the help of government funding they

have been able to offer affordable loans to low income families in Australia (albeit with

conditions often placed on the purpose of the loans). The Australian experience offers

valuable lessons for thinking about how to promote affordable credit in the UK and a better

dialogue with UK banks is needed about the potential nature and scope of social

responsibilities.

47

The UK Coalition government’s vision for developing a ‘Big Society’ should be welcomed

with the promise of investment in social innovation and the third sector. There is clearly a

need for better social banking and third sector lending in the UK and this is likely to involve

renewed commitment and investment from the British government if this is to be a success

as recent experience in Australia demonstrates (see Section 3.5). Consumer Focus has urged

the government to make continued and improved investment in social lending through

credit unions and community-based initiatives (Burton 2010). There are renewed efforts to

boost the social banking sector in the UK, especially with the closure of the Growth Fund in

March 2011 which provided an important source of affordable credit for low income

families in deprived areas. Low income families and consumers are increasingly likely to

need opportunities to save small sums of money against future financial difficulty and

borrow at affordable rates in times of crisis.

Low income consumers in the UK need improved choice of affordable credit options. New

third sector partnerships with government and industry are now required to offer

affordable credit and social banking options for low income families.

There is a plausible argument that the government could do more to ensure that families in

the UK are living above the minimum level of income that the public finds acceptable to

receive a decent income for healthy living may also help to reduce levels of credit use which

we see among low income families in the UK.

In summary, the review has highlighted a broad level of consensus in the UK on what needs

to be done and the way forward in the UK:

• better information, with clear fee structures as already described

• improved choice for consumers

• better and more responsible lending practices embedded in the credit market

• increased need for social banking and third sector lending

• improved monitoring of activity in the UK credit market

• more could be done to improve levels of financial inclusion in the UK

• greater efforts to improve financial capability and financial literacy in the UK.

Opinion on interest rate restrictions is divided in the UK. France and Germany have long

capped interest rates to help prevent extortionate lending practices but there is debate on

the extent to which the strong regulatory framework has disadvantaged low income

consumers. The evidence on the pros and cons of interest rate caps for low income

48

consumers and the credit industry is unclear and disputed. If interest rate restrictions are

introduced in the UK it is plausible that low income families may find it more difficult to

access credit but many may feel this is a price worth paying. In France and Germany this

trade-off appears to be accepted but the history, culture and use of credit in these countries

is very different to that of the UK which has tended towards a more liberal, small state

tradition of governance. In considering the use of interest rate restrictions, it is also crucial

to consider the wider social environment in relation to levels of welfare benefits, public

service provision and wage levels.

Evidence on the strength of public opinion and public views on high-cost credit lending and

interest caps in the UK is weak. If we accept that the issue of interest rate restrictions is a

moral issue, at least in part, then it would appear prudent to objectively gather UK public

opinion to inform this debate and future policy relating to credit market regulation within

the UK. More work could be done to test general public opinion in this field, particularly the

extent to which government should play a crucial role to address problems of access and

use regarding credit and the strength of public opinion on this.

Improving the financial capability and financial literacy of UK consumers is essential to

encourage better and more responsible credit borrowing; a baseline survey of financial

is now required to track changes, and progress, in people’s financial capability within the

UK.

The European Commission has measured levels of financial exclusion in EU countries by

drawing on Eurobarometer Survey data which was collected at the end of 2003 (European

Commission 2008). It is important therefore to note that the Eurobarometer data is useful

to draft a broad picture and to be able to draw very rough international comparisons but is

now in urgent need of updating.

Further research might consider the potential impact for borrowers of any ban on payday

lending in the UK as Consumer Focus has observed (Burton 2010).

Information on household debt by household income is not captured in international data

and so it is difficult to assess levels of household debt in low income families in a way that

makes it possible to compare across the various systems of credit regulation. Improved

international monitoring and reporting of household debt levels by family income would

help to shed further light on the impact of consumer credit market regulation in different

countries and we recommend this as an area for further research.

49

33(4): 394-415.

Melbourne: ANZ.

Melbourne: Brotherhood of St Laurence.

Arts, W. I. L. and J. Gelissen (2002) 'Three worlds of welfare capitalism or more? A state-ofthe-

cohésion sociale et du logement.

Bodenhorn, H. (2007) 'Usury Ceilings and Bank Lending Behavior: Evidence from

Bradshaw, J., S. Middleton, A. Davis, N. Oldfield, N. Smith, L. Cusworth and J. Williams

Rowntree Foundation.

London: Consumer Focus.

http://www.cabinetoffice.gov.uk/media/407789/building-big-society.pdf

Rowntree Foundation.

Canberra: Commonwealth of Australia.

Australia.

http://www.workingforwalthamstow.org/2011/01/everything_you_need_to_know_

ab.html

50

http://www.datamonitor.com/store/product/an_overview_to_sub_prime_lending_i

n_western_europe_2007?productid=DMFS2066

York: The Joseph Rowntree Foundation.

Deeming, C. (2010) 'The Historical Development of Family Budget Standards in Britain, from

Pensions.

Stationery Office.

Opportunities.

Treasury.

London: Financial Services Authority.

des Institutions (LEFI), Université Lyon.

College Dublin.

Australia.

51

für Finanzdienstleistungen e.V./Zentrum für Europäische Wirtschaftsforschung

GmbH.

Industry.

http://www.jennymacklin.fahcsia.gov.au/mediareleases/2009/Pages/jm_m_localme

asures_18october2009.aspx

www.jennymacklin.net.au/new-financial-services-for-disadvantagedaustralia/

1157150/news-item.htm

foundation.

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52

Foundation.

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53

prices, purchasing power parity)

2,185.96 2,121.72 2,909.69 831.25

GDP per capita (US dollars) 35,631 33,090 35,432 38,637

Unemployment Rate (Percentage

of labour force)

5.60 7.90 7.30 4.20

Public Social Expenditure (as a

percentage of GDP)

21.29 29.17 26.75 17.11

Public Health Expenditure (as a

percentage of GDP)

6.70 8.80 8.20 5.80

Public Pension Expenditure (as a

percentage of GDP)

5.47 10.58 11.01 3.24

Income inequality: Gini

0.34

0.28 0.30 0.30

Income inequality: Gini

coefficient, rank

23 13 15 16

Hourly Minimum Wage (US

dollars)

9.40 11.86 - 9.96

2000s) – (Poverty rate after taxes

and transfers).

15.50 14.10 17.20 20.30

Children in Poor Households 10.10 7.60 16.30 11.80

expenditure) among individuals or households within an economy deviates from a perfectly equal distribution.

A Gini index of zero represents perfect equality and 100, perfect inequality

the 21 countries for which they are available.

54

enterprises/businesses, and community sector organisations;

building into communities that are most disadvantaged or underserved;

strategies, skills and knowledge;

organisations in the markets in which they operate;

exclusion;

through appropriate policy and regulation;

sourced from a diverse base - with the majority of their funds coming from capital markets

to ensure their long-term sustainability.

Source: Foresters Community Finance (2009).

55

Semi-structured interview schedule

affordable credit for low income consumers?

control/regulation

access and use of credit services?

example, reduce credit costs for customers? Result in less product choice? Result in lower

credit access?

sub-prime market, making it hard for industry to develop and market products? To what

extent is this as positive or negative?

consumers and/or the financial services industry? What are they and are they positive or

negative?

toolkit which have been helpful for consumers of credit, particularly those on a low income?

industry and or low income consumers

affordable credit provision to third sector providers in [country]? such as credit unions or cooperatives

any issues not covered?

Affordable Credit – Lessons from overseas

Consumer Focus

Fleetbank House

Salisbury Square

London EC4Y 8JX

t: 020 7799 7900

f: 020 7799 7901

e: contact@consumerfocus.org.uk

www.consumerfocus.org.uk

Published: July 2011

If you have any questions or would like further information about our research,

please contact Marie Burton, by telephone on 020 7799 7992 or

via email marie.burton@consumerfocus.org.uk

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