The Social Security (Claims & Payments) (Amendment) (No XX) Regulations 2006

The Affordable Credit Deducions Scheme

September 2006

1. Introduction

The Law Centre (NI) welcomes the opportunity to comment on The Social Security (Claims & Payments) (Amendment) (No. xx) Regulations 2006 on the Affordable Credit Deductions Scheme (ACDS).  We understand that similar proposals to those presented in this consultation document will be brought forward for Northern Ireland and we have therefore decided to make this submission at this time.

The Law Centre (NI) is a public interest law non-governmental organisation.  The Law Centre works to promote social justice and provides specialist legal services to advice organisations and disadvantaged individuals through our advice line and our casework services from our two regional offices in Northern Ireland.  The Social Security Unit provides expert legal advice to the advice sector and individuals and manages a varied casework portfolio.  Our response is informed by the work of our social security practitioners.

Below we outline some factors relating to the Northern Ireland context that are relevant to this consultation followed by comments in relation to the proposal under consideration.

2. Northern Ireland Context

For the purposes of this consultation, there are a number of relevant factors pertaining to the Northern Ireland regional context.  First, there is a strong credit union sector in Northern Ireland which plays a key role in providing affordable credit within local communities.  Unlike other regions of the UK, there is a high density of credit union membership in Northern Ireland.[1]  This has not, however, offset the practice of extortionate money-lending in lower-income communities.[2]  Second, in relative terms, there is a high level of poverty and social disadvantage in Northern Ireland, particularly amongst certain vulnerable groups, as compared with other regions in GB.  This is exacerbated by the relatively high cost of living in Northern Ireland, including higher fuel costs.[3]  Per head of population, the level of reliance on means-tested benefits in Northern Ireland is above that in the rest of GB.  The higher proportion of Disability Living Allowance and Incapacity Benefit claimants in Northern Ireland reflects strong patterns of disability and ill-health. 

Third, historically, there have been wider powers to recover debt in Northern Ireland than in the rest of GB.  Save for child support maintenance, in GB deductions can normally only be made from Income Support, Pension Credit and income-based Jobseeker’s Allowance.  Deductions can also be made from Incapacity Benefit, Retirement Pension and Severe Disablement Allowance where paid in conjunction with Income Support or Pension Credit and the amount of the latter benefits are not sufficient to cover deductions.  In addition, deductions can be made from contributory-based Jobseeker’s Allowance in limited circumstances.  In contrast, in Northern Ireland, deductions can be made from Jobseeker’s Allowance, Incapacity Benefit, Retirement Pension, Severe Disablement Allowance and Widow’s Pension and Widowed Mother’s Allowance regardless of whether they are paid in conjunction with Pension Credit or Income Support.  Therefore persons claiming benefits in Northern Ireland are already subject to greater powers of debt recovery than is possible in GB. 

The deductions scheme as outlined in the memorandum to SSAC considerably extends the benefits from which deductions can be made beyond the wider arrangements in effect in Northern Ireland.  In particular, deductions under this scheme can be made from Carer’s Allowance.  In GB deductions can also be made from Retirement Pension and Incapacity Benefit without any requirement that Income Support or Pension Credit also be in payment.  In effect, in GB those people on Incapacity Benefit, Retirement Pension and Carer’s Allowance without Income Support or Pension Credit will have the ACDS deduction treated as a priority debt as there is no provision to make deductions for housing or fuel arrears from freestanding benefits.  The same will apply to Northern Ireland claimant’s on Carer’s Allowance. 

Finally, given that the ACDS is predicated upon access to money and debt advice, it is worth highlighting that although there has been recent improvement in the level and funding of money advice services in Northern Ireland, with investment from the Money Advice Trust and the Department for Social Development and Enterprise, Trade and Industry, there remain gaps in provision.  The provision of advice in Northern Ireland is currently under review and we would be concerned that the new Advice Strategy for Northern Ireland is properly resourced to ensure appropriate levels of support, particularly for marginalised groups and rural communities, the latter of which make up a proportionately greater number of the population per head than elsewhere in GB.[4] 

3. General Comments on ACDS Scheme

The extent to which those on low incomes borrow for essential items and the extent to which they pay higher rates on that borrowing has been well-documented.[5]  The Government has recognised that ‘many low income households rely on credit products with interest rates of over 100 percent.’[6]  In broad terms we therefore welcome the initiative to promote access to affordable credit facilities for those on low incomes.

Equally, however, affordable credit must not be allowed to substitute for adequate benefit levels and access to state support and assistance as required.  We therefore caution against the use of the ACDS scheme as an alternative means of assisting those who should properly be eligible for state support through benefit and the Social Fund.  The Social Fund was established as a means of providing affordable credit to those in need.   It is important that an ACDS scheme does not erode the proper application of the Social Fund.  In its 2001 Report, the Select Committee on Social Security recorded problems of under-funding of the Social Fund[7] and recent research on behalf of the Joseph Rowntree Foundation reports ‘considerable unmet need’ for Budgeting Loans and other grants.[8]  In light of these findings, we would argue that priority should be directed at reform of the Social Fund, rather than the establishment of a new means of providing credit to those claiming benefits.  We therefore endorse the recommendation of the NACAB that ‘reform of the social fund could be a more significant means of widening access to affordable credit than allowing credit unions and other lenders access to the third party deduction scheme’.[9]  In terms, NACAB argue, this would mean ‘increasing the grants available and … extend[ing] loans to those in low-paid work or in receipt of other benefits’.

The experience of many of those claiming benefits in Northern Ireland is that benefit levels are set at too low a rate, particularly given the relatively high cost of living in Northern Ireland.  Benefits rates cannot support additional deductions to those currently permissible under the third party deduction scheme.  We support the views of the Select Committee on Social Security that it is time to give ‘ever more urgent’ consideration to a re-examination of the adequacy of weekly benefit levels[10] and therefore take this opportunity to urge a fundamental review of the level of benefit as a means of fulfilling the Government’s own anti-poverty targets and specifically, the Northern Ireland Anti-Poverty Strategy.   

4. The ACDS Scheme

We recognise that for some persons claiming benefits, the third party deduction scheme has been a means of managing priority debts, i.e. debt for essential services.[11]  We consider that the direct deduction scheme should be limited to such debts and we have been concerned at the gradual extension of direct deductions to other forms of debt (such as Integration Loans).  We strongly caution against the further extension of the direct deduction scheme to include other forms of non-priority debt.  We consider this will lead to an increase in the risk of over-indebtedness for our clients, and for those on benefits generally. 

We also have concerns about the operational management of the proposed scheme and the lack of provision for budget management in transitional arrangements from benefit to work and these are discussed below. 

4.1 Third Party Deductions

Three issues arise:

	Extent and Level of Deductions: The experience in Northern Ireland is that the third party deduction scheme exacerbates existing levels of poverty by allowing those subject to deduction to fall below the safety net level of support represented by Income Support and other benefits.  This is particularly so for those claimants against whose benefits deductions are made up to the upper limit of 25% of a claimant’s Income Support applicable amount or Pension Credit minimum guarantee.  This upper limit level of deductions, which is to apply in relation to the ACDS scheme, will generate real hardship and does not, in our view, ensure ‘the customer is left with a reasonable level of benefit after deductions have been made’.[12]   We agree with the NACAB that the current level of deductions for arrears (£2.90 per week) is too high and that adequate safeguards need to the put in place to prevent undue hardship.  We therefore support the recommendation of the NACAB that as little as £1 per week should be accepted as an appropriate level of benefit deduction to service priority loans.[13]
	Range of benefits subject to deductions: We have already highlighted the lack of parity between GB and NI in relation to those benefits which may be subject to deduction and we have argued above that direct deductions should apply only to priority debts.  We also note that many families on Income Support no longer receive applicable amounts and a premium for children, having to claim Child Tax Credit instead.  If Government is committed to this scheme, will those who receive Child Tax Credit and Income Support be given the opportunity to have deductions made from Child Tax Credit?  We recognise that HM Revenue and Customs do not have a similar direct deductions scheme; however, there is an issue of parity which is not addressed within the direct deductions scheme.
	Priority of Debts: Historically, the primary purpose of the third party deduction scheme has been to target priority debts.  As we indicated above, we are concerned in general terms about the risk of increased over-indebtedness where deductions may be made for non-priority loans.  In its evidence on the new scheme, the NACAB insisted that this form of loan should fall to the bottom of the debt priority list[14] and we recognise that this approach is largely followed here.  We are concerned, however, that ACDS deductions will be permitted to take priority over new loans from the Social Fund, commenced after ACDS deductions have been sought by a lender.  The rationale proffered for this is that borrowers have ‘the choice whether or not to take out a SF loan in addition to existing commitments.’[15]   We question this rationale given that it is by no means clear that claimants are indeed in a position to exercise meaningful choice about borrowing given income levels and essential expenditure.  We believe that Social Fund loans should continue to displace ACDS loans even where they are commenced after ACDS deductions have been established, not least because of the consequences of exclusion from Social Fund loans for those claiming passport benefits.

4.2 Regulation of Lenders & Operational Matters

Careful monitoring and evaluation of lenders practices and loan products will be essential to the scheme.  We welcome that participation in the scheme will be subject to prior FSA registration or otherwise licensed by the Office of Fair Trading and that a memorandum of understanding will set out the terms on which lenders will be regulated for the purposes of the scheme. 

A centrally administered scheme will, we believe, present a number of administrative and operational challenges.  First, there will be a need for staff to be trained to effectively assess lenders financial products.  Second, it is unclear how the department will manage, in an administratively efficient fashion, varying rates of APR which may apply to a single loan at different points in time, as is current practice within the credit union sector.   Moreover, we note the high administrative and running costs of the ACDS which cover almost 11% of the costs of the scheme.  Arguably, in Northern Ireland, the administrative costs are likely to be even higher.  Given too that not all lenders will apply to join the scheme, in general terms, we have serious reservations about the cost effectiveness of the scheme.

4.3 Debt Advice

In its Budget statement, the Government recognised ‘that face-to face money advice is an effective mechanism for tackling problem debt’[16] and in its 2005 report, Take it Away, the NACAB argued that the need for independent financial advice was integral to the scheme and required appropriate levels of funding.   We echo those concerns and draw particular attention to our comments at para. 2 above. 

4.4 Transition Arrangements

We are concerned that consideration does not appear to have been given to transitional arrangements for those moving from benefit to work.  The draft regulations (S. 2(9)) require the cessation of deductions where a person is no longer in receipt of benefit.  At this point the debt ceases to be regulated by the terms of the scheme.  We would strongly urge that consideration is given to supporting those making this transition from benefit to work, particularly low-paid work, in managing the repayment of such debts and that any rate of recovery should not increase during the first three months of employment.  This should be made a requirement of the memorandum of understanding entered into by participating lenders.   

5. Conclusion

Whilst we broadly welcome a commitment to address the very real problem of exploitative lending practices by unregulated lenders we are concerned that the ACDS scheme will create further hardship for many of those most at risk of poverty.  For this reason, we have argued that the scheme must not be allowed to become a substitute for either adequate levels of benefit or for Social Fund provision.  Rather, we support a review of benefit levels and for further diversion of funding to the Social Fund.  In the event that the ACDS scheme is brought forward for Northern Ireland, we would argue that these loans must, without exception, be displaced by other priority and Social Fund loans and that the level of repayment is lower than is currently the case in the third party deduction scheme.  We also do not support this scheme being used to extend the range of benefits from which deductions can be made.  Further, we urge that the provision of debt advice envisaged in this scheme is considered alongside the current review of advice services in Northern Ireland.  Finally, we urge a full consideration to be given to the need to put in place transitional arrangements to support the move from benefit to work.  We trust that you find these comments useful and we welcome the opportunity for further comment.