Yesterday I wrote about the Social Fund and how it’s changing. Today I want to delve into the effects of these changes, particularly to the supply and demand for affordable credit. To really get to grips with what this will mean for service-users, I spoke to several charities working in debt and financial inclusion, and three headline risks emerged.
Localised provision results in a postcode lottery. The DWP hopes that localising the Social Fund will inject local knowledge into decision-making on applications and improve targeting. But by leaving each council to draw up its own package to meet these needs—or not, as the case may be—it is likely to create a hotchpotch of provision. This makes it difficult for charities working with those affected to anticipate and respond to the changes, particularly since many local councils have not been forthcoming about their strategy to provide alternative assistance. Departmental responsibility also varies from council to council, making it all the more difficult for charities to devise a joined-up response.
This has specific ramifications for financial inclusion because, as well as a supply of appropriate financial products, consumers need to have the confidence and capacity to make informed financial decisions. If it is not clear how to access such financial lifelines, those who need it most may be put off applying. For example, Judith Moran, Director of Quaker Social Action, explained that many of QSA’s service users feel bewildered by the changes and their complexity, and are unsure whether they will be affected and how. Others may be completely unaware that such support exists. In such cases, people may turn to other, more expensive forms of credit, such as payday or illegal loans, which may exacerbate their financial situations.
Councils lack the capacity to administer payments. Repayments on Crisis Loans were previously collected from benefit payments, but local councils lack the power to do this. More broadly, it is not clear that councils have the capacity to process and disburse loans, and to collect repayments. Some charities I spoke to reported that, during their conversations with councils, officials said that while they expected repayment, their internal follow-up would be rather light-touch, favouring cutting off future credit for those who fail to repay rather than chasing them. This is worrying, both in terms of the message it sends to service users and in terms of their future access to emergency credit.
One possible solution lies in greater support from credit unions: while most credit unions would be reluctant to become an alternative provider of crisis loans, due to the cost of providing these very small, short term loans and the impact this would have on their overall sustainability, they could provide administrative support to councils to help with the processing and collection of loans. This is already happening in some places: Abbie Shelton from ABCUL, the representative body for credit unions, informed me that ’twenty or more of our members are working with local authorities on some level in various ways.’ This collaboration is encouraging, and Abbie hopes this contact with credit unions will help people to access affordable, appropriate forms of credit when they need it, as well as savings and other financial services. But what about elsewhere?
Fewer cash loans are made. Many councils have proposed using payment cards, issuing claimants with vouchers redeemable for certain essential items. Others are focusing on in-kind support, through relationships with food banks and furniture recycling services. Policy-makers hope that by working with local organisations, councils can tap into community knowledge on who is in need of support and in what form.
While there is truth in this, in-kind support cannot meet all needs. Problems with payment card schemes have already been documented elsewhere. Sometimes cash is critical, and cannot be replaced by in-kind goods: where money has been stolen, for example, households need cash to cover their various living expenses. Importantly, restricting support in this way prevents recipients from making efficient budgeting decisions about their own needs. This risks stigmatising and disempowering those the councils are trying to help.
Returning to financial inclusion specifically, replacing cash with in-kind support limits the supply of affordable short-term credit. And in the current economic climate, this is particularly troubling: as Joseph Surtees from StepChange explained to me, ‘the downturn means that we will see a rise in structural indebtedness, and therefore a rise in the number of people who probably cannot access consumer credit and will need the Social Fund at a point when it’s disappearing. This will lead to a situation where an increasing number of people may wind up falling further and further away from financial stability.’ As a result, we may see more people turning to expensive alternatives, including payday loans or credit cards. Other charities have reported that beneficiaries are turning to stealing or sex work to raise the cash they desperately need.
Overall, then, the situation is murky and the mood somewhat tense. It’s worth emphasising that we should not be pointing the finger at councils: given the cuts to their budgets, they are having to respond in a very challenging environment. But these cuts make it all the more important to consider how councils will build the necessary capacity to provide emergency financial support, and whether they will choose to at all, given that they have discretion over the welfare assistance budget. It’s early days, but this is definitely something to watch over the coming months.
Thank you to the charities and staff who contributed their opinions and expertise during the research for this piece.