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CSJ - Confront “exploitative” high cost lenders with new Community Banks, urges major report

Two million people are driven to high-cost credit every year because it is the only loan they can get, according to the Centre for Social Justice.

  • Cut red tape to create new Community Banks for cheaper loans and
  • banking facilities
  • More than 300,000 people in the UK are too poor to go bankrupt because they cannot afford the £525 fee
  • 8 million British households have no savings – one of the lowest savings rates in the EU
  • Employers should help staff save with new auto enrolment scheme
  • Recent payday loan cap could push thousands to loan sharks

A network of new Community Banks should be created across the country as an alternative to high cost credit driving millions of people into problem debt, according to a major new report.

Red tape holding back successful credit unions should be torn up so that they can be reborn as ethical Community Banks offering more stable loans and banking services at cheaper rates and on better terms.

This is part of a major package of personal debt reforms put forward today by the Centre for Social Justice (CSJ) that will bring fairer banking to Britain’s poorest communities and challenge the monopoly of mainstream banks and payday lenders.

“There is a growing group of people under intense pressure as a result of problem debt,” said Christian Guy, CSJ Director.

“This debt rips into families and traps people on the edges of our society. Many don’t know where to turn.

“Worse, people in poorer communities are effectively excluded from mainstream banking – hit hard by punitive fees, penalties and crippling debt.”

Household debt in the UK has almost doubled in a decade to £1.44 trillion and around seven million people use high-cost credit, such as payday loans.

The CSJ criticises a lack of competition in financial services and says products for many poorer people are harsh, which is why millions either have no bank account or are forced to use accounts which regularly charge excessive penalties.

Credit unions currently serve more than a million customers lending a total of £600 million. Because of current regulations, however, unions are limited and often unable to serve the poorest in society who would most benefit from them.

But with reform and the transformation of the bigger and best managed unions into Community Banks, they could potentially help up to eight million people in a market worth as much as £3.5 billion.

One major benefit is these new Community Banks would be able to offer smaller loans commonly handed out by payday lenders, but with much lower interest rates and better conditions.

To do this the CSJ wants to see a number of credit union regulations stripped back. This includes relaxing membership rules, removing interest rate caps for small loans and allowing them to invest members’ deposits to generate income.

The Community Bank status will only be available to select credit unions who have been run well and would benefit from operating on a larger scale. The CSJ estimates there would be around a dozen of these banks across the country initially.

Researchers say the package – which includes using peer-to-peer social investment to help expand community finance – would help many of the two million people every year who turn to high-cost credit because it is the only loan they can get.

“The time for quick political fixes is over,” added Mr Guy.

“A new government should focus on preventing problem debt, creating a savings culture and a new market of Community Banks. It should also ensure more help and advice reaches people already struggling with toxic debt.”

The report builds on the debt work the CSJ did in its landmark publication Breakthrough Britain, which Prime Minister David Cameron recently singled out as having a major influence on his Government.

And it comes just days after plans were announced to cap the amount of interest payday lenders can charge – a move criticised by the CSJ, which argues that it could add to the 300,000 people already going to loan sharks.

The report, drawn up by a group of personal debt experts and chaired by former Labour minister Chris Pond, also reveals there is an estimated 315,000 people in the UK who are too poor to go bankrupt, because they cannot afford the £525 fee that is needed.

The study says problem debt drives poverty and a range of entrenched social problems.

Almost half of people with unmanageable debt report that it impacts on their health.

One survey suggested that a third of the 1.5 million debt advice clients has attempted or contemplated suicide.

Three quarters also say their relationships have suffered as a result of debt, with one quarter saying their relationships ended completely.

UK households currently have one of the lowest savings rates in the European Union.

The CSJ argues that creating a strong savings culture will build resilience against problem debt. One recommendation put forward in the report is that employers should set up auto-enrolment savings schemes for employees.

The think-tank is also concerned about people with problem debt who do not get advice. It says 8.8 million people would benefit from advice but only one in six seek help. This is because some do not ask for help because of the stigma attached and for others it is because support is not available.

The report also says energy companies, telecoms and government should do more to fund debt advice because evidence from the private sector shows it would help them recoup more money and assist people out of debt.

For media inquiries, please contact:

Ross Reid, Centre for Social Justice, 07780 707322

Nick Wood, Media Intelligence Partners, 07889 617003

Notes to editor

A Community Bank would be a type of member-owned Credit Union that is able to offer ethical affordable financial services – including low cost loans, mortgages and bank accounts – to almost every member of the community, regardless of credit history or income.

This is because it has been granted exemption from many of the regulations that have limited the growth, sustainability and professionalism of many Credit Unions in Britain. This status will only be available to a select few

Full Report: Restoring the Balance: Tackling problem debt

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