Freud: debt advice and financial inclusion speech at Centre for Responsible Credit conference

Lord Freud, Minister for Welfare Reform

Centre for Responsible Credit Annual Conference, London, 26 September 2012

The provision of debt advice and financial inclusion are hugely important issues, particularly in today’s economic environment.

The way current benefits are paid means that many claimants receive more than one benefit, with different paydays and frequencies, and to different people in the household.

This makes it difficult to control household budgets – and often forces people to use pre-payment cards to cover the cost of essential items such as utility bills and mobile phones.

This ‘hand to mouth’ existence also prevents people from getting value for money – by making it difficult to shop online for example – as they have no access to affordable credit. They are instead often forced to use pay day lenders or to buy essential items via high interest catalogues and shops like Brighthouse.

Shockingly around seven million people are said to be impacted by this ‘poverty premium’. Universal Credit is an opportunity to change this.

So it’s vital that the Government and private and third sector organisations continue to work together to ensure people on lower incomes are able to access the right advice and support and that we do all we can to steer them away from predatory lenders.

I am therefore very pleased to be here today to tell you more about what we are doing, and how we are working with private and third sector organisations to help claimants access products and better manage their finances when Universal Credit is introduced next year.

But first, let me set out the context around Universal Credit.

Universal Credit is a radical redesign of the benefit system, wrapping up main working age benefits. It will replace the current complex system, tackle welfare dependency, incentivise work to make work pay, reduce poverty and increase personal responsibility.

2.8 million households will gain under Universal Credit – of these 1.3 million households will see their benefit increase by more than £25 per week.

Households with a lower entitlement will have their benefits transitionally protected. And around 900,000 children and adults will be lifted out of poverty because people will get full benefit entitlement not just the benefits they had applied for.

An additional £300 million has been invested into childcare support under Universal Credit, making 80,000 more families eligible for this help, which will help people make the journey from being inactive into work.

But this reform is not about saving money. We will spend £2bn more on benefits under Universal credit than we do now.

We are building a new system, using agile methodology, to deliver Universal Credit incorporating many existing IT systems run by the department today. We are already testing the process on real claimants so we know what works and what needs changing.

There will be an early roll out of Universal Credit (Pathfinder) to test the new simpler, single benefit payment system with local authorities, employers and claimants in a live environment. It will launch in April 2013, working with four local authorities – Tameside, Wigan, Oldham and Warrington. This will be a gradual process to ensure we get it right.

The most important test we are doing are the Housing Demonstration Projects and Local Authority led pilots to test the processes to make sure we have the early ground work in place ahead of the roll out next year.

The six demonstration projects, which went live this summer, are testing how claimants can manage housing benefit monthly payments and looking at what safeguards are needed to help secure landlord income streams if tenants fall behind on their rent.

A further twelve pilots will also run from this autumn with local authorities. They will explore how local expertise can be used to support residents under Universal Credit, including helping claimants to build online skills to claim and look for jobs, as well as to help with developing better financial management skills.

We will pay Universal Credit monthly to reflect the fact that 75 per cent of people in work are paid that way. This will help people with the transition into work.

There are real benefits to moving to a single monthly payment Universal Credit. It will enable low income households to develop a greater responsibility for managing their household budget which will in turn support their transition into work. And one big monthly payment helps with the poverty premium, rather than receiving it in dribs and drabs.

We know that most people on low incomes manage their money well, but around 1.3 million adults still do not have access to a mainstream bank account.

The introduction of Universal Credit has therefore provided us with an opportunity to offer all claimants access to suitable banking products so that they can budget their benefits and earnings from work effectively.

Earlier this month we published a Prior Information Notice alerting suppliers that we are ready to engage with the market to explore this proposition. We are prepared to invest up to £145 million.

We are calling on a wide range of financial providers to engage with us, including high street banks and credit unions, mobile phone operators and pre pay card providers who can supply products with extra budgeting functions to support claimants as they move to Universal Credit.

These products will need to offer essential features to help people on low incomes to budget, but we want the final design to be left open to the market to devise, including:

  • Support for claimants to budget and manage their money
  • Regular payments for housing and other main bills
  • Facility for Direct Debits
  • Options for multiple income streams from work and benefits
  • Access to all claimants, irrespective of credit history
  • Options to build up a credit rating
  • Availability to people once they have moved off Universal Credit

These accounts will increase the support to families who are facing multiple disadvantages, many of whom become burdened by the effects of excess of debt, which in turn is likely to increase the chances of family breakdown, reduce opportunity of educational attainment for their children and increases their chances of remaining out of work.

Alongside this support we will also offer an advance to people who need it when they move onto Universal Credit, so they don’t see any gap in their payments when they move from a fortnightly to monthly system. We expect the advance to be made at the two week point to bridge the gap.

It’s also important that we do all we can to help people avoid unmanageable debt in the first place. And so we are investing in organisations such as Credit Unions who offer affordable financial services to people who would otherwise be unable to access them.

Credit Union loans can save borrowers on average £401 a year. But alarmingly some people on low income are paying anywhere from 270% to over 2000% APR for loans from other legal and regulated agencies. The interest rates become even more extortionate if people are forced to use a loan shark.

Applying an APR to a loan doesn't work very well when we are talking about very short term loans.

If for example Joe borrowed £50.00 on a Monday and had to pay back £55.00 on the Friday that £5 paid on top of repaying the amount loaned would equate to an APR of 14,299%.

This is because APR assumes the repayment period is 52 weeks and that the charge compounds over that time. In fact because an extra day would be included in the calculation the same loan made in a leap year would equate to 14,496%. Clearly using APR in this circumstance isn't helpful

Credit unions are growing – they have almost doubled in membership since 2006 – but we want them to be a mainstream option for savers and borrowers just as they are in other countries.

That’s why in June, we announced a £38m investment to help Credit Unions modernise and expand. Our investment will help them reach up to one million new customers providing a real alternative to rip-off interest rates from payday loans, doorstep lenders and illegal loan sharks.

We are also considering how to ensure that Universal Credit claimants who have debt problems or other vulnerabilities such as poor numeracy skills, drug addiction or mental health issues are given practical support at the onset of their claim.

For example, under Universal Credit someone with debts may be referred to a debt advisory service. Some claimants could be made an exception to the Universal Credit monthly payment rule for a period of time, whilst they tackle their debts and learn to manage their finances better.

Our guidance on exceptions to monthly payments is still being developed but the most likely scenario is that claimants’ financial circumstances will be reviewed periodically on a case by case basis, with a minimum and maximum review period – ranging from 6 months and two years. Findings from the direct payment demonstration pilots will help to inform the final development and design of payment exceptions.


Universal Credit is a huge agenda of work and a huge opportunity to draw on the help and support of third sector and private companies.

We will continue to provide updates on our work with Credit Unions and on the new financial products over the coming months.