514

The government’s policy towards consumer credit

We believe that the banks should be able to change their practices on each of

these but if they can’t, regulation will be necessary.’138 The DBIS published a

paper in July 2009 entitled A Better Deal for Consumers: Delivering Real Help

Now and Change for the Future. According to this publication, there are six key

principles that underpin the government’s consumer strategy: these are protec-

tion, responsibility, enforcement, change, proportionality and competition.139

The Coalition government also published a number of consultation papers in

2010.140 In a joint consultation paper published by HM Treasury and the DBIS,

the government proposes to transfer the regulation of credit from the OFT to

the Consumer Protection and Markets Authority (CPMA).141 The government

claim that this reform is necessary in order to ‘improve the way consumer credit

is regulated and to create a simpler, more responsive regime’.142

Q5 Briefly identify some reasons for the ineffective protection of consumers

under the Consumer Credit Act 1974.

515

8â A change of policy

high levels of debt and over-indebtedness. It has been argued that these prob-

lems were largely ignored by the previous Conservative government,148 which

has been described as contributing towards them.149 Conversely, the Labour

government initiated several initiatives aimed at improving access to affordable

credit.

(a)â Non-legislative reforms

The evolution of government policy stemmed from the creation of the Social

Exclusion Unit (SEU) in 1997. The Unit was given the broad remit of reducing

financial exclusion,150 and attempted to develop a number of ground-breaking

initiatives to tackle financial exclusion. At first, the Unit formed part of the

Cabinet Office and it then moved to the Office of the Deputy Prime Minister in

2002. Some of the solutions proposed by the SEU have been seen as important

and worthwhile; indeed, one independent assessment suggested that the efforts

made by the government since 1997 represented the first concerted attempt by

any European government to tackle financial exclusion.151 HM Treasury listed

five significant developments since the creation of the SEU:– the creation of

Policy Action Team 14 (PAT 14); the introduction of measures to encourage

savings; the launch of the Saving Gateway; the introduction of the CCA 2006,

and the creation of the Financial Inclusion Fund.152 However, the SEU’s over-

all effectiveness has been questioned because of its failure to meet the initial

aspirations of its supporters and the limited resources it has received from the

government.153

Particular note should be taken of the 1999 Report of Policy PAT 14. PAT

14 were asked to consider the scope for the development of credit unions; the

availability of insurance services; and the role of retail banks, the Post Office

and other organisations in providing access to and delivery of financial ser-

vices in deprived neighbourhoods.154 PAT 14 suggested a number of meas-

ures designed to address financial exclusion and promote access to affordable

credit. In relation to the provision of insurance, PAT 14 recommended that the

insurance industry should improve access to insurance in deprived communi-

ties.155 They also recommended that all major high street banks should offer a

148

M. Wallace, ‘A new approach to neighbourhood renewal in England’ (2001) 38(12) Urban

Studies 2163.

149

Ibid.

150

P. Watt, and K. Jacobs, ‘Discourses of social exclusion: an analysis of Bringing Britain Together:

A National Strategy for Neighbourhood Renewal’ (2000) 17(1) Housing, Theory and Society.

151

M. Drakeford,and D. Sachdev, ‘Financial exclusion and debt redemption’ (2001) 21(2) Critical

Social Policy 215.

152

HM Treasury, Financial Inclusion: the Way Forward (London, 2007) 27.

153

R. Geyer, ‘Can EU social policy save the Social Exclusion Unit and vice versa?’ (1999) 19(3)

Politics 159, 161.

154

HM Treasury, Access to Financial Services, Report of Policy Action Team 14 (London, 1999).

155

Ibid. 53.

516

The government’s policy towards consumer credit

basic bank account and that HM Treasury should continue with its policy of

deregulation of the Credit Unions Act 1979.156 PAT 14 has been described as a

‘landmark’ report,157 and as ‘the first strategic review of the problems of finan-

cial exclusion’.158 PAT 14’s Report played a significant role in terms of the gov-

ernment’s policy towards affordable credit. It contained several innovative

recommendations aimed at assisting people and communities to gain access to

affordable credit.

(b)â The Saving Gateway

The government has created several mechanisms aimed at encouraging people

to save. The Saving Gateway is a savings account for employed individuals on

low income. The aim is to encourage people to save through a government-

backed scheme. The government announced that it intended to contribute

50p for every pound saved within the scheme.159 A number of such schemes

were successfully piloted between 2002 and 2007 in Cambridge, Cumbria, East

London, Manchester, Hull and South Yorkshire.160 The government piloted

the Saving Gateway as a tool for encouraging saving amongst lower income

households and for promoting financial inclusion. The account is designed to

be flexible and permit account holders to vary their financial payments. The

scheme was given a legislative footing by the Saving Gateway Accounts Act

2009, which, among other things, outlines the eligibility criteria for the Saving

Gateway, imposes an obligation on HM Revenue and Customs to issue notices

to those people who are eligible for the Saving Gateway, and to pay the gov-

ernment’s contribution under the scheme. Membership of the scheme is open

to people who are on benefits, including income support, job-seeker’s allow-

ance and child tax credit. Eligible people are permitted to open accounts, for a

fixed period of time, with financial institutions that have been approved to offer

Saving Gateway accounts by HM Revenue and Customs.

(c)â Credit unions

A credit union is a self-help financial co-operative that provides accessible and

inexpensive savings and loans facilities.161 The principle purpose of a credit

156

For a more detailed discussion of the legislative amendments made to the Credit Unions Act

1979, see N. Ryder, ‘Credit union legislative frameworks in the United States of America and

the United Kingdom: a flexible friend or a step towards the dark side?’ (2008) 31(2) Journal of

Consumer Policy 147.

157

Welsh Affairs Select Committee, Social Exclusion in Wales, Report of the Welsh Affairs Select

Committee (London, 2001).

158

S. Collard, ‘Towards financial inclusion in the UK: progress and challenges’ (2007) Public Money

and Management (February) 13.

159

HM Treasury, Pre-Budget Report 2004 (London, 2004).

160

HM Treasury and HM Revenue and Customs, The Saving Gateway: Operating a National

Scheme (London, 2008) 8–9.

161

Davis and Brockie, above n. 30, at 3.

517

8â A change of policy

union is to encourage members to save regularly and facilitate the borrowing

of money at lower interest rates than those normally charged by other financial

institutions.162 Credit unions are based on a number of important concepts that

distinguish them from other financial institutions such as banks and building

societies. For example, membership of a credit union is based upon a common

bond, which means that members must share something in common, such as

working for the same employer or living within specified geographical areas.163

Credit unions can also be distinguished because they are based on a set of

unique co-operative operating principles. These principles are open member-

ship, democracy, distribution of refunds on a patronage basis, limited interest

payments for the use of capital, political and religious neutrality, cash trading,

and the promotion of financial education. It is the self-help ethos that has led to

the government viewing credit unions as a perfect institution to combat finan-

cial exclusion. Since 1997, credit unions are perceived by policy-makers as an

ideal vehicle for redeveloping struggling economies and meeting the credit

needs of the financially excluded. There are several factors which have limited

the development of credit unions in the United Kingdom: a restrictive legal

framework, ineffective financial regulation, inappropriate credit union devel-

opment models, an overdependence on state subsidies and a disunited credit

union movement. The next section briefly outlines the measures introduced to

promote the growth of credit unions.

The Credit Unions Act 1979 was regarded by many commentators as the

most restrictive of its kind in the world. In recognition of the Act’s limita-

tions, the government introduced a series of legislative amendments aimed

at encouraging the growth of the sector.164 For example, the interpretation of

the membership criteria was widened, and credit unions were allowed to offer

mortgages, individual savings accounts,165 child trust funds,166 and transaction

accounts.167 These were intended to help credit unions become over time a ‘one

stop shop’ for the financial services of their members, who would benefit from

162

R. Donnelly and A. Haggett, Credit Unions in Britain: A Decade of Growth (The Plunkett

Foundation, Oxford 1997).

163

For a more detailed commentary on the common bond see N. Ryder and A. Baker, ‘The enemy

within? A critical analysis of the Credit Unions Act 1979 and the common bond’ (2003) 36(2)

Journal of Co-operative Studies 117.

164

See, e.g., Credit Unions (Increase in Limits on Deposits by Persons Too Young to be Members

and of Periods for the Repayment of Loans) Order 2001, SI 2001/811; FSMA 2000 (Permissions

and Applications) (Credit Unions etc) Order 2002, SI 2002/704; FSMA 2000 (Consequential

Amendments and Transitional Provisions) (Credit Unions) Order 2002, SI 2002/1501;

Regulatory Reform (Credit Unions) Order 2003, SI 2003/256; Civil Partnership Act 2004

(Overseas Relationships and Consequential, etc. Amendments) Order 2005, SI 2005/3129);

Individual Savings Account (Amendment No. 3) Regulations 2005, SI 2005/3350; and Child

Trust Funds (Amendment No. 2) Regulations 2005, SI 2005/909.

165

Individual Savings Account (Amendment No. 3) Regulations 2005, SI 2005/3350, reg. 3.

166

Child Trust Funds (Amendment No. 2) Regulations 2005, SI 2005/909, reg. 3.

167

See HM Treasury Select Committee, Banking and Unbanked: Banking Services, the Post Office

Card Account and Financial Inclusion, 13th Report of Session 2005–2006 (London, 2006) 43.