The plight of 116,000 Christmas savers, still waiting to recoup some of their money five years after the collapse of the savings firm Farepak, is a seasonal reminder of the precarious position of low-income communities.
The savers, many living in social housing, had their day in parliament following a concerted campaign. However, given that liquidators trying to unravel the company's affairs have already spent £8m on fees and administration, it is unlikely that savers will receive anything close to the £35m owed them. Although a small eddy in the flood of the financial crisis, the Farepak case shows how the deck is stacked in favour of financial institutions and against low income communities.
Research by the Human City Institute and Compass charts how the widening gulf between those who can make use of credit options to help them invest in their future, and those who are forced into self-defeating cycles of expensive debt, impacts upon social housing communities. It is worth remembering that two thirds of all the UK's financially excluded households live in social housing.
Our research demonstrates that social tenants are particularly reliant upon the high-cost credit sector, including pay-day loans, doorstep lenders, pawnbrokers, "discount stores" and mail order catalogues. The exorbitant cost of such credit – often running at 3,000% per annum – is destroying the lives of tenants and communities as they struggle to make ends meet in the face of squeezed incomes, the ballooning cost of living and exclusion from mainstream credit.
Our analysis of tenants' outgoings showed that debt was the third largest element after food and heating, accounting for 14p in every £1 of their household incomes. For many, there was often a conflict between eating, heating and debt repayment. One quarter owed more than £5,000, which is two thirds of their relatively low average income. Almost half had been harassed by high-cost lenders when failing to meet their repayments – with younger, female and BME tenants most likely to have experienced such harassment.
The high-cost credit industry is growing at a terrifying rate. Pay-day lending alone doubled in value between 2008 and 2010. Dollar Financial, the US-based lender that owns The Money Shop in the UK, expanded from just one store in the UK in 1992 (which dealt primarily with cheque cashing) to 273 stores and 64 franchises by 2009. Now it plans to quadruple the number of stores it operates on Britain's high street. Wonga.com, an online start-up whose representative APR is an astonishing 4,214%, announced an annual gross profit of £35.5m and is ploughing further capital investment into its business.
Social tenants are looking to housing associations for help and our research shows that many provide a range of financial inclusion services including assistance with opening bank accounts, community finance initiatives, financial inclusion awareness and literacy training, fuel poverty advice, household insurance schemes, pay point services, rent deposit schemes, white goods and furniture re-use as well as debt and money advice.
A recent report by the Financial Inclusion Centre, in partnership with a group of London housing associations, and a benchmarking study by the Aster Group point to the cost-effectiveness of social landlords providing debt and money advice services on the bottom line of the rent account and reducing tenancy churn, and their popularity with tenants.
The Trident Money Advice Centre (featured in our research) helps between 200 and 300 clients in social housing annually. Last year, welfare benefit advice alone increased tenants' collective incomes by £312,000 and Trident helped deal with £802,000 of tenants' debts over the last two years. This represents a major social investment in often economically marginal communities that illustrates the "added value" of social landlords.
But provision of debt and money advice services is only a short-term palliative answer. So what are long-term solutions? Social landlords need to put in place broader financial inclusion strategies that help tenants to reducing heating costs and cut fuel poverty; they must roll out new community finance options for all social housing communities; they should provide furnished tenancies. These steps reduce the root causes of tenants' reliance upon high-cost credit.
At the macro level, our research advocates parliament applying a cap on high-cost credit of around 25–50%, dependent upon the type and length of extended credit. Longer terms solutions should include the introduction of a living wage, improving social mobility and reversing recent expansion of economic inequality.
Kevin Gulliver is director of the Human City Institute
This content is brought to you by Guardian Professional. Join the housing network for more comment, analysis and the latest jobs direct to your inbox
