rose to move, That an humble Address be presented to Her Majesty praying that the regulations, laid before the House on 6 December 2006, be annulled (SI 2006/3188).

The noble Lord said: My Lords, the third-party deduction scheme for people on some benefits like income support has existed for many years. Although I agree with the National Association of Citizens Advice Bureaux that it is overdue for revision, that is not the reason I have put down this Prayer to Annul; it solely concerns the regulations. Their objective, as the useful Explanatory Memorandum makes clear, is to permit a facility for credit unions to have recourse to reductions of the income of borrowers who are in receipt of the standard list of social security benefits. This scheme is in pursuit of the Government’s financial inclusion strategy, about which the Minister will remember I spoke in passing on Monday when we discussed the Welfare Reform Bill. I said then and I repeat now that we on this side of the House believe that the Government’s attempt to achieve that is correct, but that often they go about it in a rather dangerous way, and to my mind the regulations are rather dangerous.

By definition, benefit recipients are on low incomes and access to mainstream financial services, mostly banks, is not available to them. Far too often they are tempted into loan arrangements with exorbitant rates of interest. I have seen annual percentage rates of over 100 per cent offered. These must be accepted from time to time, otherwise the APRs would come down or the lenders would go out of business. Borrowers, by definition, therefore get into the most horrific financial straits, are pestered by debt collectors and regularly lose their possessions. That leads to what can only be described as a miserable and disastrous life.

The last Conservative Government set up the Social Fund to alleviate this problem. Noble Lords will recall that it still continues to offer grants for perhaps a new cooker or the repair of a boiler and—most important in this connection—it makes loans. These loans are repayable either from income or, in extreme cases, by reduction of benefit. The scheme was and is administered by local social security offices and each one has its own budget.

It became quite quickly a postcode lottery as some offices had surpluses and others spent their budgets early in the year. One of the few social security measures I was able to undertake unilaterally as a Social Security Minister in Northern Ireland—or as a Social Services Minister, I should say, to give it its technically correct title—was to watch the position in all the offices in the Province and, periodically, to take the money from the under-providers and give it to the offices which had reached their limit. This practice then became commonplace across the United Kingdom.

The total budget was always severely limited, as I believe it still is. It is fair to say, however, that I have not had many complaints about it recently. I do not know if the Minister has had any complaints during the few weeks that he has been in his current position.

I happened to be listening, rather unusually, to my noble friend Lady Byford winding up the previous debate. She said that periodically we ought to consider whether there is a better way of doing things. I ask the Minister: what consideration, if any, was given to increasing the loan sector of the Social Fund, which is, to my mind, the obvious solution to the problem of achieving more financial inclusion? Would this not have been a far more cost-effective way towards curing the problem than the way the Government have chosen? If so, there would have been no need for these regulations in the first place.

Rather than increase the Social Fund budget, the Chancellor decided to do something very different. As part of his social financial inclusion project he set up a small fund of £20 million originally, as I understand it, to be bid for by what he calls third-sector lenders, which are commonly known as credit unions. Perhaps the Minister will update us on this as the scheme should have become live on 1 January. I rather wonder whether it did.

These regulations widen the third-party deduction scheme to include non-priority deductions from claimants’ benefits when contracted repayments arrangements have broken down, the object being to encourage low-cost lending schemes and, by so doing, give credit unions a tremendous boost. Clearly they are delighted. What business of the Government is it to enable this rather one-sided performance? After all, the Government are supposed to be even-handed—or at least that is what various Ministers have told us over the past eight to 10 years.

When the department had prepared the regulations it sent them, as it had to by law, to the Social Security Advisory Committee. That committee was far from enamoured and produced one of the most critical reports I have seen in a long time. Your Lordships’ Merits Committee, to which I am grateful, supported and added to some of its findings. The Government have always admitted that they did not expect a high take-up rate. The committee concluded that, in that case, the set-up costs did not seem to be worth the candle. It used the word “over-elaborate”, which amounts to the same thing.

At the time of the report, officials had estimated that those costs would be about 8 per cent of the scheme. The Chancellor’s response was surprising to say the least—he threw more money at it, so reducing the percentage. I understand that the Chancellor promised in the last Budget and the Autumn statement, which he gave not long ago, that the amount of money will be doubled, which will bring the costs down to about 3 per cent. But this is only if there is a full take-up, which the committee doubted as it had received responses, including those from three potential lenders, one of which was against the proposal. The committee pointed out that there are more than 550 credit unions but that a maximum of 50 would participate and, at that, not until after three years’ time. Those who welcomed the scheme did so only in principle, believing that it would provide adverse incentives for claimants, and for lenders to intensify their efforts to attract borrowers. That cannot, or should not, be what the Government want.

My Lords, it has been a long and busy week for the Minister and for the rest of us who are active on DWP matters in this House, so I will be brief. It is right that we draw this to the attention of the House. The Merits of Statutory Instruments Committee has some pretty trenchant criticisms of this measure. They boil down to saying that both the regulations and their Explanatory Memorandum are very sloppy pieces of work. The memorandum contains pious aspirations, but no proper assessment of how this measure will prove a cost-effective way of dealing with debt for vulnerable people. If I were to give it an old-fashioned school report, I would summarise it with a C for effort and a D for attainment.

A cost of £3 million initially and £100,000 to £150,000 a year for a maximum of 5,000 cases looks like pretty poor value for money to me. I agree with the Social Security Advisory Committee and with the noble Lord, Lord Skelmersdale, that the obvious way to achieve these same ends more effectively would be to boost the Social Fund. It seems to me, having studied the Chancellor’s statements over the years, that to set up the new procedure is another case of new-initiativitis, rather than funding existing policies and institutions properly.

The conclusion to the Explanatory Memorandum states that the Government are grateful to the Social Security Advisory Committee and the agencies which responded to consultation for their consideration of the scheme and resulting comments, but it does not add, “but we’re going ahead anyway”. What is the point of expert scrutiny by the Social Security Advisory Committee and the Merits of Statutory Instruments Committee if the Government do not take their strong reservations seriously, especially on an issue such as this, which does not raise major issues of public policy—it is essentially practical and technical? What does it cost for the Government to be a bit more humble and to take these serious practical considerations properly on board?

My Lords, I, too, am grateful to the Merits Committee and the Social Security Advisory Committee, and to the noble Lord, Lord Skelmersdale, for bringing these regulations before us today. We are talking about a very serious problem. Perhaps the Minister will ask his department what the full extent of low-income-family indebtedness is. Government figures which I have seen give me no comfort or assurance that the Government know how bad the problem is. The best thing that I have seen to date is the Joseph Rowntree Foundation study which was done by Collard and Kempson in 2005. It came to the conclusion that 6.2 million low-income people aged between 16 and 64, in the course of the year that it studied, needed to borrow. Some 1.8 million of them had borrowed commercially, and 750,000 had been forced to use a high-income lender. That is more than likely to be a substantial underestimate, because we all know that people in distress in low-income families often turn to family, friends and informal arrangements to get them through difficult circumstances. So this is a big problem.

The Treasury should stop interfering with the Department for Work and Pensions. The noble Lord, Lord Skelmersdale, is absolutely right that the Chancellor of the Exchequer magicked £20 million into this equation, without any let, hindrance or, it seems, thought from the Department for Work and Pensions policy experts who have been working on access to credit for low-income families for far longer than Treasury people. This £3 million is a result of that interference and a complete waste of money.

How will the scheme work? The unit that will oversee it will presumably be centrally based. How on earth will it relate to front-line staff to work out whether the lenders are competent to enter minutes of agreement of the kind that are envisaged in the regulations, or whether the claimants and customers of the department—the people who are taking out the loans—will get proper service from them? Any suggestion that that can be done for £150,000 a year is laughable. The Minister may not have time to explain in his winding-up speech the mechanics of how the £3 million will be spent and the running costs thereafter, but I would be very interested to receive details in a letter and happy to share it with others. I do not believe that it can be done in the way which the Government suggest.

I object to the drift towards debt recovery through the benefits system. The benefits system is not a debt recovery tool. Over the years, we have seen increasing numbers of people having their benefits clawed back in circumstances that were admirably described by the noble Lord, Lord Skelmersdale. These families are not in a position to cope with substantial reductions to what are subsistence-level benefits in the first place. As far as I can calculate, 11 types of deductions—there may be more—can already be made from subsistence-level benefits. It is wrong for this House to allow others to be added willy-nilly without very careful thought.

We are being quite casual and wrong in assuming that the situation is acceptable just because benefits are uprated by price protection annually, which seems a perfectly reasonable thing to do from year to year. As an example, unemployment benefit in the early 1970s, when I first took an interest in this matter, was the equivalent to some 20 per cent of average earnings. The equivalent GSA is now worth about 11 per cent of average earnings. It is easy for us all to slip into the ways of thinking that from year to year price protection will give customers and claimants some protection but, over the period, those who are relegated to non-statutory price protection on an uprating basis suffer grievously. Citizens Advice tells me that 40 per cent of its debt clients on income support have no money left at the end each week, so we are dealing with families who are right up against a degree of adversity that some of us would find it difficult to deal with.

I think that these regulations for the first time extend the third-party debt access to contributory benefits. I may be wrong about that, but I would like it confirmed one way or another, because it has always been otherwise in the past. I was around when the system was put together during debates on the Social Security Bill in 1986. It is actually an inheritance from the supplementary benefit system. The noble Lord, Lord Fowler, the Secretary of State at the time, rightly recognised that priority debts—and I emphasise the phrase “priority debts”—should be given some priority in terms of deductions that could be permitted from benefit levels. We have now moved away from priority to levels of debt that are difficult to describe—certainly as they were originally envisaged, at the time when the scheme was set up in 1987. It is wrong to do this now without looking across the whole spectrum of the history that attaches to this system, how it is operating and the context in which it is operating, before we implement piecemeal small amendments of this kind. The third-party debt scheme would have to be reviewed in its totality before I could be confident that what we are being asked to do in these regulations is right.

The full review of access to low-cost credit is also overdue. I commend the work done by Collard and Kempson, and I hope that the Minister adds it to his weekend reading, as it is extremely well argued. As my noble friend Lord Oakeshott and the noble Lord, Lord Skelmersdale, said, it points clearly in the direction, for anyone with any knowledge of these things, to a more intelligent use of and increase in the Social Fund provision in terms of community care grants—grants, not loans—as well as budgeting loans. I am sure that the Minister will resort to saying that the Government have put £90 million in the three years up to 2005-06, and that is very welcome; but the Collard and Kempson study found that twice that will be necessary to meet the identified need.

Finally, if we are looking at ways in which to support credit unions and region-based community loan schemes, as we should be, that means investing in them directly to give them more capability of servicing the needs that they generally meet well. The best credit unions are the biggest ones; the community-based credit associations are the ones that are best able to meet the needs that they face. If it was my money to choose how to spend, I would certainly have invested some £3 million, or gone down that kind of route, rather than pursuing this scheme, which, I am absolutely certain over the coming five to 10 years, will prove to be next to no use at all, hard to administer and dangerous, because it is being done without proper accounting of the background and history of the schemes that it seeks to try to influence.

My Lords, I support the Prayer of my noble friend Lord Skelmersdale to annul the regulations. He has drawn your Lordships’ attention to the widespread criticism from authoritative bodies that have examined the legislation and found it wanting. Citizens advice has commented adversely on it. The Social Security Advisory Committee has most unusually recommended that the measure should not be implemented and our own Merits Committee draws our attention to the Government’s inadequate response to the criticism of the SSAC. In particular, it notes the failure to establish an advantage through proper cost-benefit analysis and a failure to present other options to achieve the same objectives. These are damming indictments which should have caused the Government to reconsider their proposals. As it is, the Government stand alone while these authoritative critics all point to flaws and the potential for muddle and waste in the implementation of the regulations.

My noble friend also reminded us of the well tried Social Fund loans scheme which, although not perfect, operates well and which could benefit greatly from the additional liquidity which this measure diverts to non-commercial financial lenders. This encouragement of third-party lenders removes from benefit officers the opportunity to take a holistic view of individual and family support systems. It is true that nothing can stop individuals going elsewhere to get out of a financial jam but this measure could well remove them even further from the help that departmental officials can provide.

It is also strange that the benefits listed as deductible are relatively restricted. Why do the Government not include in the list tax credits, which are increasingly the vehicle for family support? Is it simply because the tax credit system has become too encumbered to allow this factor to be brought into play?

It is a pity that the Government have pressed ahead with this measure. They have ignored advice and have complicated an already Byzantine system which few of those on benefit fully understand. The benefit system is already too complex to give a sense of direction to claimants. This measure only makes it worse.

That brings me to my final point. Parliament and government quite properly seek to find ways of supporting individuals and families in poverty. They rightly seek to do so within a framework of social responsibility. This includes encouraging even the most disadvantaged individuals to plan and budget for their needs. The Social Fund loans scheme is designed for exactly this and, it is interesting to note, accounts for by far the largest number of benefit deductions. According to the department’s most recent figures in its quarterly statistical bulletin on income support, jobseeker’s allowance and pension credit, the number of deductions in respect of Social Fund loan recovery across all three benefits was, in February 2005, 904,300 out of a total of 1,817,500—more or less half the deductions made—and was, exceptionally, an increase from five years previously of 190,000 when Social Fund loans accounted only for a third of total deductions made. The Government will recognise the increased use of the fund in these figures.

In the future, the move is towards one-stop, single-assessment benefit support. By seeking, at considerable cost, to introduce external agencies—namely, the non-commercial credit unions—the Government dilute the unique and pivotal role they alone have in supporting and nurturing individuals and families in regaining financial control over their lives. This is what the social security system of this country should surely seek to do.

My Lords, I am very grateful for the opportunity to respond to this debate. I shall, of course, do my best to answer all the points that were raised. However, I start by taking the opportunity to explain the Government’s thinking in introducing these regulations as, given the tenor of the debate, I think that there is some misunderstanding. In doing so, I hope to reassure your Lordships about the relevance and value of the scheme that will be created by the regulations—which we have called the eligible loans deduction scheme.

Many people on low incomes are unable to use the financial products and services that are taken for granted by most of us. They often cannot access mainstream bank accounts or low-cost loans; and that imposes real hardship on individuals and their families. In some cases, families turn to high-cost credit or illegal lenders and get locked into a vicious circle of unmanageable debt. The noble Lord, Lord Skelmersdale, in particular acknowledged that point. The regulations were made in the context of the Government’s determination to tackle financial exclusion. The case for doing so and the strategic approach were set out in the Treasury report, Promoting Financial Inclusion, which we published in December 2004. In total, the Government have committed £120 million to tackling the problem.

One of three priority areas highlighted in the Treasury report was to improve access to affordable credit for people on low incomes. A number of measures were announced to support this objective. They included a growth fund of £36 million, which was allocated to credit unions and other third- sector—not-for-profit—lenders, for them to provide additional affordable credit in areas of high financial exclusion. They also included the creation of a financial inclusion taskforce to support and monitor the provision of credit by third-sector lenders. The deduction scheme was proposed in the same Treasury report. It is a scheme that allows third-sector lenders to apply for deductions from benefit where normal loan repayment arrangements have broken down.

When people have to borrow, it is important that they can do so at affordable rates from responsible lenders, but the costs of lending small, unsecured amounts to people on a tight budget can be high. Default rates in the third sector can be as high as 15 per cent. One of the larger lenders in this sector calculated that a reduction in default rates from 15 per cent to 5 per cent could save them up to £1 million a year. The deductions scheme could therefore considerably reduce the risks and costs of lending to people on low incomes. This in turn will help to keep interest rates at affordable levels and allow funds to be reinvested and lent to more people on low incomes.

The issue of cost has been raised, and the impact of the scheme cannot be looked at in isolation. It is part of a package of measures that the Government are introducing to support third-sector lending, including through the growth fund, additional training support, and more flexibility for credit unions in setting interest rates. I can confirm, however, that the level of interest from lenders in the deductions scheme in the few weeks since the regulations were made has been gratifying. By 31 January, we had received 60 requests for the application form to join the scheme, 37 had been returned, and 30 have already followed up by signing the required memorandum of understanding. That level of early interest reflects the potential value of the service on offer and suggests a higher take-up than we first anticipated.

We have kept costs to a minimum. The total cost of setting up the scheme, including running costs until March 2008, is now expected to be £2.25 million. Most of this money was spent on changes to computer systems, but that investment means that future running costs will be small, probably between £100,000 and £150,000 per year.

The financial inclusion taskforce will monitor the cost-effectiveness of this initiative in the context of the Government’s wider package of measures, and I have asked officials to ensure that a comprehensive evaluation framework is in place. The scheme needs a reasonable period to settle in; but in the unlikely event that our evaluation shows that the scheme is not achieving its objectives, we will revisit the policy.

The issue of the impact of multiple deductions causing hardship to customers has been raised. In drafting the regulations, we balanced carefully the aims of the policy on the one hand with safeguards to the benefit claimant on the other. The deduction rates and limits set out in the regulations ensure that the claimant is left with sufficient money to live on after deductions are taken, although I acknowledge that the amount is not overly generous.

The third-party deduction scheme has been in place for about 30 years. Its main purpose is to safeguard the position of people receiving income-based benefits who fall into arrears with essential bills, but deductions can also be made for other purposes, for example to enforce payments for fines or to support children. The deductions scheme works well and we do not believe that a comprehensive review is needed at this time, although I acknowledge that the noble Lord, Lord Kirkwood, took a different view. I can assure your Lordships that we do not amend the scheme or introduce new deductions without careful consideration of the value and consequences of doing so. In fact, although we have previously changed some of the rules governing the scheme, this new eligible loans deduction is the first new type of deduction introduced by the Government since we came to power in 1997. This shows that we do not take such changes lightly.

Concern has been expressed, particularly by the Social Security Advisory Committee, about whether this would encourage lenders to lend irresponsibly or to pursue recovery without taking account of potential hardships to the debtor. In response, the Government changed the regulations to extend the period of default to three months before a loan can be recovered. We extended the memorandum of understanding that all lenders in the scheme are required to sign. It sets out the good practices that lenders must follow in making loans and dealing with default. For example, lenders are required to carry out a risk assessment of a customer’s ability to repay before making a loan. They must handle cases of financial difficulty sympathetically and positively, offering rescheduling and money advice before submitting a case for deductions from benefit. That is in clear contrast to the market to which some poor people might be forced if these facilities were not available to them. Lenders need to demonstrate that they have a policy of following these good practices before they are accepted on to the scheme and must then show they have done so with each individual referral for benefit deductions.

A number of noble Lords, including the noble Lords, Lord Skelmersdale, Lord Oakeshott, Lord Taylor and Lord Kirkwood, referred to the Social Fund. The Government have demonstrated their commitment to the Social Fund budgeting loan scheme. An additional £300 million has been invested over a six-year period from 2003-04 to expand the discretionary loans and grants budget, helping more people who claim income-related benefits to meet and budget for large and unplanned expenditure. We anticipate that by April 2008 the Social Fund will be lending up to £800 million per year. Financial exclusion and inability to access mainstream borrowing does not just affect people on benefits, and the aim of the policy is to expand the supply of affordable loans to all those unable to access normal mainstream credit.

I was asked about complaints regarding the Social Fund. Although none has crossed my desk in the past three weeks, the note that I have from officials says that we are not aware of any particular theme of complaints in that regard. The noble Lord, Lord Skelmersdale, asked if the scheme had gone live. Yes, the regulations came into force on 27 December 2006. The issue of the deduction rate was touched on by several noble Lords. We consider that the current rate of £2.90, in context, is modest and consistent with the amount taken to repay arrears of other debts that benefit deductions may cover, for example rent arrears and utility debts.

Why did we reject the Social Security Advisory Committee’s recommendations not to proceed? We carefully considered its report and, as I outlined, made modifications to further protect the position of the benefit customer. My right honourable friend the Secretary of State for Work and Pensions made a full statement in response to the points raised when the regulations were laid before Parliament on 6 December. He noted calls for an overall review of the third-party deduction scheme but, as I said, decided that it was important to the overall strategy to proceed with the proposals. The Government greatly value the contribution made by the Social Security Advisory Committee in all its activities, including the scrutiny of regulations. We considered the committee’s views on these regulations very carefully and made modifications, but we could not accept its overall recommendation not to proceed.

The costs which I outlined of £2.617 million are considerably lower than the £10 million originally allocated from the financial inclusion fund, and we expect future costs to be lower.

The noble Lord, Lord Kirkwood, asked what the Government are doing generally on high levels of debt. The strategic cross-government approach to consumer debt is set out in the Tackling Over-indebtedness annual report, which was published in August 2006. Our key objectives are to minimise the number of consumers who become over-indebted and to improve support and processes for those who have fallen into debt. As part of this strategy, £47.5 million has been made available to fund the recruitment and training of over 500 new debt advisers. Timely, well delivered money advice can reduce the costs of over-indebtedness to the benefit of the individual and of society as a whole.

My Lords, at this late hour I shall resist the temptation of going over the Minister’s comments line by line. But to accuse noble Lords of misunderstanding the new system, especially when one of the noble Lords involved was the noble Lord, Lord Kirkwood, who has much more experience of these subjects than I will ever hope to gain, is by way of being an insult, and I hope that the Minister does not do it again.

My Lords, it certainly was not meant to be an insult. The ingredient that I felt was missing from the debate was that the thrust of what we are doing is to seek to improve and expand lower-cost credit, making it available to a vulnerable group of people. That, rather than giving lots of extra security to third-party lenders, is the key objective.

My Lords, we all understand that. Indeed, the noble Lord, Lord Oakeshott, said clearly that he understood the intention, but that it was an aspiration. There is no guarantee or even suspicion that this will work as the Government intend.

Right at the end of his speech, the Minister said that he noted the calls for a review. Does it go any further than that? There have been so many calls for a review of the deductions scheme that I think that the time has come for the Government to take a serious look at it. I am not talking about the Government as a whole; I am talking about the DWP and emphatically not the Treasury. I beg leave to withdraw the Motion.

Motion, by leave, withdrawn.