2 Grants versus Loans
2.1 The consultation paper expressed a clear view from the Scottish Government that the successor arrangements should combine the current systems of grants and loans into one grant fund. This view was based on the evidence that providing loans to those on very low incomes simply increases their problems and results in further debt. Whilst loans provide monies for recycling to other claimants, this currently operates through deduction from benefits at source by DWP. This option would not be available to new delivery partners under the successor arrangements and a considerable new infrastructure for the recovery of loans would have to be implemented to support a loans scheme. This would be costly and challenging to deliver by the timescale of 2013.
2.2 The consultation paper asked for submission of any evidence on the operation of the current system that would be relevant to the consideration of the successor arrangements. These comments are discussed below before going on to present respondents' views on the successor arrangements.
Evidence from Independent Review Service cases in Scotland, 2010-11
2.3 The Social Fund Commissioner submitted a substantial annex which provided an analysis of data from the Independent Review Service (IRS) casework in Scotland., Altogether, in 2010-11, the IRS dealt with 6,645 cases from people in Scotland. The evidence that was submitted focused on 251 applications for independent review which were submitted in a one-month period (March 2011).
2.4 The IRS evidence showed that almost half of the 251 applications for independent review included an adult with a mental health condition; a similar proportion included an adult with a physical health condition and about a quarter included an adult with both a mental and physical health condition. Applications also included a small number of cases of children with mental or physical health conditions.
2.5 A significant number of the 251 review applicants saw a healthcare professional regularly. About a fifth had some form of third-party support from people or organisations such as Citizen's Advice, welfare rights organisations, law centres, debt advice services, housing organisations, rehabilitation workers and probation officers. About one in seven review applicants had a representative working on their behalf to help them deal with their review. This was either a family member or friend, or a third party such as Citizens Advice or NACRO.
2.6 The average amount requested by review applicants in this one-month period was £1,113.89. This covered a range from £30 to £9,847.99. The median figure was £805.
2.7 Over eight in ten of the 251 cases examined by the Independent Review Service already had an existing Social Fund debt, either budgeting or crisis loans. Of those with loan debt:
- Eighty-four applicants owed more than £1,000.
- The average combined budgeting and crisis loan debt was £706.23, which was repayable at an average repayment rate of 12.24% of a household's income. Amongst the 85 family units, the average Social Fund debt increased to £1,000.83.
Respondents' views about the problems with the existing scheme
2.8 In commenting on the overall system, respondents consistently made a link between the need for the Social Fund and the current low level of welfare benefits which do not cover the basic costs of living, rather than people's inability to manage their finances. Delays in processing benefits payments also give rise to the need for crisis loans.
2.9 Access to credit or grants from the Social Fund was described as 'a vital lifeline for vulnerable people' as people living in poverty have few other options available to them. They might otherwise turn to lenders who charge extremely high rates of interest. This can compound existing debt problems, and can lead to eviction and homelessness.
2.10 Some of the vulnerable groups reported to be using the Fund were:
- Young people, aged 16-25, experiencing or at risk of homelessness
- People leaving long-stay hospitals, residential care homes or schools and those living in pressured family circumstances
- Social housing tenants (of any age)
- Lone parents on low incomes
- People who are already in debt or who are otherwise financially excluded
- Individuals with mental health problems (including mental illness, personality disorder, learning disability and dementia).
2.11 Young people experiencing, or at risk of homelessness, were said to be 'reliant' on Community Care Grants to purchase furniture and other items for new tenancies. From an organisational perspective, such grants were seen as 'a vital tool in increasing tenancy sustainment'. Single parents on low incomes were reported to need credit to pay for basic necessities such as household appliances, clothing, and furniture, and to pay bills.
2.12 An agency that provides support to people with complex needs noted a declining success rate for Community Care Grants over the past few years, despite applications being completed by professionals on behalf of their clients.
2.13 Many of the identified problems with the current system corroborated the evidence from the literature view discussed in Section 1. Such problems, which can have a substantial impact on Social Fund applicants, include:
- A lack of clarity about which element of the Social Fund is most appropriate for different needs and wide variation in amounts awarded between grants and loans
- Problems of access and getting through on the telephone
- A failure to treat claimants with dignity and respect
- Lengthy waits for decisions and payments, particularly for Community Care Grants causing further personal and financial hardship
- A large and increasing number of rejections, many of which were successful on appeal
- Insufficient resources and reducing levels of awards
- No safeguarding mechanism to ensure the money is spent appropriately, particularly by vulnerable young people.
2.14 For example, the evidence showed that delays in decision-making and payment of Community Care Grants can cause serious difficulties for young people and formerly homeless people moving into new tenancies. Delays create a risk of accumulating rent arrears for accommodation that people cannot live in because it is unfurnished. Housing Benefit regulations mean that most people are not entitled to help with their rent until they physically move into a property. As a result, a significant proportion of new tenants start their tenancy in rent arrears due to delays in the Community Care Grant system. Delays also create bottlenecks in the temporary accommodation system, as people will not leave temporary accommodation until they are in receipt of a grant.
2.15 Given these difficulties with the existing system, devolution of the Social Fund was seen as an opportunity for the Scottish Government to remedy these issues and secure better integration with other aspects of welfare and public policy.
"With the proposed devolution of parts of the Social Fund, the Scottish Government has an important opportunity to tackle both the shortfalls in the current system for claimants and the way in which the current welfare system undermines other aspects of Scottish Government policy." (Third sector)
2.16 Respondents commented that these existing difficulties and the consequent opportunities for the successor arrangements will have to be tackled in the broader context of forthcoming UK-wide changes in the welfare system. There is a need to consider how these different elements will interact and what their potential impacts will be on the wellbeing and welfare of vulnerable people in Scotland.
A single grant fund
2.17 Twenty-nine respondents agreed that the successor arrangements should operate as a single grant fund. Table 2.1 shows the pattern of responses by respondent type. A significant number of respondents gave no direct response to this question and expressed uncertainty about the merits of a single grant fund or generally felt that they did not have sufficient information about the parameters of the future system to voice a preference.
|Respondent type||Yes||No||Don't know||No Data||Total|
|Other public sector||1||-||1||1||3|
|Social Fund Commissioner||-||-||-||1||1|
The advantages of grants
2.18 Respondents saw a number of advantages of offering a single grant fund, in terms of:
- Simplicity: A single scheme would reduce confusion, both among applicants and the people supporting them, about which scheme to apply for.
- Effectiveness: Grants would reduce financial pressures on claimants by avoiding the need to repay loans from benefits, with consequent increased debt and stress.
- Ease of administration and lower costs: A grant scheme would be easier to administer and reduce decision-making time. Loan recovery would have high initial and ongoing administration costs. A standardised grant system would be cheaper to set up and administer and a higher proportion of the budget could be used to directly benefit those in need.
2.19 Those supporting the single grant scheme thought that it fitted well with other key Scottish Government strategy documents, for example, Achieving our Potential and the Child Poverty Strategy for Scotland with their focus on maximising household incomes and protecting people from poverty. There was more limited reference to the fit with the policy principle of early intervention, but a desire to ensure that this did not detract from the need for a safety net for times of crisis.
2.20 Some respondents in favour of a single grant fund nevertheless pointed out that there is a risk that the fund could be exhausted quickly in the current economic climate unless clear and strict eligibility criteria were set for its use. In particular, those local authorities that supported a single grant fund were concerned that potential changes in the number of applicants could give rise to a situation whereby the demand for grants would legitimately exceed supply:
"Although the Council has responded by saying yes to this question there are caveats attached. The amount of non-repayable community care grants and repayable crisis loans under the current Social Fund system for [our] residents is unknown. The current economic climate may increase the demand beyond the funding levels available and therefore there may be a financial risk to the Council." (Local Authority)
2.21 Local authorities were also concerned about any continuation of a loan element and potential financial risk to councils in terms of administration costs.
2.22 In addition, as noted above in section 2.3, evidence was provided by the Independent Review Service, that showed high levels of existing Social Fund (loan) debt among review applicants.
2.23 A single grant fund was seen as making budgetary sense with the potential to be managed more efficiently and to create more impact for the vulnerable people of Scotland. However, it was also this aspect that was seen as most challenging: respondents wanted a fund which was adequately resourced to meet greater needs, ring-fenced, demand-led and not fixed in size.
2.24 Respondents expressed concern that a potential pitfall of a single grant fund might be that eligibility criteria would be higher and more tightly targeted to those deemed most in need. This was seen to contradict current policy thinking on preventative spending, emphasised as crucial by the Christie Commission report. Given this, it was suggested that it may be prudent to offer a single grant fund initially, with a loan fund as a longer term goal.
2.25 Respondents felt a grant fund should be used to facilitate the purchase of otherwise unaffordable items by those with no savings or ability to access affordable credit. It should also be able to be used to cover (often unexpected) costs arising from specific situations, for example, immediate expenses, emergency or crisis and transition from care. There were also concerns about the options remaining for people who may be ineligible for grants. These individuals may nevertheless require access to affordable credit in a financial crisis and might otherwise resort to doorstep lenders.
2.26 One view suggested two grant funds - one for crisis and one for resettlement - in order that tightening criteria for grants does not exclude those who might previously have qualified for a loan.
2.27 Respondents favouring a single grant fund specified features they would want to see in place. These included:
- It should be a last resort and applicants should have been supported to find alternative solutions prior to claiming.
- There should be legal entitlement based on need, with flexibility within the budget to ensure that eligible claimants will receive an award.
- A percentage of any new grant scheme should be reserved for immediate and emergency living costs previously eligible for Crisis Loans.
Uncertainty about grants or loans
2.28 Table 2.1 shows that there was notable uncertainty about the merits of grants or loans, with 12 out of 50 unable or unwilling to give a direct response to the question posed. Comments from these respondents tended to weigh up the potential respective benefits of grants and loans.
2.29 Uncertainty was also underpinned by concerns about equalities and accessibility. Respondents highlighted the Scottish Government duties under the Equality Act and felt it should be clearer how the successor arrangements will address the needs of people with protected characteristics under the Equality Act. It was suggested that this could be addressed by actively engaging equalities groups in the development of the scheme from an early stage. This was seen to be relevant in relation to publicising the scheme, giving accurate and relevant advice, developing eligibility criteria and ensuring that those organisations delivering the scheme have an in-depth understanding of the people using its service and their needs.
2.30 Respondents sought further details about the following specific issues:
- Information on possible models for delivery
- The legal status of loan agreements
- How repayments of loans would be recovered
- Whether claimants would have access to the advance of benefits facility proposed under Universal Credit, which will mitigate the impact of loss of access to affordable short-term credit if Crisis Loans were no longer available.
Preferences and arguments for loans
2.31 Respondents who disagreed with the option of a single grant fund mainly argued that the successor arrangements should continue to offer both loans and grants, since loans may be suitable for some individuals and grants better for others. Others who were in favour of a single grant fund suggested there may be scope to introduce low-cost loans at a later stage. One view was that the successor scheme should operate entirely as a loan scheme, with no grants.
2.32 In discussing the pros and cons of loans, respondents endorsed those arguments put forward in the consultation paper, particularly in relation to their effects on claimants and the costs of administration. In expanding these arguments, they highlighted wider issues including the adverse impact of loans on wellbeing and mental health. There were also concerns about the likely increased scale of demand in the current financial and welfare climate and given lower benefits entitlements.
2.33 Those respondents in favour of loans saw their advantages as:
- Limiting demand: A loan facility provides a check on the volume of requests.
- Maximising resources: Loans enable money to be recycled back into the system, and so help to avoid a situation whereby the fund runs out of money before the end of the financial year.
- Easier to administer: Current arrangements suggest that grants take significantly longer than loans to administer.
- Supporting self-reliance: Loans fit better with the intention of helping people to reach independence.
2.34 In addition, respondents who did not endorse the option of a single grant fund were concerned about the potentially finite nature of any such fund, and that once exhausted, people would have no alternative but to seek loans with high interest rates.
2.35 Moreover, there were concerns from local authorities that 'overstretched' Social Work Departments might come under pressure in two ways. First, there may be an expectation that Social Work will administer the grant fund (which would require additional resources). Second, existing funding might be further stretched to pick up any short-fall in the new grant fund.
2.36 Again, it was felt that, as yet, there was insufficient information available about both the current system and the nature and extent of any future budget, to be able to state a preference for a successor single grant system.
2.37 Local authorities against the idea of a single grant fund emphasised concerns about the potential future administrative burden and timescales of a grant scheme. In particular they felt that there were already mechanisms in place at Local Authority level for recouping money from loans. There was also potential for these mechanisms to be enhanced but this might require additional legislation.
2.38 One respondent saw potential to use loans to enhance financial capability through a loans and savings combination, perhaps involving Credit Unions.
2.39 Exceptionally it was felt that the successor scheme should operate entirely as a loan scheme. If any element of grant funding were to be maintained then there should be a professional involvement in the applicant's support network, for example by a Social Worker or Key Worker, and professional oversight ensuring that any acquisitions made through grants were appropriate.
2.40 Whatever succession arrangements are put in place, respondents proposed that they must focus on providing a simple, fair, fast and transparent service that can respond quickly to people in crisis. However the system should also be able to meet different needs and purposes with attendant timescales.
Access to other sources of funding or low cost-credit
2.41 In discussing the merits of grants or loans, issues about access to other sources of funding or low cost-credit were raised.
2.42 Evidence was provided that those most in need of credit are subject to a 'poverty premium' or extra cost through higher levels of interest (not paid by people in a more secure financial situation), with long-term impacts on other areas of public spending. This issue has been examined in detail by a short-life working group led by the Tackling Poverty Stakeholder Forum (TPSF) organised by the Evidence Participation Change project of the Poverty Alliance. The group's findings reported that the Social Fund is often the only form of affordable credit that people have access to and it is used predominantly because there are no other options other than high-interest lenders or selling items from the home. People often cited that the money was needed in an emergency situation so they needed quick access to cash. Many people had no bank account as they had no identification and no salary to be paid in, thus presenting a barrier to accessing affordable credit.
2.43 Respondents in favour of a single grant fund requested that the Scottish Government give full consideration to other sources of affordable funding for low income families and individuals in need, with specific reference to the potential for integration with other grants administered by local authorities and also to sources of affordable credit:
"If a grant system is adopted the Scottish Government should look to incorporate other grants currently administered by local authorities, so that there is no duplication and so that the most vulnerable can be identified and help targeted accordingly. There will still be a need for low cost loans for people who fall outwith the criteria for a grant. The Scottish Government needs to work with existing providers, such as credit unions, to promote and increase access to their services." (Third sector)
2.44 Respondents suggested that a Scotland-wide approach was needed to working with the voluntary, community and private sectors to ensure access to and delivery of affordable credit, including consideration of repayment arrangements so that the provision of credit does not worsen a household's financial situation. There was support for a continued role for Credit Unions. Low-interest credit or Credit Union schemes would be best linked to the provision of reputable support and advice on financial capability and to ensure people know the options available to them.
Summary of views on grants and loans
2.45 Devolution of the Social Fund was seen as an opportunity for the Scottish Government to remedy a range of difficulties with the existing system and secure better integration with other aspects of welfare and public policy.
2.46 There was qualified endorsement of the proposal that the successor arrangements should operate a single grant fund, with funds available for both daily living and crisis needs. A single grant fund would deliver financial benefits, both to applicants and organisations by reducing complexity, improving effectiveness, lowering delivery and administration costs and maximising available resources. This approach was also seen as fitting well with other key Scottish Government policies.
2.47 There was a common desire to have more information about the parameters of the future system. Respondents in favour of a single grant fund nevertheless expressed caveats in relation to: the level of funding available; tightening eligibility criteria; the need to balance demand and supply; and nature of any ring-fencing of funds. There was fear of potential financial risk to councils if a loan element was continued.
2.48 Those who did not express a clear preference for a single grant fund had similar reservations and required more detailed information on models, legal status of loan agreements, plans for loan recovery, and forthcoming changes concerning Universal Credit and the proposed advance of benefits facility. Uncertainty was also underpinned by concerns about equalities and accessibility.
2.49 In general, respondents who disagreed with the option of a single grant fund did so because they saw benefits in running a system of both grants and loans. The key advantage of loans was in recycling funding back into the system; additionally loans were perceived as potentially quicker to administer and local authorities already had mechanisms for recouping monies.
2.50 A major concern was that successor arrangements would not address the current lack of affordable credit resulting in applicants being forced to turn to high-cost and risky options for borrowing. Respondents called for a Scotland-wide approach to support the development of affordable credit.