Christine Allison, CSFI Financial Inclusion Fellow and Member of the Archbishop of Canterbury’s Task Group on Responsible Credit and Savings, writes about the report of the Financial Inclusion Commission, launched today:

The Financial Inclusion Commission’s report, Improving the Financial Health of the Nation, is a timely review of the state of financial inclusion in the UK, and in publishing into today’s pre-election environment its recommendations aspire to put financial inclusion squarely back into the political arena.

Indeed, since the Financial Inclusion Task Force was disbanded in 2011, attention to financial inclusion in the public policy arena has fallen away, initiatives are fragmented, and the UK has slipped down the international financial inclusion league table. In the banking sector, attention to financial inclusion has similarly declined, in part as the industry recovers from the financial crisis and is required to re-balance risk and comply with new regulation. But banks have also demonstrated a growing preference for large scale transactions, withdrawn from a variety of markets where financial margins are too small, and found non-standard customers too expensive to service. Of particular note is the short term, unsecured credit market where the banks’ withdrawal has facilitated the unprecedented growth of the payday lending industry. This has been hugely detrimental to the financial health of many UK households.

The goal of universal financial inclusion is a state in which “every adult in the UK is connected to mainstream banking, has access to affordable credit, is enabled and encouraged to save, and has basic insurance cover” . This connectivity to financial services is no different from connectivity to mains electricity or mains water, and is an essential requirement for full participation in a modern society. The reality is far from this: nearly 2 million adults don’t have a bank account, around 4 million people took out high cost short-term payday loans, 8.8 million people are over indebted, 60% of the population has no savings and a further group has savings insufficient to tide them over a modest drop in income, and half of all low incomes households has no insurance. In this way, a sizeable part of UK society is excluded from mainstream financial services and lacks financial resilience to cope with income volatility and financial shocks, inescapable features of 21st century life. Related to this financial vulnerability are negative economic, social and health effects. In a developed and wealthy country such as Britain, a country that leads the world in many of aspects of financial services this is a shocking state of affairs.

So what to do about it? And whose responsibly is it? The Financial Inclusion Commission offers a wide array of recommendations which cover six areas, namely national leadership (in government and the FCA), banking and payments, credit and debt, savings and pensions, insurance, and financial capability (education). In offering such a wide array of recommendations, the Commission shows an appreciation that the road to financial inclusion is far from straightforward and differs from person to person and that financial resilience requires actions on a number of different fronts. The Commission also appreciates that no one institution alone can solve the challenge. Joined up, collective action is needed.

To highlight a handful of recommendations.  

Banking and payment recommendations are designed to offer a greater degree of transparency in the cost of various banking products and to make payment mechanisms (such as direct debits) more customer friendly. These are key to attracting people into (and keeping them in) mainstream banking as this is often the first point of contact with a bank and the principal services a customer is looking for. By way of levelling the playing field for new entrant banks and non-bank providers, such as credit unions, there are important recommendations for the new Payment Systems Regulator. As a new fee free, basic bank account is already in the pipeline for introduction by all banks, there is no further recommendation in this area. However, there is an important role to monitor the impact of these new accounts and to assess how well they are meeting the needs of low income customers.

One area where the Commission could have given more emphasis is technology. The report itself reflects on the way in which technology has changed banking and payments, but with regard to serving customers it is mindful of access to technology as yet another route to exclusion. While that is a consideration, the growth of payday lending has shown us that many people have no hesitation in using a mobile phone or other devise to arrange financial transactions. Indeed, research has shown that it is the anonymity of the service which often appeals to people. Ease of access regardless of location is another dimension. Perhaps more can be done through technology as a low cost alternative.

Access to responsible, affordable credit is a crucial part of financial services, and it is an area where there has been seismic shifts in the market in recent years. Huge attention has been given to the conduct of payday lenders who grew their business in response to a major gap in the market. Regulation and a price cap are now reining in the payday lenders, and attention is shifting to other short-term credit providers. Like many commentators, the Commission is encouraging both retail banks and the community finance sector to do more to help address the low income credit gap. There is perhaps a sense that retail banks will struggle to improve their offering as small loans over a short period are administratively intense and carry a high level of risk, and a fully loaded interest rate would carry an unacceptable reputational risk (similar to that incurred by payday lenders).  However, the cost to consumers of unauthorized overdrafts is not dissimilar to payday loans, and if banks embrace the cost of service transparency recommendation of the Commission these costs will become more visible. Alternative providers who might be better placed to meet the credit needs of low income customers, credit unions and CDFIs, feature in the report and the Commission’s enthusiasm for the community finance sector to step into this space is welcomed.  The Commission has some good recommendations to help grow sustainable community finance institutions and close the credit demand/supply gap, but appreciates that this is a long term agenda.

The Financial Inclusion Commission should be commended for its attention to savings and insurance. In terms of building financial resilience amongst the financially excluded, this is as essential step which has been lacking in recent times. (The Archbishop of Canterbury’s Task Group has purposely added the promotion of savings to its remit.) Recommendations that encourage the development of small savings instruments, such as payroll savings,  and their fair treatment in the tax regime are important steps, as is the development of suitable insurance products.

Another area where the Commission should be applauded is the attention to financial capability. Finance is a complicated subject and evidence presented to the Commission confirms that many people are confused by the information they are given. In some cases it confirms an impression that financial services offered by the banks are ‘not for me’. Starting with children in primary school and continuing into retirement, offering financial skills training in a culturally sensitive manner is key. This is an area where civil society can work hand-in-hand with government. In recent months, the Archbishop’s task group in partnership with the Credit Union Foundation and the Personal Finance Education Group has launched LifeSavers, a pilot financial education programme for children in  primary schools starting in Bradford, Nottingham and South East London. If successful, the programme will be rolled out nationally.

The Financial Inclusion Commission has offered a timely report with a comprehensive set of recommendations. It demonstrates that mainstream financial services are currently not meeting the needs of many customers, and low income households are generally least well served and pay a “poverty premium”. Alternative providers who might better meet their needs face significant challenges of their own. What is the best way to square this circle and where does responsibility rest? The Commission clearly feels that the next government, regardless of its composition, should take the lead. In those areas where the government can act directly this looks quite promising. On the other hand, getting the banks and other financial service providers to do things differently, where a quantum culture shift is needed if the requirements of low income customers are to be met, will require considerable more effort. Civil society will need to keep a close watching brief.

Christine Allison