Thank you for the invitiation to speak this morning. What follows are my personal view on the topic I was asked to address:
Most financiers are optimists.
Most financiers are primarily motivated by personal reward.
Some financiers are willing to do wrong to gain personal reward.
The system is too complex to fully understand.
Unintended consequences happen.
If you combine these statements with:
• The ambition of politicians
• The parochialism of regulators
• The imperfection of economic science
• And the lack of knowledge and materialism of consumers
You have a good shorthand description of the fundamental behavioural drivers of the last financial crisis.
I might remind you that this has been the worst in modern times. It has inflicted considerable damage to the global economy and has impacted the lives of many.
The question I will address today is: Has society responded in the best way possible and what role can the Church play in that response?
To respond to that question it is constructive to differentiate the elements of the crisis which arose from poor financial risk management, technically known as prudential risk, and those elements which arose from behavioural failings and mis-selling, otherwise known as conduct risk.
The response to the prudential crisis has been comprehensive. The essence of the measures can be summarised under three headings:
• Firstly, the authorities have drawn up improved rules.
The principle prudential rules govern the minimum amount of capital and liquidity that a bank should hold. I see these rules as defining the boundary within which the banks management take responsibility for their own decisions and their consequences. Good regulation should ensure that the consequences of bad decisions are primarily restricted to impacting capital providers and employees. The new rules undoubtedly have reduced significantly the probability of banks failings and thus potentially putting the wider society at risk.
• Secondly the authorities have strengthened their deterrence capability.
In the UK in particular they have introduced rules to make senior executives accountable for reckless decisions which should have the effect of focusing their minds when making risk decisions.
• And finally the authorities are working hard to ensure that when a bank fails this does not impact on the wider economy. There is more work still to be done in respect to the very large global institutions. However, I do believe it is reasonable to assume that is unlikely in the future that the tax payer will be required to act as a back stop.
Overall this seems a strong and thoughtful response to the prudential elements of the crisis. It recognises that failures and mistakes will happen but reduces the probability of their occurrence and their impact.
In respect of conduct issues, so far the regulatory response has focused mainly on pursuing retribution on firms or individuals who either mis-sold or indeed acted improperly, such as in the case of Libor fixing.
Consumers have also been compensated. In addition, there have been changes to the regulatory regime and firms have significantly enhanced their compliance and oversight structures. Nevertheless overall in my opinion there is still much work to be done to make the system fairer and more ethical.
So for the rest of my time today I will consider the question of how the Church can assist in developing a more ethical system.
Before doing that I would like to address why the Church should be involved at all?
I believe this is a mission of the utmost importance. It is clear that financial distress is one of the principle causes of social detriment. Indeed, Archbishop Justin has emphasised that helping alleviate financial distress should be central to the Church’s mission.
This call, to make helping people manage their money, a key part of the Church’s mission, reflects the belief that how we handle money – as individuals and communities – is central to living full and contented lives: ‘Life in all its fullness’
A few statistics to remind us why:
• Around 8 million adults are over-indebted (MAS),
• Of those, just one in six is seeking advice or help,
• The average amount of unsecured debt in the UK, excluding mortgages, is around £6,000 per household,
• 21 million don’t have £500 in savings to replace a fridge or mend a car,
• Over 1 in 5 adults do not know how to read the balance on a bank statement.
These statistics are in themselves justification for action, but for me, even more moving is encountering the impact of financial distress at the personal level.
Last year on a visit to Christians Against Poverty, I met some of the people they have helped. This brought home to me the extent of the personal suffering that results. Christians Against Poverty have recently published the following statistics about their debt advice clients in 2014:
• 65% visited their GP due to the negative effects of debt.
• 39% were prescribed medication due to negative effects of debt.
• 34% have contemplated or attempted suicide.
• 26% of parents said that being in debt had a negative effect on their children’s emotional wellbeing
• 21% said their relationship had broken down entirely.
These statistics alone demonstrate that tackling these issues would impact every aspect of life, which is why, in my view; the Church should be involved with passion and commitment.
If you agree with the Archbishop that the Church should be involved in contributing to a fair and ethical financial system the what would an ethical system look like?
In my opinion an ethical financial system would:
• Be fair to all (both providers and users);
• Be accessible to all;
• Serve the common good and in particular provide responsible credit
Is the current system ethical?
Against my suggested criteria, clearly not.
It is not at present fair to all. In my view that is demonstrated by the fact that many of the current conduct scandals have occurred within the last two years.
It is clearly not accessible to all, as demonstrated by the fact that 2 million adults are without a bank account.
Crucially many would assert that the common good is not well served. A good example of this is the relative scarcity of responsible credit.
What do I mean by responsible credit?.
In my view responsible credit would have the following features:
• Realistic: offered with the reasonable expectation that the borrower can meet the terms of the contract.
• Affordable: that the interest and charges are fair.
• Flexible: the repayment terms are flexible to allow for unforeseen changes in people’s circumstances.
Another way of expressing this is that the contract should be in the long term interest of both the lender and the borrower. Clearly this was not the case for many high cost credit providers.
It is thus relatively straightforward to assert that the system is not as ethical as we would like, the more difficult question is how can we improve it?
How can we improve it? We have to work with human nature and accept our limitations. It will never be perfect but it can be a lot better.
Changes are needed in at least four areas:
• Firstly, firms and regulators need to strengthen the oversight and deterrence framework in relation to the conduct of institutions. In my view the regulatory rules have a role to play, for example they have undoubtedly been the main driver in reducing high cost short term credit. However the main focus for oversight is the compliance and audit functions within firms themselves. These have been significantly strengthened but there is more for firms to do. In particular I would emphasise that more work needs to be done by firms to improve their underlying cultures. Enforcement and deterrence are the responsibility of both regulators and firms. Again, good progress has been made here in demonstrating that wilful wrongdoing will be punished but in my opinion further resources are still needed in this area. Particular in relation to criminal prosecutions.
• Secondly, firms need to increase the alignment between serving the common good and the actions of their institutions and their employees. Here the focus needs to be on firms creating and sustaining the right cultures and the right incentive systems for their employees.
• Thirdly, society needs to increase the financial capability of individuals and in particular their ability to manage when they find themselves in financial distress.
• Finally, competition and diversity in the system needs to be increased. In particular the community finance sector needs to be strengthened.
o Why do we need community finance institutions? I would suggest there are two principle reasons:
They are local: they have the local knowledge and commitment that is vital to delivering services to the disadvantaged and credit to start-up businesses and local enterprises.
And they are cooperatives: they are member owned and thus from the customer perspective provide the benefits of mutuality. Although I should note that mutuality does have some structural draw backs.
Given this analysis, what does it mean for the church community?
The principle areas where local churches can respond is through helping create a vibrant and sustainable community financial sector and through assisting people to manage their money well.
This essentially has been the mandate of the Archbishop’s Task Group on Responsible Credit and Savings which I have had the honour of chairing for the last two years.
My talk today is focused on the Task Groups’ wider agenda. However, I would like to note that the Archbishop’s words – now known as the ‘War on Wonga’ - were the catalyst for changes in the landscape of the credit sector. We now have tighter regulation and a price cap on short-term credit which has resulted in a decline in payday lending of 68% from its peak in 2013 (CFA, 2015). Citizens Advice have also reported a 53% drop in the number of payday loan problems they helped with between April-June 2015 compared to the same period last year.
The Task Group’s purpose is, however, a wider one. Its formal mandate is:
“To promote responsible credit and savings” – reducing dependency on payday lending and other forms of high-cost credit and supporting the development of a larger and stronger community finance sector.
It also has a subsidiary objective of reinforcing the Church’s place at the centre of local communities.
So how has the Archbishop’s Task Group set about delivering its mandate?
We were not seeking to solve the whole problem but rather to identify a set of practical and achievable actions, through which the Church community can make a difference by harnessing the national and grassroots resources of the Church.
We grouped our actions into four work streams:
• Church Community Support
• Direct Service provision
• And influencing.
In all cases we were not seeking to ‘reinvent the wheel’ and were aware of the importance of building on existing work, of which there is much within the Church already. We are conscious that initiatives will only succeed with the support and enthusiasm of Church communities at a parish level.
Let me comment on each of the work streams in more detail:
Education: Helping society manage money from a more informed perspective is a multi-generational project. Thus, equipping children is a key element of the mission. The Task Group concluded that the Church’s focus in this area should be on primary schools. This reflects the fact that it is both the most neglected area with regard to financial education and the area where the Church has the most influence. Currently only around a third of all primary schools offer any financial education. One in four primary schools are Church of England schools, so there is a real opportunity for the Church to make a difference.
The vision for LifeSavers is to establish an effective national financial education programme for primary schools in order to equip children with the knowledge, skills, attitudes and values to manage money well both now, and in the future. It is a joint initiative with Young Enterprise/Pfeg.
The LifeSavers model consists of three inter-connected components.
• Establishing a weekly savings club for children in every school, administered by a local credit union and run by students under the supervision of adult volunteers.
• Provision of training and classroom resources to help teachers to integrate financial education within the whole school curriculum. This includes a strong values component, based around four core Christian values: generosity, thankfulness, justice and wisdom.
• A whole community approach which actively involves parents, staff and church volunteers, creating opportunities for the wider community to contribute to financial education provision within the school and helping to reinforce positive messages around money.
This approach builds on a number of successful small-scale initiatives in various part of the country, as well as evidence of what makes for an effective financial education programme: starting early, giving children a practical experience of handling money, and ensuring that children receive consistent messages from a range of sources.
The LifeSavers programme is currently being piloted in three areas, Bradford, Nottinghamshire and South East London, and we plan to roll this out to 120 schools from early 2016, benefitting an estimated 30,000 children.
Next I turn to Community Support: The Church of England is the best branch network in the country. A major high street bank has at most 3,000 branches, but the Church of England has 16,000! In order to harness the energy and enthusiasm of this network we have supported the creation of the Church Credit Champions Network that helps local churches to engage effectively with issues of money, debt and credit in their communities.
The Network launched in May 2014 with pilots in London and Liverpool and plans for a wider roll-out.
So far, the pilot has engaged over 200 churches, trained 150 Credit Champions and is on target to bring in 3,000 new credit union members.
The vision is for a countrywide network of clergy and lay people who are trained and supported as Credit Champions. Over 50 credit champions from the pilot dioceses were recently commissioned by the Archbishop of Canterbury and we hope that, in time, every Diocese will have enough of these trained volunteers and clergy to deliver help for all who seek it.
The core mission of these Credit Champions is:
• Support local community finance organisations, such as credit unions, to help them grow and develop. This would include raising awareness among and encouraging active membership by the church members and their communities. And also linking skilled professionals within churches with credit unions through a partnership with Reach UK.
• Ensure that those in financial distress have access to quality debt advice appropriate to their needs. This would include training clergy and lay workers as debt signposters in their local community using the debt awareness and signposting training workshops developed with the Money Advice Trust.
• Work with LifeSavers in local primary schools.
• Provide information and help for those who wish to save and borrow through ethical organisations.
• Encourage the use of Church premises for the delivery of community finance, such as hosting the branch of a credit union.
The pilot programme is expected to generate £2.2m in social value in terms of increased access to more affordable credit and increased volunteering – that’s nearly £7 for every £1 invested in the programme to date. The proposed next stage is an 18-month rollout to 30 diocese which would train 6,000 Credit Champions, benefitting 2.5m people.
Direct Service Provision: Modern technology has opened up many new ways of accessing credit for both small businesses and individuals – mostly through peer to peer lending. The Task Group also looked at the question of whether this new area could be utilised in some way by church congregations for the benefit of the communities they live and work in. Our conclusion was the idea that the Church endorse or operate a specific platform was inappropriate. However, we did conclude it was important for the Church to support and raise awareness of the alternative (non-bank) finance industry to help fill the funding gap in small business lending and contribute to a more competitive and diverse financial system.
Although not part of the Task Groups work I would also like to draw attention to the fact that during this period the church has launched its own credit union for its own employees, the Churches Mutual Credit Union which many of you will be eligible to join.
Influencing: This work stream aims to help and add value to the many existing initiatives designed to promote the growth and development of community finance. This builds on the obvious impact that the Archbishop’s interventions has had on debate in this area.
This is perhaps the moment for me to make a very important point. The task group is fully aware that currently many credit unions are not equipped to the degree necessary to fully engage with our initiative. Success will require not only the commitment of the Church community but also the commitment of many credit unions to further enhance their services and credibility. Central to achieving this is the success of the project financed by government to provide a technology platform. I strongly support this initiative and recognise the importance of it being successful.
The Task Group has also engaged with regulators and public policy makers to acknowledge recognition of achieving the right balance between encouraging growth and new entrants into the community finance sector and consumer protection. In my views there is a risk that the prudential regulations are too concerned with consumer protection and are not focused sufficiently on the benefits to society of growing the sector.
In summary the two principle initiatives coming out of the Task Groups work is that of the Church Credit Champions Network and the LifeSavers programme. As the two year life-span of the task group draws to a close we have given consideration to how these initiatives will continue to be supported .The plan is to create the TOYOURCREDIT FOUDATION which will become an umbrella organisation to oversee the Church of England’s continuing work in promoting responsible credit and saving. The Foundation will oversee the Task Group’s two core initiatives - the Church Credit Champions Network and the LifeSavers financial education programme – but will also have the flexibility to initiate or adopt new or related initiatives
Longer term, however, these initiatives will only succeed if they become embedded in Church community as a core part of their mission. This requires ‘ownership by all’ in the Church. It will only come about through the collective recognition that managing money well is key to living a fulfilled and contented life, and it is the duty of Christians to help people achieve this goal.
For me the most important statistic I have heard so far in relation to the Archbishop’s Task Group is that at least 31 out of 40 dioceses and over two-thousand Anglican parishes have been actively involved in supporting credit unions in various ways.
This is a start, but I for one would not be satisfied until all churches are involved. Only then would I be confident that the initiative is firmly embedded in the church community.
Many thanks for your time this morning - I look forward to answering your questions.
Hector Sants, 5th November 2015