SUBMISSION: Our response to the House of Lords Financial Exclusion Inquiry

September 14, 2016

Select Committee Inquiry Response: House of Lords Select Committee on Financial Exclusion

Executive Summary

The Financial Inclusion Commission is an independent, nonpartisan body of experts and parliamentarians who want to see an improvement in the financial health of the nation. The Commission offers leadership, co-ordination and accountability, and acts to raise awareness, and advocate for change. A full list of Commissioners can be found in Appendix A.

For more information visit our website

We welcome the work of the Financial Exclusion Committee Inquiry in directing further parliamentary and political attention to an issue of great importance to the livelihoods of citizens, and the future economic stability and prosperity of the UK.

Our response is drawn mainly from evidence we gathered in 2015 as part of our own inquiry into the topic, which took evidence from over 80 individuals and organisations, and which led to the publication of a report entitled Financial Inclusion: Improving the Financial Health of the Nation. The submission also considers developments which have taken place since our research was published, as well as our own advocacy work on the topic. We are responding to each set of questions by theme, with the aim of addressing the key points in each area for consideration.

Our primary focus is to encourage leadership and coordination from the Government and policy makers across the country. In particular, our responses to Questions 10 to 13 highlight our key analysis and recommendations for changes to policy the Government should consider. In addition, our 2015 report made 22 recommendations for stakeholders across industry and sector, which can be found in Appendix B.

Definitions and causes of financial exclusion

Q1. Is financial exclusion the inverse of financial inclusion and, if not, how do the two concepts differ? What are the causes of financial exclusion?

Q2. Who is affected by financial exclusion? Do different sectors of society experience financial exclusion in different ways? To what extent, and how, does financial exclusion affect those living in isolated or remote communities?

Q3. What is the relationship between financial exclusion and other forms of exclusion, disadvantage or deprivation? What role does problem debt play in financial exclusion?

Q4. Do individuals with disabilities, or those with mental health problems, face particular issues in regard to financial exclusion?

The Commission defines financial inclusion as the availability and uptake of essential financial services, at affordable costs, to every section of society. Financial inclusion ensures everyone in society has enough skills and motivation to use these services, and to benefit meaningfully from them. Financial capability, i.e. the awareness and skills necessary to participate in the financial system, is a key element which underpins inclusion. The Greek Temple model we have developed (below) highlights how the Commission views the various constituent parts in achieving a financially inclusive society.

Financial exclusion can affect different kinds of people, at any point in their lives, and it is not just about those who are unbanked or underserved, although these groups remain of crucial importance when tackling the issue. Everyone with a stake in society benefits from greater financial inclusion – government, regulators, financial services firms, investors, charities and, above all, consumers. In our report we used a number of data points to highlight how financial exclusion impacts individuals in different ways. These were:

Nearly two million adults in the UK did not have a bank account

Financially excluded people paid a ‘poverty premium’ of £1300 each year

Two million people took out a high cost loan as they were unable to access any other form of credit (in 2012)

Up to 8.8 million people were over-indebted

13 million people did not have enough savings to support them for a month if they experienced a 25% cut in income

50% of households in the bottom half of the income distribution did not have home contents insurance

15 million people reported one or more signs of financial distress

The Commission endorses recent independent research commissioned by the Financial Conduct Authority, leading to a new Occasional Paper on Access to Financial Services[1], which goes some way to identifying the exclusionary barriers within the financial system through the lens of five social and technological trends. These can be summarised as:

Consumers with no permanent address or who move often can have problems opening bank accounts and gaining access to credit, as this affects bank verification of their details.

Those aged 65 and over and people who are disabled or who have experienced serious illness have, in general, poor access to insurance.

Living in rural areas of the UK with poor internet access makes it difficult or impossible for people to manage their money online; and the lack of even basic digital skills limits use of online financial services.

Not having a passport or driving licence causes consumers problems in obtaining a bank account, as these are the typical standard documents used by banks to verify identity.

Financial exclusion can have an especially detrimental impact on people with low incomes and/or those struggling with debt due to lower levels of financial resilience, leaving people susceptible to greater harm when experiencing a change in circumstances. As mentioned in the same Occasional Paper, research suggests that people on low incomes have a greater chance of experiencing financial exclusion problems if they are, for example: unemployed; have disabilities; are unable to work due to illness; are caring for someone; are single parents; are single pensioners; or are from certain black and minority ethnic groups.

The primary role of the Commission is to provide a leadership role in driving forward policy solutions to financial exclusion issues, and we support the work of stakeholder organisations across different fields, whose focus is more on determining root causes.

Recommendation: The Committee should establish an agreed definition for financial inclusion, to act as a driver for its own recommendations for policy development.

Financial education and capability

Q5. Are there appropriate education and advisory services, including in schools, for young people and adults? If not, how might they be improved?

Q6. How can financial literacy and capability be maintained and developed over the course of a person’s lifetime?

The Commission found that financial education provision and quality in the UK has been disparate, with varying levels of availability and quality across geography and school type.

Financial education has been on the curriculum in Scotland, Wales and Northern Ireland, and was introduced in secondary schools in England in September 2014. But this excludes academies, free schools and independent schools, meaning that fewer than half of secondary schools in England will be obliged to provide financial education. And the requirement is limited to only a few hours of education in the secondary curriculum, which is far from enough.  Academic research suggests that, to be effective, financial capacity building needs to start at primary school, and continue throughout the school years. Research suggests that by the age of seven children have developed several basic ‘finance’ behaviours such as counting, and have developed an understanding of the value and exchange of money[2].

Moreover, schools are provided with no extra resources to enable them to deliver this requirement and most teachers feel ill-equipped to provide guidance to students. Charities such as Young Enterprise, MyBnk and The Money Charity offer support to schools either by training teachers or sending specialists into schools to teach the subject directly, but their capacity is extremely limited.

New Zealand’s Ministry of Education, by contrast, has direct responsibility for financial literacy in schools. This is a long-term strategy to provide children with a grounding in the basics of personal finance at a time when they are developing attitudes towards money management.

Recommendation: Financial education should form a critical part of education from primary school through secondary school. This should be across all nations of the United Kingdom, and HM Government should support schools with the resources necessary to deliver this commitment.

People do not generally think about money in isolation, separate from what else is going on in their lives. Initiatives could therefore be more successful when delivered at key life stages and events when people’s finances change alongside their circumstances. Education should also cover cultural, as well as technical, aspects of money management.

Recommendation: Financial education should be delivered throughout people’s lifetimes, from primary school right through to retirement, focusing on life stages and events, such as marriage or civil partnership, the birth of a child, illness or unemployment and retirement.

Addressing financial exclusion

Q7. What role should the concept of ‘personal responsibility’ play in addressing financial exclusion? Is appropriate support available for the most excluded and, if not, how should support be strengthened? What role should Government, the charitable sector and business play in tackling financial exclusion?

Q8. Are appropriate financial services and products available for those who are experiencing financial exclusion? What might be done to address any deficit? What role should banks play in increasing access for those most at risk of exclusion? What is the role of the Post Office in providing access to financial services for such customers, and how might that role develop?

The Commission believes that a collaborative approach involving stakeholders from all sides is necessary to tackle financial exclusion. People are increasingly being required to take on greater personal responsibility, in particular through reform of the welfare system, and it is important that individuals are able to access the skills and information necessary to allow them to develop the resilience and capacity expected of them.

Regarding products and services, excluded people require convenient products that should be made easily available, but there is growing recognition that this is not enough. Products should be appropriate and affordable for the circumstances people find themselves in. They also need to adapt to their needs over a person’s lifetime and if possible, be able to improve financial capabilities.   The FCA’s Access to Financial Services Occasional Paper illustrates how even the savviest of consumers can face issues with products which do not meet their needs.  This has huge implications for social policy makers, for example, many consumers want to protect themselves and their families from future financial difficulty and not become a burden upon the state but at the same time can find themselves locked out of affordable and/or appropriate insurance products. Products which help people budget and control their money should be supported and encouraged. We particularly welcome research being conducted into improving the provision of products for those with physical and mental health challenges and any efforts being undertaken to improve access to insurance.

The digitisation of consumer banking, as well as the growing trend for banks to close down under-used and remote branches, has implications for financial and digital exclusion – in particular for the elderly.

Recommendation: Financial institutions should ensure that inclusion considerations are built into their decision-making, product design and service provision. They should continue the good work that many are already doing to promote digital skills, as well as ensure that digital products are adequate, and mindful of those with more complex needs.

The Post Office, more trusted than the commercial banks and still with an extensive network of branches, has a role to play in providing financial access for the underserved. The Post Office Card Account (POCA) provided the government with a low-cost way to make payments of benefits and state pensions, but the POCA has always had limited functionality, being unable to accept payments other than state benefits (such as wages) and to operate direct debits or standing orders.

Recommendation: DWP should promote inclusive and properly functional alternatives to POCA, in particular to support the introduction of Universal Credit, which meets the new basic bank account industry standard agreed by HM Treasury, including electronic payment facilities.

Accessing affordable credit

Q9. What has been the impact of recent changes to the consumer credit market – such as the capping of payday loans - on those facing financial exclusion? How can it be ensured that those in need of affordable credit can access appropriate products or services?

In our 2015 evidence gathering, we heard that many people had difficulty accessing appropriate credit at affordable rates, and that the use of unaffordable or poorly managed credit could lead to problems with debt.

The FCA cap on interest rates charged by pay-day lenders was welcome extra protection for vulnerable consumers, although it didn’t apply to other forms of high cost credit, such as credit cards and bank overdrafts. Moreover, it regulated the supply of credit, but could not regulate the demand, which continues to grow. It has, however, highlighted the problems faced by consumers with insufficient credit history or poor credit ratings, who cannot access mainstream sources of credit.

Recommendation: The Commission believes that measures need to be taken to increase the supply of affordable credit, including alternative forms of credit, Credit Unions and CDFIs. There also needs to be a smarter approach to credit scoring, in particular through a broader use of data, such as regular payments for non-credit products, and evidence of financial education and capability training. Consumers being told the main reason why they have been declined credit would also help consumers know what to do next.

We continue to be concerned that as a result of the low-income credit gap, more consumers are turning to illegal money lenders for their credit needs. The Government has a role to play in ensuring that safeguards are in place to protect against loansharking. The Commission was pleased to see funding for the Illegal Money Lending Teams secured, following a campaign by the Commission, MPs and others for continued Government support for these vital units in December 2015.

Recommendation: The Government should maintain support for the funding of specialist Illegal Money Lending Teams in England and Wales.

Government policy and regulation

Q.10 How effective has Government policy been in reducing and preventing financial exclusion? Does the Government have a leadership role to play in addressing exclusion?

Q11. What has been the impact of recent welfare reforms on financial exclusion?

Q12. How effectively are policies on financial exclusion coordinated across central Government? Is there an appropriate balance and interaction between the work of central Government and the work of local and regional authorities, and the devolved administrations?

Q13. To what extent is the regulation of financial products and services in the UK tackling financial exclusion? Are alternative or additional regulatory interventions required to address financial exclusion? What balance should be struck between regulations and incentives for financial institutions?

Financial inclusion has strong macroeconomic implications, and ought not to be simply considered as a corporate social responsibility objective. Financial Institutions should be encouraged to see the commercial benefits of pursuing strategies which promote financial inclusion, both for the benefit of business, as well as to the advantage of society as a whole. Research by the Bank for International Settlements (BIS) in Basel suggests that having all consumers and firms inside the financial system has beneficial effects on financial and monetary stability. For central banks, financial inclusion has a positive impact on long-term economic growth and poverty reduction and important implications for monetary and financial stability. For example, greater inclusion should make interest rates more effective as a policy tool and may facilitate central banks’ efforts to maintain price stability. Financial inclusion helps more consumers to smooth their consumption over time, potentially influencing basic monetary policy choices including which price index to target. It also encourages consumers to move their savings away from physical assets and into cash deposits.

In recent years, Government has not provided the leadership needed at national level to coordinate and monitor financial inclusion. Since the Financial Inclusion Taskforce was disbanded in 2011, no single government department has been tasked with promoting financial inclusion.

Government departments, devolved administrations, local authorities, voluntary organisations, regulators and industry are all working in different ways to address aspects of financial exclusion. Yet there remains a need for clearer leadership and coordination. Without a clear lead from Government, the regulator finds it difficult to justify mainstreaming action to promote financial inclusion.

Recommendation: To show clear leadership the Government should:

Designate a senior minister as the government lead on financial inclusion, and financial capability, with the title of 'Minister for Financial Health'.

Establish a Ministerial champion for financial inclusion in each relevant Government Department, as well as in the devolved administrations.

Establish an independent, expert group to report to the Minister for Financial Health on emerging issues and on progress toward financial inclusion, similar to the Financial Inclusion Taskforce. 

Provide the FCA with ‘political cover’ and a specific and clear direction to promote financial inclusion. At present, financial inclusion sits within the FCA’s competition objectives and the FCA “may have regard…for consumers in areas affected by social or economic deprivation”. A new Financial Inclusion commitment should sit within the FCA’s Consumer Protection Objective, rather than within its Competition Objective.

Financial technology (Fintech)

Q14. Does the Government have a role to play in ensuring that the development of financial technologies (FinTech) and data capture helps to address financial exclusion? If so, what should this role be?

The rise of FinTech as well as broader innovation in the credit and payments landscape should increase financial inclusion by providing tools and education for those who are not catered for by existing services. Prepaid cards, and the technology which underpin them, can aid users in managing their money, and can be distributed by public sector bodies for the disbursement of welfare payments. Money management apps and new innovations in Credit Scoring using non-traditional methods can help provide financial capability, institutional trust and the necessary access to financial products for those facing barriers- in particular among the underserved and unbanked sections of the population.

The Commission is concerned that digital financial services are not equally accessible across society, and that the benefits of technology may be less likely to reach those on low incomes, since they are a less profitable market. FinTech innovation needs to go hand in hand with a broader digital inclusion strategy, which identifies that many of those at risk of exclusion either do not have physical access to technology, nor the requisite skills to use it to meet their needs. Ofcom estimated that 34% of UK adults did not have a smartphone in 2015 (first quarter), and last year’s House of Lords Digital Skills Inquiry discovered an unfolding crisis.

Recommendation: Financial inclusion should form part of a broader digital skills strategy, and digital inclusion needs to be a core consideration for any FinTech related policy innovations. The Government should continue its support for FinTech in the UK, in particular technology which tackles financial exclusion, in areas like cashless technology, alternative credit scoring, affordable insurance and facilitating money management.