House of Lords Select Committee on Financial Exclusion – Call for Evidence
Response from the Association of British Credit Unions Limited (ABCUL)
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?
Logically we believe that financial exclusion is the inverse of financial inclusion. They simply denote opposite sides of the same concept. That said, in both respects there are matters of extent of exclusion / inclusion and nature of exclusion / inclusion which are driven by the concept’s nebulous and cross-cutting dynamic. These aspects of extent and nature come about in respect of how people become excluded – i.e. its causes – as well as who is affected and in what respect – i.e. in relation to which type of financial service and at what time of life.
Financial exclusion is the phenomenon of groups or individuals either being denied access, or opting not to access, financial services. In turn this places them at a disadvantage or precipitates negative financial outcomes such as: a failure to save for retirement; over-indebtedness; not having access to discount prices; a lack of protection against unforeseen events (i.e. lack of insurance). As well as negative financial outcomes, exclusion can indirectly cause an inability to participate fully in society: diminished employability; lack of access to cash; inability to access online services, etc.
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?
There are a range of sectors of society who are affected by financial exclusion. The most obvious groups are:
- the poor and welfare-dependent – through inability to manage bank accounts without penalty charges or lack of access to affordable, low-interest credit
- those living in isolated communities – through lack of physical access to financial services branches
- the old – denied services such as certain insurance or credit
- those with disabilities – through a lack of accessible channels
- those in particular geographical locations affected by regular natural disaster (e.g. flooding) – inability to secure affordable insurance
- the young – those with a limited credit history, for example.
- those not native to the UK – often have difficulties opening bank accounts.
- those who have gone through bankruptcy or other distressed credit history – can struggle to access transactional accounts or credit
Different sectors are affected in different ways but the effects can be generalised. A lack of affordable credit increases credit costs, for example; a lack of insurance can leave one vulnerable to unforeseen events. Isolation and remoteness present particular difficulty for those on low or fixed incomes who tend to be less visible in rural communities. The lack of physical services in rural locations can exacerbate or expose vulnerabilities to other forms of exclusion. Rurality and bank branch closure also has particularly difficult effects on small business.
Q3. What is the relationship between financial exclusion and other forms of exclusion, disadvantage and deprivation? What role does problem debt play in financial exclusion
There is a strong correlation between poverty and deprivation and financial exclusion. Problems created by low income can create the conditions for self-exclusion since financial systems do not accommodate the needs of those with limited means. Examples of this include the unpredictable schedule for Direct Debit payments and the risk of penalties when payments are missed as against the cost benefits that utilities and others attach to this payment method or credit with fixed, inflexible repayment schedules which do not fit the need for low income people in terms of flexible payments.
Problem debt is a key result of financial exclusion – those without access to sources of affordable credit resort to borrowing from high-interest lenders and this can exacerbate problem debt in that high interest can cause debt to accumulate much more quickly than it would otherwise. Accessing credit from certain providers can then be used as a negative flag on a credit report, thereby further limiting access to affordable credit. Subsequently, previous problem debt can further exacerbate exclusion from affordable sources even where this is historical. Negative credit history can also exacerbate exclusion from, for instance, transactional bank accounts such as in the case of undischarged bankrupts.
Q4. Do individuals with disabilities, or those with mental health problems, face particular issues in regard to financial exclusion?
Those with disabilities and mental health problems have different needs which are not well accommodated by financial institutions and their standardised policies and procedures. In the case of disabilities this is most often the case with limited availability of accessible formats and channels. In relation to mental health, the work of Martin Lewis’ charity, The Money and Mental Health Policy Institute, has been instrumental in highlighting the issue such as those with bi-polar and the possibility of their overspending during manic periods. Those with diminished mental capacity can also make financial decisions which don’t align with financial wellbeing. Financial institutions need to be better able to respond to people with specific needs such as these.
Q5. Are there appropriate education and advisory services, including in schools, for young people and adults? If not, how might they be improved?
Financial education in schools could be improved but needs to be effectively funded. Schools will always have different priorities and the provision of financial education is unlikely to be high on the agenda given that it is not assessed. This could be part of an expanded PSHE provision in schools. This education is currently provided by teachers who are not properly or appropriately trained and often do not feel confident in delivering education of this kind and so work to provide dedicated teaching resource would be welcome.
Many credit unions provide financial education in schools through the provision of school savings clubs. A notable example of this is the Lanarkshire Credit Union which has engaged more than 80 schools, recruited more than 7,500 junior members and has accumulated more than three quarters of a million pounds in savings. These savings clubs are provided alongside financial education classes and the credit union has developed a compelling game concept for boosting financial education and promoting good financial health. While these are hugely valuable interventions, they can only be provided if the credit union is supported to deliver it with funding. Lanarkshire has received more than £100,000 in recent years to support its work with schools.
Advisory services are limited and generally focus on those with problem debt. The key here is finding a sustainable source of funding. The successes in debt advice demonstrate this with funding for Citizens Advice and StepChange Debt Charity coming from creditors and the funding for Money Advice Service’s debt advice coming from the financial services industry. In order to expand advisory services and education more generally a sustainable and viable source of funding needs to be found as this activity cannot be conducted without appropriate funding from some third party source. In the case of the debt advice funded by Money Advice Service, it has taken too long to provide for consumer credit firms to make a contribution to this funding and we hope that this will be done soon.
Q6. How can financial literacy and capability be maintained and developed over the course of a person’s lifetime?
The work that the Money Advice Service has undertaken in developing its Financial Capability Strategy has uncovered and brought together a number of key insights as to how financial literacy and capability can be maintained and developed. Within this there are a number of key areas. Firstly, it is important to target adult literacy and capability interventions at key life events such as: leaving school / college / university; buying first home; having children; approaching retirement. These are times at which people are considering their financial position and are more disposed to positive interventions. MAS has also played an important role in the provision of generic information and guidance.
We would also point to the role of regulators and financial service providers in developing and designing services which better meet the needs of consumers and contribute to good financial outcomes. The credit union sector is a good example to follow her in relation to, for example, the work it does to provide savings and credit services via payroll deduction which has proven benefits in making services easy to access and therefore encouraging good financial outcomes. These include successful loan repayment and the accumulation of savings building on the behavioural economics literature around the benefits of default settings to tackle inertia. Another example of this in the credit union sector is the role of requiring a small amount of saving alongside repaying loans as a default. This has been shown – particularly in work by the Fairbanking Foundation – to have strong benefits in terms of helping those who have never saved before to begin a savings habit and turning an engagement with credit into an opportunity to do this. A larger role for credit unions in these areas would greatly support better financial capability.
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?
In general, we do not believe that personal responsibility should be a primary factor in seeking to understand financial exclusion. While of course personal responsibility is crucial and the ideal outcome would be for all consumers to take full responsibility for their financial position it is also the experience of many credit unions that in tackling exclusion we often find that consumers are not being well served by the market or find themselves excluded despite their best efforts and that, therefore, interventions to design and develop services which better meet peoples’ needs is a more fruitful area to pursue. As such, it should be seen as the responsibility of policy makers, regulators and the industry to provide mechanisms which support good financial outcomes.
Financial exclusion is a cross-cutting phenomenon with implications for a range of social, health and other problems and therefore often falls between various stools. With public funding under pressure interventions to tackle financial exclusion can be deprioritised. Government should take a leading role and fund interventions which will support financial inclusion as long as such investment is done on the basis of sustainable solutions and will therefore have net benefits for society. An example of this is the Credit Union Expansion Project which is an investment by Government in financial provision which supports long-terms sustainable provision to the otherwise excluded. Another example of this is the creditor-funded provision of debt advice already detailed above.
The regulatory community can also play a more active role in encouraging the financial services sector to design and support products and interventions that support financial inclusion and positive financial outcomes.
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?
Some appropriate financial products and services are available – such as those provided by credit unions – but these generally remain subscale and therefore require greater investment and support. ABCUL has been working closely with Big Society Capital to develop a case for social investment in credit unions which may support this growth and investment agenda. Similarly, we would encourage a very tight focus on areas which build long-term sustainability in institutions. The Credit Union Expansion Project is an example of this in that it seeks, through collaborative business models, to help credit unions to sustainably continue to serve excluded groups. The vision and foresight of the Department for Work & Pensions here is to be commended.
The positive services and interventions already provided by the likes of credit unions should be supported and invested in by the banking community if it is not able to emulate such services directly. Lloyds Banking Group, Citi and Barclays Bank are all examples of UK and international banking groups that have invested and supported British credit union development and we hope that they will be encouraged to continue to do so. The sector is enormously grateful for this support which has seen a diverse range of action from direct investment in credit union capital reserves by Lloyds, to investment in training and business intelligence tools by Citi and corporate volunteering and expertise sharing by Lloyds and Barclays. This work is to be commended.
Longer term there is the potential for credit union services to be made available via the Post Office once the Credit Union Expansion Project and Fiserv Agiliti model that it is developing has been implemented. This is particularly powerful given the extent and reach of the Post Office network. We envisage a relationship whereby credit unions participating in the Agiliti model could offer a full cash desk and loan application service via their local Post Office. This could potentially boost footfall in Post Office branches, making them more sustainable, while supporting the reach, accessibility and sustainability of credit unions.
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?
The effect of the introduction of FCA regulation into the consumer credit market and the cap and other requirements on payday lenders has been to disrupt the traditional payday lending model very successfully. Other less scrupulous lenders have also been forced out of business or into more responsible forms of lending which take better account of consumer needs. This is largely positive as, for example, the bullet-repayment payday loan is no longer very evident in the market. However, evidence from debt advice charities now shows an increase in arrears among priority debts such as utilities, tax and rent which is of serious concern.
In order to ensure that there is a sufficient availability of affordable credit, measures need to be taken to continue to support the expansion and growth of credit unions as the main source of affordable credit to excluded communities. As already outlined, it is crucial that such interventions support sustainable business models. Policy-makers can support this in the following ways:
- Supporting and investing in collaborative and shared business models such as under the Credit Union Expansion Project – through collaboration, credit unions can gain scale while remaining responsive to local needs. Investment should seek to encourage more collaboration between credit unions to support sustainability.
- Payroll deduction and employer partnerships are crucial. Financial exclusion, over-indebtedness and related phenomena are not limited to the unemployed or otherwise out of work and the provision of credit union services in the workplace can have significant benefits for low income workers. The new credit union for the retail sector is a good example of how the sector is innovating in this regard. Payroll partnerships also have significant efficiency and sustainability benefits for credit unions and productivity benefits for employers making them a win-win.
- Proportionate regulation is vital. While it is important that credit unions are well governed and run soundly with proper risk management and prudential oversight, the sector also needs the flexibility of a proportionate framework in order to be allowed to grow. Innovation and diversification is crucial if credit unions are to develop and proportionate regulation is critical to this.
- The credit union legislative framework needs also to support innovation and provide for a credit union sector which is able to adapt to meet member needs sustainably. Current ambiguities in the legislation threaten to stifle innovation in some areas.
- Measures to encourage and support inward investment in balance sheet growth are crucial. Credit unions are limited in their growth potential by their ability to accumulate capital and encouragement of external sources of support, such as subordinated debt and deferred shares would help to accelerate this. Soon to be published research from Social Finance on social investment in credit unions suggests there is a case for supporting this through providing a tax relief for investment in credit unions.
- Credit unions tend to lack access to skills and expertise in key leadership and governance positions which can limit their growth and development. There have been some exciting initiatives around corporate volunteering and skill-sharing from some key supporters of the sector and extension of these schemes would be beneficial.
Q10. How effective has Government policy been in reducing and preventing financial exclusion? Does Government have a leadership role to play in addressing exclusion?
Government policy in respect of supporting credit unions has been strong in its prioritisation of capital investment in sustainability. Previous support, while welcome, did have a tendency to breed dependency and distort business models. We suggest other interventions seek the same sustainable outcomes. More generally the economic environment and the Government’s response to this have put extra pressure on services which might otherwise support inclusion while the low interest rate context has had a discouraging effect upon saving. Government should take a leadership role in tackling exclusion to the extent that it supports, invests and co-ordinates sustainable solutions to the problem. These should be driven by market actors and providers but encouraged by Government.
Q11. What has been the impact of recent welfare reforms on financial exclusion?
Welfare reform has seen the incomes of some groups put under pressure and this necessarily has an impact on levels of financial inclusion. At the same time reforms have placed an emphasis on personal responsibility and though this can be beneficial, some find it challenging to effectively manage their own financial resources. Personal debt levels continue to rise while saving levels are below where they need to be.
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?
Policies across government on financial inclusion could be better coordinated. There is no clear cross-government responsibility for tackling financial exclusion and as a cross-cutting issue which impacts a range of government policy, this can leave gaps. Local government provision is patchy and commitment to tackling financial exclusion is hampered by pressure on budgets. The Welsh Government has been the most consistent in maintaining a focus on financial inclusion with some positive results but the long-term sustainability of their interventions is not proven. A central focus on financial exclusion issues could be beneficial providing its focus was on supporting market- and provider-led sustainable interventions.
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
Regulation of consumer credit has seen a marked improvement since the introduction of FCA oversight and rigour. Under the OFT meaningful regulation was non-existent in this market. More intervention is needed – particularly in the payments systems – in order to support wider consumer benefits outside of just credit and debt issues. The advent of the Payment Systems Regulator is driving positive changes here already. The problem of financial exclusion is one of market failure and therefore regulatory intervention and incentive frameworks are critical to delivering results and improvements.
Regulatory interventions need to strike a balance between consumer protection and maintenance of financial stability and the need to support innovation, competition and choice for consumers. Sadly we sometimes find regulatory authorities becoming a barrier to innovation and competition in the credit union space and we hope that they will take a more flexible approach in future.
Q14. Does the Government have a role to play in ensuring the development of financial technologies (FinTech) and data capture helps to address financial exclusion? If so, what should this role be?
FinTech holds many possibilities for supporting financial inclusion such as helping people to more effectively budget or gain access to the best financial deal. It also holds the possibility of allowing the provision of services which support inclusion more cheaply and therefore making such products and services more sustainable.
However, it is important not to complacently assume that FinTech will solve financial exclusion on its own without higher-level regulatory and other interventions. We would suggest that Government considers incentives – either regulatory or otherwise – which are open to any firm (FinTech or not) that can demonstrate that it is tackling the problems of financial exclusion in some way.
The full PDF version of this reponse is available to download on the right-hand side.
ABCUL – September 2016