Recommendations to promote sustainability of community finance and for banks and other lenders to work more closely with community finance firms
The UK Financial Inclusion Commission has today published its report “Financial Inclusion: Improving the Financial Health of the Nation” which calls for financial inclusion to be a higher public policy priority. The Commission, an independent body of experts and parliamentarians which focuses on personal rather than business finance, has set out its vision for a financially inclusive United Kingdom. It wants financial services that are accessible, easy to use and meet people’s needs over their lifetime. This includes every adult having “access when necessary and appropriate to affordable credit from responsible lenders”.
The Commission identified challenges in
- Leadership: the lack of a national financial inclusion strategy
- Credit: the credit gap for people on low incomes who are not served by the mainstream market.
- Savings: Many people lack financial resilience. Savings products are not suitable or rewarding enough for those wanting to save small sums.
To address these challenges the Commission has made a series of recommendations, including:
- 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 interested Department and in all 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
- Place a statutory duty on the Financial Conduct Authority to promote financial inclusion as one of its core objectives
- Establish an independent, industry-funded think tank to work with consumer groups, tackle regulatory challenges and facilitate innovation in the interests of financially excluded consumers
- The new Payment Systems Regulator to ensure Direct Debits and Faster Payments are accessible to small organisations and new entrants
- Government to enable the use of public sector and non-traditional data in credit scoring, with safeguards, to make access to financial services easier for excluded groups
- Government to lead a collective effort with retail banks and others to promote wider data disclosure and to fill the low income credit gap which has been widened by departing payday lenders
- Promote measures to make community finance institutions more sustainable, such as government lifting the APR cap on credit unions, lenders and investors developing a better understanding of business models and risk, and community lenders attracting a wider customer base
The Commission took evidence from a wide range of stakeholders, including the CDFA’s Ben Hughes and our members Fair Finance, Moneyline and Scotcash.
Fair Finance told the Commission that the key to the CDFI becoming investible has been a robust business plan, efficient processes and actively turning down subsidies. Santander said that the decision to lend to Fair Finance on a commercial basis was a ‘relationship-led’ model, where the bank invested time to develop a deep understanding of Fair Finance’s business model, needs and risks.
The Commission commended this approach and has recommended that banks and other lenders work more closely with community finance firms.
The Commission suggests that community lenders might become more sustainable by reaching a wider market, therefore making themselves more attractive to commercial lenders and social investors. This might be achieved through learning from good technology and marketing practices developed by others in the market.
The Cabinet Office is facilitating the development of an online portal to make community lenders more readily accessible to consumers, in partnership with the private sector and the CDFA.
The report also suggests that the UK could learn from the Community Reinvestment Act in the US.
Financial inclusion in numbers
- Nearly two million adults in the UK do not have a bank account
- Financially excluded people pay a ‘poverty premium’ of £1,300 each year
- 13 million people do not have enough savings to support them for a month if they experienced a 25% cut in income
- An estimated two million people took out a high-cost loan in 2012 as they were unable to access any other form of credit
- 50% of households in the bottom half of the income distribution do not have home contents insurance
- Up to 8.8 million people are over-indebted
- 15 million people (31% of the population) report one or more signs of financial distress