Introducing a quality mark for the sector
The financial services market looks like a web of confusion to many consumers. Businesses, individuals and social enterprises looking for credit may all find a bewildering range of choice at first glance. Retail banks including the new challengers, P2Ps, and pay day lenders all have large marketing budgets and a slick offer of speedy access to credit tailored to personal need. But too often the business or consumer goes away empty handed, either because credit isn’t made available or the terms of which it are offered are not suitable.
The Responsible Finance sector exists to serve these markets while also supporting customers on a road to financial resilience through debt management, business planning and other types of support. The term ‘responsible’ has become widely used. But how easy is it for consumers and, as importantly, funders, to easily identify that our brand of responsible finance is embedded in cultural values and commitments?
All Responsible Finance members must support the following goals:
- Increasing access to finance – serving customers not supported by mainstream lenders
- Mission-driven – social enterprises re-investing profits to deliver economic and social benefits, not distributing them for shareholders’ private gain
- Treating customers fairly – clear and transparent about the costs of borrowing, lending only to thosewho can afford to repay and ensuring customers get the best deal and the best outcome
- A personal service – a supportive approach, with decisions made by people for people
- Quality-assured and professional – meeting all Financial Conduct Authority (FCA) requirements and complying with the Responsible Finance Code of Practise.
But it isn’t always easy for customers to readily identify which financial service providers do or do not act responsibly. Similarly potential funders and investors in the sector want assurance that high standards are met and quality controls are in place before undertaking their own due diligence.
So can a quality mark help distinguish who is responsible and who isn’t and increase transparency about lending and management practices?
Our research shows that organisations benefit from a quality mark through:
- Being in a better position to communicate their strengths and respond to funding opportunities;
- Providing a tool to help reflect on performance and focus activities that create the most impact;
- Reassuring stakeholders and customers that services are working well and on track.
But, of course, there are drawbacks, including:
- The amount of resources (time and cost) involved in achieving and maintaining a quality mark;
- The risk of confusion over what’s being evaluated (processes rather than outcomes);
- The potential for diverting effort from service delivery and encouraging organisations to be ‘good enough’ through minimum standards rather than as good as possible.
In an increasingly competitive environment, the potential advantages of holding a quality mark are clear. But the commitment required to achieve and maintain high standards means that it’s crucial to ensure any mark is robust.
Responsible Finance providers (known as Community Development Finance Institutions, CDFIs) in the US started to implement a quality mark, known as Aeris in 2004. The Aeris rating is the CDFI industry’s gold standard for transparency and accountability to investors, grant makers, governments and other stakeholders. With most major investors using Aeris rating reports and data to support their due diligence and monitoring, Aeris-rated CDFIs benefit from strengthened relationships with investors.
Responsible Finance, with funding from the Citi Foundation, is now developing a pilot model of an Aeris type rating or quality mark for UK responsible finance providers, working with members such as Five Lamps and Purple Shoots. This will build on existing regulation and quality standards that the sector already adopts, such as FCA regulation and the European Code of Conduct for Microcredit Provision.
The responsible finance sector has already made great strides to adopt consistent, transparent standards across what is a diverse range of organisations. The Change Matters 2 performance framework, funded by RBS, helped to bring a greater degree of rigour and consistency to how the responsible finance market in the UK assessed itself, making it easier for potential investors to consider the investment potential of individual responsible finance providers. Consumers can also trust that they will be treated fairly. The pilot will build on this work as well, so that any final quality mark adds real value to our members as well as consumers, funders and investors.
Recent consultation on a quality mark for the sector with consumers, funders and investors showed significant support for the adoption of an easily recognizable but robust, evidenced based quality mark. By developing this in partnership with stakeholders and members we are confident it will provide yet more evidence that our members are sustainable organisations committed to serving those often excluded from mainstream financial markets.
Chief Executive, Responsible Finance