Over the summer, the Lab convened the Transforming Finance Network to develop knowledge about how the UK’s policy response to COVID-19 has affected and is changing the financial system. In this blog, the Lab’s Head of Programmes Marloes Nicholls shares a summary of her key takeaways.
The role that the financial system has played in shaping our lives under the pandemic has been under-examined. At the same time, the crisis response of policymakers and regulators is affecting the sector in ways that will determine how we recover from the crisis. Here are four key issues to confront, if finance is to help build back better:
1. A debt tsunami
At the end of last year, 3.2 million people in the UK had severe debt problems, and 9.8 million were showing signs of financial distress. From this starting point, it is no surprise that debt has mounted to a critical point over the course of the crisis – especially since the Government has asked people and businesses to take on additional debt to carry them through the last few months. For instance, temporary “freezes” on loan payments are still to be paid up later, with added interest.
StepChange warns of an impending debt “tsunami”. As of late May, each adult faced, on average, £1,076 in rent arrears and £997 in debt. The impact will be long-term. Citizens Advice estimate that it can typically take the people they help almost three years to pay back just their priority debts. Tragically, they find that it is key workers and people directly affected by coronavirus who are most likely to have fallen behind on their bills.
Debt can ruin lives. It is also a drag on the economy. The government, financial institutions, and others, urgently need to provide further debt relief. In the short term, they could extend freezes, cancel interest, issue grants, and better resource debt advice services. Looking forward, we need to rethink the role of debt in our economy and society. It is unjust and counterproductive to force people living in poverty (prior to COVID-19 that was already nearly 20% of the population) to take on debts to survive. Alongside measures to tackle poverty and support a responsible lending sector, we should examine ways to write down exploitative and unpayable debts, and prevent dangerous debt build up in the future.
2. Risky assets
The Bank of England is “going big and fast” in order to steady financial markets and support record government spending. Its major quantitative easing (QE) programme has contributed to more than just maintaining asset prices – they’re booming. Stock markets are experiencing the largest corporate valuations of all time, high bond prices have pushed borrowing costs down to record lows, and house prices have rebounded.
The approach is fuelling risks too. Policymakers are now warning of an unintended destabilisation of the financial markets. That could be devastating for the UK economy, which has plunged into the largest recession since records began. Regardless, the central bank’s current approach is exacerbating longstanding social and environmental risks. New funding it has provided for the UK’s largest corporations, with favourable rates, has seen billions of public money go to firms that are laying off workers and harming the planet.
Positive Money and other civil society organisations have long called for QE to be decarbonised, and the Governor agreed it was a priority earlier this year. Campaigners (with support from two thirds of the public) are now calling for social and environmental conditions to be attached to the Bank’s crisis loans. We still have a long way to go when it comes to aligning the financial system with achieving a just climate transition. How can any use of public money that supports business as usual rather than tackling the climate crisis be justified?
3. Intensified inequality
The COVID-19 policy response has been “unprecedented” but, as the Institute for Public Policy and Research has shown, it has not been progressive. In finance, too, crisis measures have intensified inequalities. While those wealthy enough to own assets have seen their valuations rise, people in need face the cost of increased debts. While big banks have been able to issue loans backed by state guarantees, businesses who take them on remain liable and bear the risk of default. Economic inequality intersects with other injustices, including racism and sexism, and so we can expect to see people of colour, women, and people from other marginalised groups disproportionately negatively impacted as a result.
Rather than entrenching inequality, now is the moment to investigate how finance can help to create a fairer and more equitable society. Harnessing the once in a generation opportunity to support a community banking movement would be a start. We must also take responsibility for the challenges the world’s poorest countries, some with health systems close to collapse, face managing unpayable debts which need to be rapidly and fairly written down.
4. An unaccountable revolution
The ‘data revolution’ already underway in finance – and catalysed by state-led programmes like Open Banking – has been turbocharged by COVID-19. Social distancing and misguided pressure to not use notes and coins have seen digital payments and online banking soar, while cash use plummeted to levels not expected for another decade. Industry has responded by accelerating digital transformation plans, which could cut their costs and open up new data-driven business opportunities. We have heard reports of programmes that were scheduled over several years being completed in just a few weeks. As a result, for example, the Co-op Bank will shut another quarter of its branch network by the end of the year.
Less widely reported is that, while managing your money online can be a lifeline, it does not work for everyone. A significant number of people – nearly 20% of the population – could not do without cash. The most powerful predictor for reliance on it is poverty. Irrespective of wealth, there are very good reasons to not want to participate in the digital economy, including the rise of Surveillance Capitalism.
We urgently need a new dialogue – one that includes consumer groups, civil society organisations, and responsible finance providers – to ensure that the data revolution, and the new tools, infrastructure, business models and players it introduces to finance, serve people and planet.
Thank you to Christine Berry (Senior Fellow), Tony Greenham (Senior Fellow), Laurie MacFarlane (Lab trustee), Eva Watkinson (Jubilee Debt Campaign) and Simon Youel (Positive Money) for presenting their work and insights at the Transforming Finance Network meeting, and informing this blog. If you work for a civil society organisation and would like to join the Transforming Finance Network, please email firstname.lastname@example.org.