Written by Sam Rex-Edwards – Co-Head of Movement Building and Campaigns
At the end of October, I sat in a room in Glasgow with seven remarkable people. Each of them has had to ask a bank for help at some point, and each of them has been turned away. I listened as they talked about the realities of what it’s like to not be able to access affordable credit when you most need it, the practical consequences of that, and the feelings of shame that come from having your application rejected, despite being more than capable of managing a budget and repaying debt.
Also in the room with us were four of Glasgow’s MPs, who had come to learn more about the scandal of financial exclusion, and what it means for their constituents. We’re grateful that they made the time to do so, because the expertise and insight which comes from direct experience of an issue should be at the heart of policy-making – but it’s too often overlooked.
The MPs were asked to carry back to Westminster the clear message that the government needs to step up. That waiting for banks to solve the problem themselves is simply unrealistic. That people have waited long enough, and now is the time for ambitious action which can deliver wide-reaching, long-lasting change so everyone can access fair and affordable financial services. Most specifically, they were asked to give their backing to calls for a Fair Banking Act, which could be transformative for access to credit across the UK by pushing banks to offer more affordable lending, and by supporting the growth of credit unions and Community Development Finance Institutions (CDFIs) – institutions who are often better placed to understand and respond to the specific needs of their members and customers than mainstream banks are.
This meeting came just a few days before the government published their Financial Inclusion Strategy – and the hope was that this strategy would deliver the kind of ambitious, comprehensive change needed to address the scale of financial exclusion in the UK.
The strategy is published now, and it’s fair to say that the response from the community of people and organisations who work on financial inclusion has been mixed at best.
There are certainly welcome interventions within it: action to help tackle economic abuse, an initiative to support homeless people with access to financial services, and a commitment to offer more financial education in schools.
On access to credit, we have the subsidy that Fair4All Finance will provide to one mainstream bank to pilot small sum, short term loans of less than £1000. Likewise, £30 million from dormant assets funding for a Credit Union Transformation Fund for digital infrastructure investment into the sector in England – also via Fair4All Finance – and reforms to the common bond will both support the sustainability of that sector (perhaps particularly the larger players within it). There is however, no support for personal lending CDFIs.
So the question is, will these interventions be enough to address the scale of the affordable credit crisis and to fill the estimated £2 billion gap in the UK credit market?
Our partners at Fair By Design summarised it well: this is a strategy ‘of consolidation, not transformation’. It feels unambitious – not least because the metrics for success are so vague. There is no mention of any targets to close the affordable credit gap, or any accountability mechanism via a transparent ratings framework to ensure mainstream finance institutions play their part in this. The inclusion of something like a Fair Banking Act would have demonstrated a different level of commitment and real seriousness of intent – but that is sorely missing.
Why is that?
I think it’s because the government hasn’t grasped the nettle in acknowledging why financial exclusion exists in the first place. Quite simply, we have financial exclusion because the dominant parts of the financial system have decided that it’s too risky or not profitable enough to provide services to particular sectors of the population. That typically includes people on lower incomes, people living in more deprived regions, and also disproportionately people of colour, women and disabled people.
The result is that services are either more expensive (the poverty or ethnicity premiums – whereby households on lower incomes, and/or people from ethnic minority communities pay more for essential goods and services) or are unavailable for people in those positions. At worst, and through a combination of factors, an increasing number of people are borrowing from loan sharks.
This is a basic market failure, and it’s clearly the responsibility of the government and regulators to step in to address it. Instead, what we have in the financial inclusion strategy is a continued heavy reliance on industry-led initiatives and voluntary commitments. That means that the mainstream institutions who are trying to do the right thing will continue to do so, but it will be piecemeal and impermanent – subject to changing priorities, leadership and political winds – while others get away with doing little or nothing.
Gareth Thomas MP raised exactly this problem in Parliament recently when he asked the Economic Secretary to the Treasury, Lucy Rigby “what assessment she has made of the potential implications for her policies of the reasons for which (a) HSBC, (b) Santander and (c) Barclays have not chosen to support work between banks and Community Development Finance Institutions to support the provision of affordable credit in the areas of highest deprivation”. He didn’t get much of an answer.
One thing that really stuck with me from the Glasgow meeting was when one of the participants said that – for all the talk of strategies, metrics and so on – the only really important question is whether the choices the government are making are going to actually make a difference to people’s lives. Without a comprehensive, holistic, and ambitious approach to ensuring people, small businesses and social enterprises have access to affordable credit when they need it – such as through a Fair Banking Act – we believe the government is missing the opportunity to transform millions of lives for the better.