Millions of people can’t access the banking services they need, a problem that could be solved by a Fair Banking Act, write Kay Polley and Sam Rex-Edwards.
Financial exclusion in the UK
The scale of vulnerability and hardship caused by our failing financial system is shocking. Tens of millions of people can’t access basic banking services, particularly credit, and are forced to deal with a very high cost lending and illegal money lenders. During a cost-of-living crisis, this means that people can’t get support when they need it, and people on the lowest incomes are forced to pay more to borrow money. Having to take out an expensive loan – because a fair option was not available – is all too often the trigger for falling into a life-ruining debt trap. This is a scandal that’s both hidden and getting worse.
As well as the impacts on individuals and families, small and medium sized enterprises (SMEs), particularly those outside South East England, are being starved of the finance they need to start and grow. This creates a major drag on economic growth and prosperity, and has a significant knock-on impact on local economies, given SMEs account for most private sector employment in the UK.
Fair banking for all
Despite many worthwhile initiatives from governments, regulators and the banking industry, the problem keeps getting worse. Recent research shows that the number of people who feel ‘locked out’ of the financial system shot up by 40% in the last year, and is significantly higher for black and ethnic minority groups than for white people. Financial exclusion is so entrenched in the UK financial system that it’s clear we need a step-change in response: that’s why we’ve built a broad coalition to campaign for a Fair Banking Act – a practical solution to this pressing problem of financial exclusion.
Under the Act, banks and building societies would be required to disclose their performance on financial exclusion in a transparent, publicly available, data disclosure framework. It would create a system of clear ratings, showing which banks are doing well and which need
to improve. If this disclosure and ratings framework did not incentivise banks to up their game, the main government regulator, the Financial Conduct Authority, would then be empowered to use regulatory tools and incentives to drive change.
Mainstream banking institutions would be able to improve their rating by:
- Expanding the provision of affordable and ethical lending to underserved communities, giving fair access to credit, regardless of people’s backgrounds or where they live;
- Providing fair services to those who are underserved and excluded, either directly or via a partnership; and
- Creating partnerships with cooperative, community-focused or other purpose-driven banking institutions to enable them to expand their services and support for financially excluded people and businesses. This point is discussed further below.
The potential of purpose-driven banking
Currently, the number of purpose-driven banking providers in the UK is small, but it is growing. These stakeholder institutions include Community Development Finance Institutions (CDFIs), credit unions, emerging regional mutual banks, and ethical banks and building societies. Placing purpose at the core of the business changes what is created and supported by finance and banking, with growth and profit directed to supporting the financial wellbeing of customers, providing resources to local businesses, contributing to local wealth creation and circulation, providing financing for sustainable housing or making other positive investments for a sustainable world. These institutions are able to have a holistic, relationship-based approach to assessing an individual or small business’s needs, and can take decisions based on a deeper understanding of risk and what is considered profitable. Financial resilience support for individuals is often provided alongside, in the form of money advice, help in accessing grants and benefits and longer-term strategies such as saving, which further strengthens financial wellbeing.
However, these institutions still face substantial challenges and barriers to establishing or scaling up, particularly in increasing the supply of affordable credit at the national level. In addition to getting mainstream banks to improve, a Fair Banking Act would also provide a much needed boost for purpose-driven institutions, creating a more diverse and ethical banking sector overall.
In conclusion, a Fair Banking Act has the potential to transform both our financial system and the lives of millions of people in the UK. We call on all political parties to support the introduction of this Act and include it in their manifestos ahead of the next general election.
Read the full report and support the Fair Banking for All campaign here.
The Fair Banking for All Campaign is supported by a diverse alliance of organisations, including ABCUL, Centre for Responsible Credit, Finance Innovation Lab, Mutual Banks Association, Responsible Finance, South West Mutual, Fair4All Finance, Fair By Design and The Financial Inclusion Centre.