| Continuity and Change in Financial Inclusion |
|
Continuity and change in financial inclusion * How successful was financial inclusion policy over the last Parliament? What were the main achievements and shortcomings? The seminar held under the Chatham House rule focused on the role of the financial inclusion taskforce, the legacy it would leave and the challenges for the new government and other actors in this area. Brian Pomeroy (Chair, Financial Inclusion Taskforce) opened the discussion, joined by Sharon Collard (Director of the Personal Finance Research Centre, Bristol University) with Sunder Katwala (General Secretary, Fabian Society) as chair.
The discussion focused on the main two objectives of the Financial Inclusion Taskforce’s remit (i) The aim of reducing the unbanked by half had been achieved, with a reduction from 3.5 million to 1.75 million by the end of 2009, falling again to 1.5 million by late 2010. This also raised the question as to the outcomes achieved, given that having a bank account did not itself necessarily entail financial inclusion. The new accounts were mostly being used regularly, though with a not insignificant number of dormant accounts. There was some evidence of broader well-being effects, such as people saying that having a bank account gave them a sense of being more properly part of society. There were also poor experiences: these reflected a model of free banking supported by penalty charges, so that some people had bad experiences of losing more on charges than they saved on bills or in other ways. It was striking that about half of those who remain unbanked have been in the banking system and had left it, often with poor experiences. Was it possible to go further? It was suggested that the issue of the financial inclusion needs of those who remained unbanked was not a simple one, and that further progress may depend on other approaches and products beyond the Basic Bank Account, such as simpler budgeting accounts or ways of using e-cash. Trust in the banks was a major barrier for some, and it was likely that other providers (such as supermarkets with banking licences) could well prove more successful in offering simpler products and savings schemes. • (ii) On improving access to affordable credit, the picture was more mixed. Government funding (of around £100 million) had been rotated to provide around 300,000 small loans, typically under £500, from people who would have been pushed onto the high credit market. This had been successful, on this modest scale, but this had depended on public funding. But it was now in doubt as to whether there would be sustained government funding of this kind beyond March 2011 for use by credit unions and community development institutions. The banks had supplied some credit, but had not met their commitments to the government in terms of support which they had pledged to credit initiatives and the third sector. The banks were very reluctant to get involved in this market (in part for reputational reasons, as they would be lending at higher rates than usual, though they had the capacity to lend at lower rates than customers were paying). There were a range of other useful ways the banks could contribute more, perhaps including the potential to centralise back-office functions for third sector lenders. The Taskforce had tended to be sceptical about calls for interest rate caps, partly in recognising that there were costs in providing unsecured loans in small amounts. An alternative approach was to address the lack of competition in the commercial sector – and for a stronger approach from the Competition Commission. Competition remedies to reduce the cost of credit might, for example, involve specific price-capping regulation of the rates for a particular lender in a particular area because the level of market dominance could be demonstrated. During the discussion of how to protect vulnerable consumers on the cost of credit, there were a range of views expressed, for and against different forms of intervention, including arguments for and against interest rate caps. There was recognition of the utility of forms of credit which were accessible and which people understood; conversely, it was also suggested that this accessibility and attractiveness could itself be considered a driver for more interventionist regulation. A key challenge for a successful policy approach depended on ensuring that needs for affordable credit were met. Building capacity for community lenders to supply affordable credit had to be an important driver of policy responses seeking to reduce the cost of credit. Financial inclusion: policy successes, failures and future lessons It was suggested that this was a good example of evidence-based policymaking, responding to academic evidence from the 1990s about the creation of banking deserts, through the withdrawal of bank services and building societies from poorer areas. It was also noted that the outcomes achieved reflected both the strengths and weaknesses of the decision to go for a voluntarist approach, rather than the stronger regulatory compulsion of the US model of the Community Reinvestment Act. This was reflected in successes and shortcomings in there being relatively good engagement from stakeholders, as reflected in the bank account outcomes, but this funding had been greater in the UK than other European countries, and this was one key to policy effectiveness. It was suggested that there was a need for more evaluation and scrutiny of outcomes. This had been done at the national level. The reasons for relative successes and failures depended on a more textured local assessments. Future policy direction: challenges for government It was noted that the new Coalition government contained specific Ministers with a strong interest and engagement in these issues, but did not have an overall strategy. It seemed likely that public support for affordable credit would be reduced – and this risked leaving a significant gap. 500 debt advice posts have been funded up to March 2011. Again, the future of these was in doubt, at a time when there was likely to be increased demand for debt advice, due to economic pressures and rising unemployment. One response to this was a call for a levy on providers of finance and other utilities to sustain debt advice services. It was generally agreed that the new government focus has been to reduce indebtedness by increasing self-reliance. However, the effectiveness of this approach depends on whether borrowing was to address needs, or for optional consumption. There was good evidence of a need for credit, and that approaches to reducing debt needed to reflect and recognise this. The government has expressed interest in encouraging saving. There was evidence that the right saving models could work for those on very low incomes. However, approaches which incentivised and matched savings were being phased out, though they had been effective. It was suggested that there was scope for greater pressure in terms of regulation and consumer protection for vulnerable consumers in particular. Policy stakeholders and campaigners in this area had tended to underestimate the potential role of the FSA, which may tend to think more about the protection of ‘middle England’ than vulnerable consumers. Potential drivers for change here included how it would respond to equalities legislation, and challenging it to focus on the needs of potential consumers in terms of unnecessary barriers to access, as well as protecting current consumers in its regulatory role. In particular, there was much less transparency about lending in the UK than in the US, and pressure for greater transparency and disclosure on lending practices could generate important information. With the Financial Inclusion Taskforce coming to an end in Spring 2011, there were challenges for civic voices as to how to maintain the salience and profile of issues of financial inclusion, affordable credit and debt advice, at a time when these could be increasingly pressing public policy and political issues. This event was kindly supported by Provident Financial.
|
