Memorandum submitted by A4e (Action for
Employment)
EXECUTIVE SUMMARY
1. The Government, supported by the banking
industry and other involved bodies, has had some success in increasing
access to banking services. However, it is apparent that the nature
of the behaviour of the financially excluded means that existing
models of service delivery are not effective. The challenge therefore
is to establish a model capable of providing low cost transactional
banking services that are easily understandable and accessible
to the financially excluded. This model needs to be scaleable
and commercially sustainable and incorporate financial education.
2. The typical credit needs of the financially
excluded are for relatively small amounts on an intermittent but
ever present basis. This credit is vital due to the low incomes
of those involved, but due to their position outside of the financial
mainstream they pay the most to borrow the least. To support the
tackling of this issue it is suggested a three pronged approach
is followed:
— "Real" competition is fostered
in the market to stimulate the move to better service and lower
pricing, organizations seeking to enter the market and drive down
prices over realistic timeframes should be encouraged and supported.
— The discretionary Social Fund should
be joined up and co-ordinated with the Financial Inclusion Fund
as part of the policy drive to tackle the problem.
— Work should be undertaken with the
financially excluded to support a positive change in behaviour
to a culture of "borrow to invest, save for crisis".
3. The key to financial education is to
embed the process in the education system and to continue it on
through various staging posts covering individuals both in and
out of employment. The need is also clear for working age financial
education. The Government could take a clear lead on this through
its own position as both an employer and as the overall provider
of services to those not in employment.
4. The understandable need to regulate advice
to avoid mis-selling has inadvertently led to a disincentive for
those on below average incomes to save. Reviewing what advice
needs to be given and therefore simplifying it, and reducing cost,
is important. However, it is clear that offering the financially
excluded the ability to save without the need for regulated advice
through high interest current accounts "jamjar" savings
pots are vital in stimulating a savings culture.
5. The Financial Inclusion Taskforce and
the Financial Inclusion Fund have brought welcome focus to tackling
this issue but there seems to be a lack of co-ordination in the
operation of the Fund and its approach to procurement in particular,
the lack of a mixed economy overall is a significant problem.
It must be recognised that a small number of socially driven for-profit
organisations have an important role to play in tackling this
issue effectively. Experience suggests that while aggregate funding
across Government is not insignificant its dispersion considerably
lessens its impact.
6. It is clear that tackling financial exclusion
makes a significant contribution to eliminating social exclusion.
In the current environment advances in technology allow an unprecedented
chance for the financially excluded to leapfrog forward but a
concerted drive is needed by all involved to take advantage of
this window of opportunity.
1. Access to banking services
A. The Governments drive to address the
problem of households without bank accounts has had a significant
impact. Activities such as the Direct Payment programme, which
supports individuals in receipt of benefits and/or state pensions
to receive payment electronically into an appropriate account
have been an outstanding success. Such provision is a powerful
tool in reducing the number of unbanked households in the UK,
as these households are more than likely to be in receipt of a
benefit and/or a state pension. The willingness of the banking
industry to accommodate these customers should also be noted.
B. However, it is also clear that Direct
Payment alone is not the whole answer—particularly for those
most distanced from adequate financial services products. It is
also clear that responsibility for supplying bank accounts be
laid solely at the door of providers within the banking industry.
These are commercial enterprises, built on a traditional approach
to financial service delivery, whose prime driver is to deliver
shareholder value. The method by which the services are taken
to market—and the service portfolio and structure itself—require
innovation and restructuring in order to be relevant and accessible
to the financially excluded.
C. Feedback from the financially excluded
indicates that the model of service delivery and structure of
financial products used by the current high street banks does
not work effectively for those presently unbanked or address their
financial requirements. For a significant number of households
the issues of accessibility and "account literacy" are
barriers that need to be overcome if this remaining number of
1.9 million households is to be drastically reduced. In addition,
particularly on credit facilities, the products available through
the banks do not address the needs of the client cohort.
D. Research indicates that if an individual
lives in a location where the banks have withdrawn their branches
and where the only ATMs are fee charging they are physically,
and crucially psychologically, cut off from the financial mainstream.
Layered on top of this, many clients do not perceive themselves
(or are unable to operate) as "consumers" of financial
service products. As such, their choices are dictated by the availability
locally of alternative sources of finance—this may be door
to door lenders, local credit unions/micro lenders, the use of
telephone based (by heavily targeted advertising) debt consolidation
agencies or informal lending markets, including loan sharks.
E. The real challenge therefore is to establish
and support a model that does work for the financially and socially
excluded. This model needs to provide low cost, transparent, transactional
banking services that targets and markets to the financially excluded,
delivering a limited range of easily understood products designed
specifically for the customer base. Crucially, financial education
and improving financial literacy, must be an integral part of
the service facility. Such an institution could then support efforts
to market Government initiatives such as the Savings Gateway,
Child Trust Funds and stakeholder products to those who are targeted
for these programmes and are not currently engaging with them.
2. Access to affordable credit
A. Access to affordable credit is by far
the most important issue facing the financially excluded. Without
it there is no ability to benefit from account ownership and begin
to build savings and assets. Economies at every level rely on
credit, from the Governments own PSBR down through business lending,
homeowners mortgages and down to personal loans and credit cards.
Credit is essential to successful money management, for cashflow
and for ironing out the bumps of household expenditure.
B. For those on lower incomes the need is
not for large lump sums—these are the loan amounts (in the
thousands) that are profitable to the banks. In the main, households
require relatively small amounts in the low hundreds for a variety
of necessary or "essential" items such as utility bill
payments, Christmas, replacement of critical household goods (such
as a cooker) or getting the car fixed. However, what has developed
is a large proportion of households cut off from benefiting from
the historically low interest rates available because of their
position of financial exclusion. As a result the most financially
excluded pay the most for their financial services.
C. This position is challenging to change
in the short-term and unlikely to change in the future with the
current range of providers. The "sub-prime lending sector"
(the categorisation in itself indicates one of the institutional
problems with driving change) is designed for supplying this market
but it is clear that competition is not working effectively in
the marketplace to drive down costs and drive up levels of service.
Solutions will flow from increasing "real" competition
that will act as a stimulus to benefit customers and significantly
bring down the cost of borrowing over a reasonable timeframe.
Looking at overseas models of banking services to people in poverty,
it is clear that the time frame for such change needs to be realistic.
For example, in a new set for a financial institution serving
the financially excluded and unbanked, the initial rates of interest
will still be high (albeit lower than many current lenders) on
loans but the figures will be clear and transparent. However,
in examples researched, year on year reductions of a third per
annum during the five years of operation signifies the intent
to introduce a fundamentally more customer friendly service which
drives down the cost of borrowing and—as stated above—changes
the behaviour of "consumers" of the service.
D. Recently announced changes to the Social
Fund, including additional funding to the budgetary loan scheme
over the next three years, are welcomed. However, there needs
to be more clarity between the Social Fund and its ability to
help combat financial exclusion and other key Government initiatives
in this area of policy such as the Financial Inclusion Fund in
its various incarnations. The net result is that the beneficial
impact of the significant sums dispersed through the Social Fund
is lessened due to this lack of co-ordination.
E. It is not only the access to credit that
is important but working with the financially excluded to change
their behaviours in relation to using credit. In many cases credit
is heavily relied upon to manage "crises" with different
forms of credit being used to offset other credit obligations.
Simple principles, such as "borrow for investment, save for
crises" need to be integrated into the accessibility agenda.
For many individuals without bank accounts who have `deselected'
opening an account, it is because the possible `lure' of signing
up for a credit card when a mail out from their bank hits the
doorstep may be too much. Hence they abstain from opening an account
and operate in a cash only economy. Education and support must
be linked to accessibility to get the additional 1.9 million households
to open and, most importantly, maintain and use their bank account.
3. Financial education and access to financial
advice
A. Experience suggests that successfully
intervening with financial education will drastically reduce individual
chances of becoming overindebted or cut off from the mainstream
of financial services. Within this there are key possible intervention
points that can be segmented in what can be called the Youth sector,
and then a further need in the working age sector:
Financial education (appropriate bank accounts,
savings, insurance, travel, pay slips, pensions) to be included
in the curriculum as part of preparing students for work/higher
education. Schools should work more closely with commercial organisations
to deliver sector specific courses.
Twin track of showcasing financial services
industry opportunities to potential employees and also of de-mystifying
students financial future particularly in regards to higher education,
at present expectation is of accruing debt with an inability to
save and a reluctance to join company pension schemes for several
years after leaving.
The Government could take a lead for businesses
by using the Public Sector, Civil Service and Armed Forces to
provide demonstration of best practice by introducing:
— Financial Inclusion assessment as
part of induction, successful completion should allow development
onto Financial Education short course, this should prepare employees
to enable them to work with financial advisors to prepare for
future. (FI would include appointed pension advisors.)
— If IIP, ISO 9000 and NVQ's included
Financial Education as must haves for successful recognition then
many organisations will adopt and provide employees with Financial
Education courses. This in turn could result in many hundreds
of thousands of employees benefiting from inclusion and education
programmes.
— Training providers could be funded
to deliver financial education units as part of the New Deal programme.
Basic Skills Assessment and level 2 Key Skills to be designed
completely around Financial Education replacing existing programme.
Again it is an opportunity to look at Basic Skills assessments
and consider how we can use this as an exercise to not only assess
literacy and numeracy skills but also use the programme as a learning
experience. This would utilise existing Government funding (this
could also be utilised for those 16+ in employment).
B. Development of Generic Advice specialists
working across all sectors providing education and building confidence
in the sector. There is a desperate need for the development of
more financial advisors within the UK hence the FSSC looking to
open Academies for the sector. However, it is unlikely that this
will significantly improve the existing identified situation.
Training companies should therefore look to deliver generic courses
aimed at providing basic understanding of Financial Education
based on identified learner needs using existing strategies. Nurseries
and first schools could be funded to provide such provision to
parents.
C. In terms of adult working age financial
education there is a variety of provision but it lacks consistency
and funding over anything other than the short term. There are
innovative projects and programmes carrying out essential work
in the UK but there is a lack of co-ordination and the investment
needed to embed this provision.
4. Incentives and barriers to saving for
people on below average incomes
A. The Savings Gateway has helped introduce
the principles of savings to many who have little or no knowledge
of longer term savings. However the issue is one of lack of engagement.
A sophisticated multi-channel approach is necessary to successfully
engage the financially excluded and without this consistent targeting
the take-up of Savings Gateway and other related products will
be patchy and strictly limited.
B. Providing incentives for people to save
will initially prove successful, however, unless that initial
advice is re-enforced regularly then savers tend to quickly identify
other priorities. There is an identified need to provide holistic
approach to Financial Education and consideration should be given
to life cycle approach adopted by many other countries and organisations
within the UK who provide Financial Education at regular stages.
This should include school and work programmes.
C. The need for regulated advice is clear
to safeguard individuals from mis-selling, however this has had
the unintentional affect of driving the cost of that same advice
out of the reach of many households. There is a case for introducing
a much simplified, and therefore cheaper, approach to regulated
advice that could be utilised below a certain income level for
instance to ensure these individuals are not price-excluded. However,
it is also clear that this alone would not solve the issue. Offering
the ability to save through methods that do not require regulated
advice, such as high interest rates on current account balances
with accompanying "savings jamjars would provide individuals
with access to basic savings at very low cost and remove the barriers
of accessibility. This would reinforce the need to alter customer
behaviour to one of "borrow to invest and save for crisis".
5. The role of the Government, the Financial
Services Authority and other bodies and organisations in promoting
financial inclusion
A. The Financial Inclusion Taskforce has
brought a welcome attention and focus to the need to combat this
issue. A debate on clarity might be useful however to understand
and make plain the roles, responsibilities and the accountability
between the various concerned bodies.
B. It could be argued that the dispersal
of the Financial Inclusion Fund through the Taskforce, the Department
for Work and Pensions, the Department for Trade and Industry and
the Legal Services Commission has led to some dilution of the
funding's impact, and has resulted in an under-utilised and unco-ordinated
landscape of provision. Furthermore the funding has been heavily
weighted towards a not-for-profit approach almost to the exclusion
of all else and so by not utilising a mixed economy approach involving
the public, private and third sector in combination a significant
opportunity has been lost. It would then be unsurprising if the
funding encourages the development of some small scale innovative
projects and approaches that will lack any ability to be scaleable
to tackle what is a mass market issue. While understanding the
view that this area requires a significant measure of social values
in the bodies that address these problems it should also be noted
that there is a definite value in obtaining the input and contribution
from those socially driven for-profit organisations, that though
relatively small in number, have demonstrated over many years
and across many varied sectors, the ability to successfully enagage
and deliver successful programmes to this client cohort.
C. Our experience across a wide range of
Government areas suggests to us that the approach to tackling
financial inclusion is still disturbingly fragmented. For example
the Office for Fair Trading has been piloting anti-loan shark
projects in Birmingham and Glasgow, so where does this sit in
relation to the proposed activity of the Growth Fund and the lending
role of the discretionary Social Fund, it seems unclear. This
results in aggregate terms in not enough return on a gross level
from the level of investment overall. The Comprehensive Spending
Review in 2007 may well afford an opportunity to address this
handicap.
6. The benefits of financial inclusion and
the extent to which financial inclusion measures can contribute
to combating poverty and reducing barriers to employment
A. The link between financial and social
exclusion, and all of its related educational, welfare and health
implications, is indisputable. A simple worklessness example illustrates
the issue, the vast majority of employers pay wages electronically
into an account, but without an account an individual is either
unable to get a job or severely restricted in the type of employment
they can obtain. The inability to access affordable credit denies
an individual the ability to begin accumulating savings and assets
and ensures generational poverty with no wealth to cascade down.
New technology is enabling a quiet revolution in the provision
of financial services, particularly with the emergence of services
via mobile phones and the internet. This could provide the presently
financially excluded with the ability to leapfrog from their current
position into the forefront of receipt of new services and products.
It is vital that financial inclusion be tackled as a specific
policy area to enable this possibility to come to fruition.
B. That policy focus needs as a priority
to address coordination of activity and adopt an open approach
to contracted activities with a stated willingness to test a range
of delivery models, including those not from the voluntary and
community sector.
January 2006
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