Select Committee on Treasury Written Evidence


Memorandum submitted by the Personal Finance Research Centre, University of Bristol

  The Personal Finance Research Centre welcomes this opportunity to make a submission to the Committee's inquiry on financial inclusion. We are an independent research centre, located in the School of Geographical Sciences at the University of Bristol, that specializes in policy-relevant empirical research relating to personal finances. We have a long-standing interest in access to financial services for people on low incomes and have undertaken many research studies in this area. Elaine Kempson, Director of the Centre, is a member of the Financial Inclusion Taskforce and was also a member of the HM Treasury Policy Action Team 14 that reported in 1999. She also carried out the first two independent reviews of the Banking Codes.

  Our submission draws on a substantial programme of research, spanning all areas covered by the inquiry, which it has been difficult to summarise adequately in just a few pages. We have, however, tried to highlight some of the key points that we feel the Committee might like to address and would be very willing to provide further information on any of the issues we discuss below. We have addressed each of the six areas the Committee has said it wishes to cover.

1.  ACCESS TO BANKING SERVICES

    —  Action taken by the Government and the banking industry towards reducing the 1.9 million households in the UK without a bank account;

  The early indications are that considerable progress has been made since the introduction of basic bank accounts in late 2002, stimulated to a large extent by the decision to pay social security benefits and pensions directly into an account. The decision to offer the Post Office Card Account (POCA) has, however, muddied the waters. The POCA offers users nothing that a basic bank account would not also provide but with a great deal less functionality. Moreover, the fact that banks were asked to finance the POCA has coloured the way they view other initiatives to promote banking inclusion. The fact that many POCAs seem to have been opened by people with an existing current account has also not helped.

  There is a continuing concern about access to basic bank accounts. Following recommendations, the Banking Code requirements have been strengthened and BCSB monitoring shows considerable improvement in this area. But there is no room for complacency. The tightening of anti-money laundering legislation has certainly not helped. Real progress was being made with regard to proof of identity which was reversed by the September 11th terrorist attacks.

  Discussion to date has tended to focus on facilitating access to bank accounts, but there has been little consideration of the impact of even wider access to banking on those who continue to operate a wholly cash budget. We need to consider whether they will suffer additional detriment as a consequence and whether other solutions are required to meet their needs

    —  Access to banking services, including the operation, usefulness and regulation of basic bank accounts, and access to cash withdrawals.

  We are concerned that attention has become focussed on the numbers of people with a bank account with much less consideration of whether these accounts are actually used or their usefulness to people on low incomes. More needs to be done in this area. In particular, we are concerned about the fact that there is no appropriate account-based method of bill-payment for people on low incomes. A handful of banks have experimented with bill-payment accounts of the type that were commonplace before being replaced by direct debits. The inflexibility of direct debits, and the associated charges if there are insufficient funds to cover a direct debit, are a major reason why people on low incomes do not wish to use transactional banking. There is also a need to be vigilant about the introduction of terms and conditions for basic bank accounts that are inferior to those for other current accounts. This would include times for clearing as well charges and access to counter services. We have been following the debate about fee-charging ATMs with interest but note that there is no hard evidence on whether this impacts disproportionately on people with low incomes. A survey commissioned by the Financial Inclusion Taskforce should provide that evidence. We are contributing to the design and analysis of that survey.

2.  ACCESS TO AFFORDABLE CREDIT

    —  Measures to enable households excluded from mainstream credit to have access to affordable credit;

  Compared with banking, much more needs to be done in the area of affordable credit. There are no signs that the commercial market will, of its own accord, provide affordable credit to all—indeed moves towards risk-based pricing will ensure that it does not. Not-for-profit lenders offer a potential solution but there is much still to be done to increase access. The Social Fund also plays a very important role and recent increases to its budget, while welcomed, are not sufficient to permit it to meet current unmet needs.

  In 2005 we undertook a detailed study of this area[257]. This examined the features that low-income consumers look for in a source of credit and the features that lenders need in place to lend in this market. There is a remarkable coincidence of interest, with both consumers and lenders wanting to manage the risk of default on credit commitments. Low-income consumers generally want small, short-term, fixed term loans that offer cost transparency, with no hidden charges and no additional charges for default. And they want a method of payment that reduces the temptation to skip a payment when money is tight, coupled with the option of rescheduling loans to avoid falling into arrears. They recognise that these requirements add to the costs of lending, but resent lenders who they feel over-charge for these features.

  The growth in the sub-prime credit market in recent years has benefited many who would otherwise need to use high-cost lenders. But this has had an adverse effect on the economics of meeting the needs of the most vulnerable consumers who the wider sub-prime market will not accept as customers. Our research explored a range of ways of reducing the underlying costs of providing credit to these people, and we concluded that we need to find a way of allowing them to make electronic repayments without the risks of default associated with direct debits. A bill-payment account (as described above) would be one way of doing this. Potentially, direct payments from benefit and/or a restructured direct debit system might also provide a solution. Our negotiations with DWP and APACS to date have identified operational problems that might rule these out. Nonetheless, we feel that all possible avenues should be explored with the credit industry.

  There is considerable debate about the value of introducing an interest rate ceiling for credit and amending the Consumer Credit Bill to allow this to happen. Superficially this is a very attractive idea. However, our research with people on low incomes suggests that it is premature while they have such poor access to low-cost credit and could well have an adverse effect on the people it would be intended to benefit. It would, undoubtedly, lead to a displacement of costs (with more additional charges) so that they would not have to be included in the APR quoted by lenders. This would result in a serious lack of transparency for people who need it most. It could also lead some of the larger lenders specialising in lending to people on low incomes to move `up-market' and stop lending to the poorest and highest risk borrowers. This would not, of itself, be a concern if there were sufficient alternative provision for these people. As we describe below, however, this is currently not the case. Consequently more people would turn to unlicensed lenders. We are currently involved in a joint research study with Policis into illegal lending for the DTI and the early findings raise real cause for concern.

    —  The role of credit unions and community development finance institutions;

  There have been some encouraging developments in the not-for-profit credit sector. In particular we are encouraged by recent credit union developments and in services like East Lancashire Moneyline that are being established in several communities. These are adopting a more business-like approach to lending that is greatly needed if very high subsidies are to be avoided. The £36 million available to such lenders from the Financial Inclusion Growth Fund is a welcome cash injection but will do no more than scratch the surface of meeting needs. We also have a lingering concern that the Fund will be allocated to areas where provision of not-for profit lending is already above-average. Moreover, this Fund has highlighted the problems associated with state aid and the limitations it places on support for this sector. It should also be noted that not-for-profit lenders would also benefit from the establishment of a bill-payment service or some other form of electronic payment—indeed we are aware that some credit unions, through ABCUL, plan to offer basic bank accounts that offer a linked bill-payment service.

    —  The provision of interest-free loans from the Social Fund

  The discretionary Social Fund plays a very important role in meeting the credit needs of the very poorest people who find it difficult to access the licensed commercial credit at all or at prices they can afford. We have undertaken a number of studies looking at various aspects of the Social Fund[258]. These have shown that there are many (especially elderly) eligible people who are completely unaware of the Social Fund. The funding for both Budgeting Loans and Community Care Grants is inadequate to meet the needs that exist, so that eligible applicants generally only get some of the money they apply for, if they get any financial help at all.

  Constraints on the Budgeting Loan scheme budget also mean that repayment rates are generally much higher than in the commercial sector, which causes financial difficulties for some users and deters others from applying at all. Recent increases in the discretionary Social Fund budget are welcome but are still inadequate to enable it to address the issues raised above. Moreover, we are aware of pressures for the Social Fund to be extended to people who are in receipt of tax credits. We would strongly advise against this. The Fund is inadequate to meet the needs of those claiming benefit, while those receiving tax credits generally have access to credit in the cheaper end of the sub-prime market.

3.  FINANCIAL EDUCATION AND ACCESS TO FINANCIAL ADVICE

    —  The role of the Financial Services Authority, the Department for Education and Skills and others in promoting and supporting improved financial education in schools, other educational institutions and the workplace and the progress of the national strategy for financial capability;

  The work being undertaken by the FSA and DfES has been very encouraging and we are aware that it is being monitored closely in other European countries, Australia, Canada and the USA. Our role in this has been to design and undertake the first national survey of financial capability, the report of which will be published in March 2006. The preliminary report on the design was published in June 2005[259] and showed that members of the public and experts agreed that financial capability comprised four key areas. These are day-to-day money management, planning ahead, choosing appropriate financial products and keeping informed and knowing where to seek advice. The survey assesses consumer behaviour, knowledge and attitudes in each of these areas and will identify key areas where more needs to be done to raise levels of capability and which consumers require most assistance. In doing so, it takes account of individual consumer's circumstances, such as their engagement with the financial services marketplace and their ability to plan ahead. This will inform future policy developments with both the FSA and DfES.

  One concern we have is the fragmented regulatory responsibility for unsecured consumer credit. In particular, more needs to be done to try and combat over-indebtedness but it is not clear where responsibility lies for taking this forward. It is being addressed by the DTI's over-indebtedness advisory group (to which we contribute) but consumer education aspects need to be fully integrated with the FSA's programme of work. Serious over-indebtedness affects a very small proportion of the population (our research would suggest about 5% of households) and requires more than education. We believe that lessons need to be applied from other areas where `behaviour modification' has been attempted, such as smoking, drink driving or HIV/Aids.

  A second concern is that the needs of financially excluded people may get lost in the wider debate about consumer education. There is an inherent danger that attention will be focussed on informing people on low-incomes about financial services—while the bigger barrier is, in our opinion, overcoming their resistance to use commercial financial services at all. This is fuelled by a belief that big financial institutions have no interest in people like them and reinforced by press publicity about mis-selling.

  There is also much more to be done to promote financial education through schools. At present the situation regarding its place in the school curriculum varies across the four countries of the UK. And the work of the Personal Finance Education Group and others has shown that provision is patchy, with most teachers lacking the skills and confidence to teach the subject.

    —  The provision and regulation of generic financial advice about debt and savings.

  As the committee will be aware, there is a wide range of bodies providing free generic advice on debt. Our research in this area shows that the quality of this advice tends to be high and has improved over the thirty years since the first centres were opened, as a result of training and support services offered by the various networks to their members. However, demand continues to well outstrip supply. And many local advice centres live a hand-to-mouth existence financially, often facing budget cuts. Consequently local services dare not advertise. As a result, some people in need are unaware that they can get free independent assistance and others seek help only when their problems have reached crisis point. The £51 million available from the Financial Inclusion Fund will provide a welcome boost to provision, but we have a number of concerns. First we are concerned about the allocation of funds and fear that the tendering process will lead to localities that already have above-average provision getting the lion's share of the money, while those with little or no provision currently may get little—if any at all. Secondly, we are concerned about the speed with which the Fund is being allocated and the short-term nature of the funding, with no plans for ensuring that services survive beyond the end of the initiative. Large numbers of new money advisers will need to be recruited and trained in a very short period of time (or existing services will have their staff depleted) and may face redundancy as soon as they have developed their expertise. This would certainly be poor value for money.

  As for generic advice on savings, provision in this area is very poor indeed. Most is done by IFAs and research we completed last year for the DWP found they did not, on the whole, see many people with low incomes[260]. There are a number of initiatives, largely supported by the FSA, to offer free advice in this area. Most of these are local in nature although a new national organisation, the Resolution Foundation, has just been set up to provide generic advice to people on low-to-middle incomes. It is far too early to say what impact this will have. Our research would suggest that people trust local advice centres, such as citizens advice bureaux and independent advice services that are members of Advice UK, and would like them to develop a generic advice service offering `pre-shopping' advice across all financial products. Many advice agencies would be keen to offer this type of advice to their clients as part of an holistic service, but are prevented by lack of finance. Indeed, as we note above, they are under-funded for the work they already do.

4.  INCENTIVES AND BARRIERS TO SAVING FOR PEOPLE ON BELOW AVERAGE INCOMES

    —  The operation of the Government's Savings Gateway accounts programme.

  We undertook the evaluation of the first pilot of the Saving Gateway and concluded that it was a great success[261]. Most people on low incomes do save, although it tends to be episodic and for specific purposes. Money is also frequently saved in cash at home or (less often) in current accounts. The pound for pound matched funding offered in the first pilot was a considerable incentive, encouraging people to set aside money for a longer time period and to put it into a savings account. People were also attracted by the fact that this account was clearly designed for those on low incomes and this helped overcome their resistance to deal with banks. Each month most people saved the maximum £25; the average amount saved over the 18 months was £282 and more than half of participants saved the maximum of £375. On the whole, these were people who stood to gain little from tax relief on savings and for whom differences in interest rates between accounts seemed meaningless given the sums of money they could afford to save.

  We do, however, have some reservations about the second pilot as it seems to have lost the simplicity and focus of the first one—which was clearly aimed at people on low incomes and had a match rate that was easy to understand. While we welcome exploration of matching as an alternative to tax relief generally, we are concerned that the Saving Gateway may, like ISAs and Stakeholder Pensions, fail to attract people on low incomes.

    —  The impact of the Basic Advice Regime in encouraging saving.

  This is much needed although we feel that it is too early for us to say whether it will be successful in meeting the needed of financially excluded people.

    —  The extent to which decisions on saving are influenced by factors affected by financial services regulation, such as the cost of regulated advice, as opposed to other factors, such as the State benefits system.

  There also is a real need to consider whether it is desirable and feasible to encourage people on low incomes to save for the long term and for their retirement, in particular. At present there are too many Government-inspired initiatives vying for the savings of people on low-to-middle incomes: including the Child Trust Fund, the Savings Gateway, ISAs and Stakeholder Pensions. Most people will have little money to save and, in early adult life, limited scope to commit to saving in vehicles that do not provide access to savings in an emergency. In our view, we need to encourage financial service providers to adopt a creative approach and design a savings product that can met the differing needs of people on low-to-middle incomes over their lifetime.

  In our experience, current capital limits for benefit receipt do not act as a direct disincentive to long-term saving—largely because there are larger disincentives, including lack of money/competing demands and lack of knowledge. That said, they do penalise people on low incomes who manage to put modest amounts by.

5.  THE ROLE OF THE GOVERNMENT, THE FINANCIAL SERVICES AUTHORITY AND OTHER BODIES AND ORGANISATIONS IN PROMOTING FINANCIAL INCLUSION

    —  The work of the Financial Inclusion Taskforce, and the use of resources from the Financial Inclusion Fund.

  We feel that it is too early to comment on the work of the Taskforce, even though we are members of it. It was set up just nine months ago and has only had four meetings. The diversity of membership means that discussions are both wide-ranging and well-informed. These discussions have, however, identified some significant gaps in our knowledge which the Taskforce has sought to fill before deciding what action needs to be taken. Concrete outputs should, however, become available during 2006.

  Our reservations about the Financial Inclusion Fund are covered in sections 2 and 3 above.

    —  Lessons from successful local or regional initiatives designed to address geographical concentrations of financially excluded households.

  Our experience with the first pilot of the Saving Gateway and the services offered by organisations like SAFE at Toynbee Hall would suggest that trusted community-based organisations can play an important role in overcoming the disengagement from financial services that we have referred to above. This includes making people aware of financial services and providers that do meet the needs of people on low incomes, and acting as intermediaries to help people make the first approach and deal with any hitches that may arise. The work done by SAFE helping people to open basic bank accounts is an excellent example.

6.  THE BENEFITS OF FINANCIAL INCLUSION AND THE EXTENT TO WHICH FINANCIAL INCLUSION MEASURES CAN CONTRIBUTE TO COMBATING POVERTY AND REDUCING BARRIERS TO EMPLOYMENT

    —  The extent to which problems of financial exclusion can be tackled by actions in the sphere of financial policy as opposed to wider policy developments relating to welfare policy, pensions and benefits

  There is no doubt that there is a lot that the financial services industry can do—and, to be fair, has already done—to promote financial inclusion. This is especially apparent in relation to banking, where banks have developed a more appropriate product (the basic bank account) and, through the Banking Code, tried to ensure that it is made available to people who would most benefit from it. In our experience only a minority of banks believe that there is a business case for this—most see it as part of corporate social responsibility, with another minority participating very reluctantly. The decision to make banks pay for the POCA was unfortunate as it may well have diverted money from other potential developments (such as bill-payment services) that could have made basic bank accounts more viable commercially and met the needs of people on low incomes. There needs to be discussion of the future of the POCA when the current contract ends and of how best to meet the banking needs of people who do not want to open a bank account. This might usefully include the potential for a store value card with wider functionality as well as the potential role of transaction banking through credit unions.

  If we turn now to consumer credit, it is most unlikely that commercial sector will meet the needs of people on the lowest, and least secure, incomes at substantially lower prices. Greater investment will, therefore, be needed in the Social Fund. It is to be hoped that credit unions and other community development finance initiatives will also be able to meet the needs of these people. This, too, will require investment (including from banks working in partnership) as current provision is inadequate. A model where banks provide the loan capital to not-for-profit lenders who cover their costs from their loan charges is an attractive one and one that already exists, albeit on a piecemeal basis. Such developments should be linked to a requirement for these not-for-profit lenders to move towards financial sustainability, but recognising that this could create a potential tension with meeting the credit needs of people on the lowest incomes. We would also like to see the banking sector working with Government and others to find a way of facilitating consumer credit repayments by people on low incomes that is cheaper than collecting cash and less likely to fail than direct debits.

  Financial education and advice also requires a partnership approach, involving commercial financial service providers, government, the FSA and community organisations. While promoting greater savings by people on low incomes will require appropriate commercial products, appropriate financial incentives from Government and promotion by community groups and employers.

January 2006




257   S Collard and E Kempson (2005) Affordable credit: The way forward. Bristol: The Policy Press. Back

258   E Kempson, S Collard and S Taylor (2004) Experiences and consequences of being refused a Community Care Grant (DWP Research Report No. 210). Leeds: Corporate Document Services.

E Kempson, S Collard and S Taylor (2002) Social Fund use among older people (DWP Research Report No. 172). Leeds: Corporate Document Services.

C Whyley, S Collard and E Kempson (2000) Saving and borrowing: Use of the Social Fund Budgeting Loan scheme and community credit unions (DSS Research Report No. 125) Leeds: Corporate Document Services. Back

259   E Kempson, S Collard and N Moore (2005) Measuring financial capability: An exploratory study London: Financial Services Authority. Back

260   E Kempson and S Collard (2005) Advice on pensions and saving for retirement: Qualitative research with financial intermediaries (DWP Research Report No. 289) Leeds: Corporate Document Services. Back

261   E Kempson, S McKay and S Collard (2005) Incentives to save: Encouraging saving among low-income households. London: HM Treasury. Back


 
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