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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