Memorandum submitted by the Scottish Parliament
Cross Party Group on Tackling Debt
EXECUTIVE SUMMARY
In Scotland 11% of adults do not have a bank
account and 73% of people in the 15% most deprived areas have
no savings. Scottish CAB clients owe an average of £13,380,
a 64% increase in the average level of client debt in Scotland
since 2001.
Action by finance service providers and Government
should promote partnership working with communities and the voluntary
sector to improve access to financial products and services for
those who remain unbanked.
The basic bank account can be seen as the product
of last resort rather than acting as a catalyst for people to
move up the financial services/product ladder.
A dialogue between the banking sector and interested
stakeholders about how to modify and make basic bank accounts
more flexible would be a positive step.
The industry should seek to match what customers
want, particularly in deprived communities. This would help restore
the credibility of the industry and improve take-up of financial
services and products.
Improved partnership working is needed between
credit unions, CDFIs at local, city-wide and regional levels to
maximise resources and limit risk. To improve geographical coverage
for alternative providers, there is merit in engaging directly
with communities as a way to access often `hidden' consumers or
those who are unbanked within communities.
Financial education is a key priority within
the broader framework for financial capability, however, more
ambitious ways of direct delivery within schools should be considered
including engaging young people in the design, content and use
of the curriculum and providing opportunities to gain hands-on
experience.
Government, industry and the Financial Inclusion
Taskforce should support and actively encourage Community Banking
Initiatives, to promote banking services for low-income communities.
In Scotland, the Savings Gateway has not yet
been piloted. While there is scope for a national rollout, there
is an immediate need to explore possible alternatives, including
matched savings accounts, earmarked for high return investments
in business, home ownership, further education and accompanied
by financial education as a pathway to help low-income households
to save.
Experience has shown that there are considerable
benefits of linking financial inclusion activity to wider measures
that combat poverty, social injustice and to improve employability.
INTRODUCTION
i. The Scottish Parliament Cross Party Group
on Tackling Debt welcomes the opportunity to respond to the Treasury
Select Committees 2006 Inquiry into Financial Inclusion.
ii. For many Scots, vulnerability to multiple
debt and financial exclusion is a common feature of everyday life.
Figures revealed by Data monitor show the average UK adult's personal
debt is standing at £4,004, up 10% from 2003 but which has
soared by 45% since 2000.
iii. Figures from Citizens Advice Scotland
show that Scottish CAB clients owe an average of £13,380,
a 64% increase in the average level of client debt in Scotland
since 2001.
iv. Financial exclusion is often a symptom
of poverty as well as a cause. This is why action to promote financial
inclusion is important. Without appropriate and affordable financial
products, access to mainstream and alternative financial services,
independent and free financial advice, relevant, clear and transparent
information and coherent approaches to financial education and
awareness, poor people are more likely to be worse off than people
who are part of the financial mainstream.
v. Those who are financially excluded tend
to be:
— People who are vulnerable to financial
shocks during their lifetime—through illness, job loss or
loss of regular income, disability or bereavement—this can
cause an urgent need to access money that might force them into
debt.
— People who are denied financial products
and services—being unbanked; people have limited access
to more affordable financial products.
— People who can't afford products
and services experience difficulty in planning and spreading bill
payments.
— Those who are forced to pay more—particularly
people, on low incomes and vulnerable groups tend to pay more
for basic services like heating, telephones because they are unable
to use direct debit services.
vi. Being financially excluded is linked
to poverty. People most at risk from being financially excluded
are those on low incomes, on benefit or who are long-term unemployed,
but as a form of exclusion, financial exclusion has many attributes
and there is an element of risk that over a lifetime people are
exposed to the possibility of becoming financially excluded. This
risk factor is compounded by the fact that the financial services
industry has radically changed due to globalisation and increased
competition. There are more products available than before, with
new technologies and methods to access services.
vii. Financial inclusion is part of the
Scottish Executive's "Closing the Opportunity Gap" approach
to tackling poverty, with a target that by 2008 it would increase
the availability of appropriate financial services and money advice
to disadvantaged communities to reduce their vulnerability to
financial exclusion and multiple debts.
viii. To meet this target, the Scottish
Executive launched the Financial Inclusion Action Plan in 2005.
The Action Plan defines financial inclusion as follows:
Access for individuals to appropriate financial
products and services. This includes people having the skills,
knowledge and understanding to make best use of these products
and services.
ix. The focus of the Scottish Executive's
policy is to improve financial inclusion for vulnerable groups
of people and communities:
— In Scotland 11% of adults do not
have a bank account.
— 23% of lone parents in Scotland do
not have a bank account.
— Only 42% of people living in households
with an income under £10,000 per annum have any savings or
investments.
— Up to a third of households with
an income under £15,000 per annum are in arrears with consumer
credit or household bills. They are 3 times more likely to be
in arrears than better off households.
— 40% of people living in rented accommodation
don't have home contents insurance.
— 21% of people living in the 20% most
deprived areas are unbanked.
— 73% of people in the 15% most deprived
areas had no savings.
x. We believe it is important that the Select
Committee has the opportunity to hear first-hand evidence from
politicians, policy makers, practitioners, community and voluntary
sector organisations, reflecting their own experiences and knowledge
in combating financial exclusion. We would welcome, therefore,
working with the Select Committee to facilitate such an event
here in Scotland.
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.
— Access to banking services, including
the operation, usefulness and regulation of basic bank accounts
and access to cash withdrawals.
1.1 We believe more action can be taken
by the Government and the industry to promote partnership working
with the community and voluntary sectors to improve access to
affordable and appropriate financial products and services for
those who remain unbanked.
1.2 The move to Direct Payments by the Department
for Work and Pensions has contributed to higher numbers of people
converting to bank accounts but for many, and particularly the
most vulnerable, there is still a great mistrust of banks. Some
people still prefer to handle cash. More attention is required
to meet the needs of vulnerable and underserved markets and the
Government should support innovative approaches to meet the financial
needs of the unbanked.
1.3 Basic bank accounts fulfil an important
role in bridging the gap between being unbanked and accessing
the financial mainstream. However, the basic bank account can
be seen as the product of last resort rather than acting as a
catalyst for people to move up the financial services/product
ladder.
1.4 A dialogue between the banking sector
and interested stakeholders about how to modify and make basic
bank accounts more flexible would be a step in the right direction.
1.5 A less important move, but one with
a potential positive outcome, would be to re-brand the basic bank
account, for example, as a "community account" or "citizens
account" that could be either marketed or even franchised
at the community level while maintaining the core characteristics
of a basic bank account.
1.6 There is still a strong perception that
banks have moved away from disadvantaged communities. In reality,
this may not be the case as financial services can be accessed
via alternative routes, telephone banking, the internet but banks
and other financial service providers do have a responsibility
to ensure that every customer is served appropriately. More emphasis
on matching with what customers want, particularly in deprived
communities, would help restore the credibility of the industry
in these communities.
1.7 Having a basic bank account does not
necessarily result in becoming financially included. Those on
benefits can struggle with their money management and bill payments
as benefits tend to be paid weekly and while direct debits are
deducted monthly. People with basic bank accounts need support,
not only to make the transition from cash to transaction banking
but how to sustain an account over the long term to build up the
financial resources and have the confidence, ability and awareness
to move to more sophisticated and cost-effective products.
2. ACCESS TO
AFFORDABLE CREDIT
— Measures to enable households excluded
from mainstream credit to have access to affordable credit;
— The role of credit unions and community
development finance institutions;
— The provision of interest-free loans
from the Social Fund.
2.1 Those on low incomes pay more for many
things, paying more for credit that impacts on already low household
budgets.
2.2 Borrowing from high-cost alternatives
occurs because people cannot access money more cheaply or they
believe that is the case or they have had direct experience of
being turned down by financial providers.
2.3 Many low-income consumers prefer to
borrow from more expensive weekly-collected credit providers because
it is convenient, on the doorstep and they feel they can stay
in control of their finances by managing on a weekly basis. Low-income
credit users prefer to borrow small amounts for short periods.
2.4 The commercial market has moved away
from lending to the poorest people, the gap being filled by licensed
and un-licensed moneylenders, catalogues and pawn shops.
2.5 Credit unions and CDFIs have a role
to play by bringing down the cost of borrowing for low-income
consumers. However, credit unions and CDFIs need to be sustainable
and have the ability to manage higher risks of default.
2.6 Credit unions and CDFIs that provide
"wrap around services" of financial education, awareness
and bill payment schemes would be a positive step but as often
as not, financial services offered to low-income communities are
fragmented and poorly co-ordinated.
2.7 Providing small and frequent amounts
of credit to the financially excluded is not on its own a viable
business proposition. What is required is improved partnership
working between credit unions, CDFIs at local, city-wide and regional
levels to maximise resources and limit risk and to engage communities
directly in providing access to `hidden' customers within communities.
3. FINANCIAL
EDUCATION AND
ACCESS TO
FINANCIAL ADVICE
— There is a key role for the Financial
Services Authority (FSA), the Department for Education and Skills
and others in promoting and supporting improved financial education
in schools.
— The provision and regulation of generic
financial advice about debt and savings.
3.1 The need for delivery of personal finance
in schools is well understood. What is required now is to extend
provision in ALL schools, primary and secondary and to look at
more ambitious ways of direct delivery. For example, engaging
young people in the design and content used; providing opportunities
to gain hands-on experience, through the establishment of savings
clubs within schools (Saved by the Bell, Dundee), involving young
people in school budgeting and money management, more extensive
`in reach' to staff and teachers.
3.2 In Scotland, there is no single agency
that has responsibility for adult financial capability. Community
Finance and Learning Initiatives (CFLI) pilots were introduced
in England but not Scotland. While there exists good examples
on the ground (Greater Easterhouse Money Advice Project) there
are a number of national agencies that should be working at the
strategic level across Scotland to seek an improvement in overall
levels of financial capability.
3.3 Free, independent, face-to face money
advice delivered by trusted anchor organisations is the most appropriate
model for the delivery of generic financial advice.
3.4 Money advice must be shifted away from
crisis intervention to focus on more preventive measures.
4. INCENTIVES
AND BARRIERS
TO SAVING
FOR PEOPLE
ON BELOW
AVERAGE INCOMES
— The operation of the Government's
Savings Gateway accounts programme;
— The impact of the Basic Advice Regime
in encouraging saving;
— 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;
4.1 The Saving Gateway does not operate
in Scotland but there is growing interest not only in a national
rollout of the Savings Gateway but in alternative savings programmes.
4.2 An asset-based financial education programme
must be initiated, based on incentive-based programmes, for example,
linking matched savings accounts with financial/asset awareness.
4.3 One way to reduce crisis intervention
is to promote "positive goal orientation". In the USA,
key financial capability programmes have been linked to home improvement,
buying a home, going to college, progressing in work, starting
a business, rather than focused on individual problems. There
is growing evidence that asset-based approaches can serve as a
safety net against unexpected changes and help build people's
financial capability. The process of saving and building assets
appears to encourage people to focus more positively on the future.
4.4 Quoting Professor Michael Sherraden:
"Income may feed people's stomachs, but assets change their
heads and assets are hope in concrete form."
4.5 We believe there is an opportunity to
explore matched savings accounts, earmarked for high return investments
in business, home ownership, further education, accompanied by
financial education as a pathway to help low-income households
save and accumulate assets for the future.
5. THE ROLE
OF THE
GOVERNMENT, THE
FSA 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;
— Lessons from successful local or
regional initiatives designed to address geographical concentrations
of financially excluded households
5.1 The term community banking has its origins
in the USA, initially promoted by Government legislation through
the Community Reinvestment Act and it expanded through the work
of new community organisations like Shorebank in Chicago. Combined,
these provided the fundamentals for how the banking sector and
local communities could work in partnership to address the financial
needs of low-income neighbourhoods.
5.2 In the UK, the Community Banking Partnership
model has been applied to local partnership working between Community
Development Finance Institutions (CDFI), credit unions, banks,
building societies and money advice agencies to co-deliver `one-stop'
services to the financially excluded.
5.3 The core objective of the Community
Banking Partnership approach in this context is a customer-focused
service that incorporates existing community finance provision
and develops new services to deliver affordable banking to low-income
groups.
5.4 In Scotland, a different approach materialised—the
Wester Hailes Community Banking Agreement—a partnership
between the Wester Hailes Representative Council and the Bank
of Scotland (HBoS) to address the extreme levels of financial
exclusion faced by many residents living in West Edinburgh.
5.5 The Community Banking Agreement represented
a formal partnership between a locality and a bank that jointly
improved the provision of personal, organisational and business
services to all members of the community.
5.6 The key lessons identified from this
type of approach include the following:
— Disadvantaged communities have under-recognised
assets that can be used collectively to negotiate improved financial
services from private sector providers.
— All community sector organisations
have an important role to play in tackling financial exclusion
for themselves, their user groups and areas they service.
— There is further, often under estimated
relationships between financial exclusion/inclusion issues with
most, if not all, mainstream public services at local and central
government levels.
5.7 The Wester Hailes Community Banking
Agreement provides concrete evidence that by undertaking "collective"
negotiations with financial service providers, banks have become
more entrepreneurial in their outlook, actively competing for
business in low-income communities.
5.8 A critical step for the community in
the implementation of the formal agreement, which interested the
bank, was the way that local community organisers were able to
construct a "business case" for the bank which made
the community credible and relevant in the banks' eyes.
5.9 Collating, analysing and presenting
local data that enhanced the "market" potential of the
local area was the first step for the community in developing
its collective bargaining power with the bank.
5.10 A new phase of work is now beginning,
a Community Banking Partnership for West Edinburgh that includes
Wester Hailes, this is being supported by the Scarman Trust Scotland.
6. THE BENEFITS
OF FINANCIAL
INCLUSION AND
THE EXTENT
TO WHICH
FINANCIAL INCLUSION
MEASURES CAN
CONTRIBUTE TO
COMBATING POVERTY
AND TO
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.
6.1 The approach being adopted in Scotland
demonstrates the benefit of linking financial inclusion activity
to wider measures that combat poverty, social injustice and improve
employability.
6.2 There is a clear need for improved understanding
of how financial inclusion impacts upon broader policy areas including
health, housing, employment, skills and lifelong learning, regeneration
and neighbourhood renewal, community cohesion and enterprise.
6.3 In the future, measuring the impact
of financial inclusion should therefore include the secondary
effects of financial inclusion measures, for example, the impact
on health improvement, creating sustainable neighbourhoods and
securing long-term employment.
6.4 Therefore, there is a requirement for
better policy co-ordination at the UK, national, regional and
local levels between key service providers, the industry and wherever
possible, the communities themselves.
7. CONCLUSION
7.1 The central message we would like the
Select Committee to reflect upon is that debt and financial exclusion
requires coordinated action at all levels and partnerships with
Government, industry, the regulator and the voluntary and community
sectors to deliver change on the ground.
7.2 Experience tells us that the provision
of financial products and services, affordable credit, advice,
information and education alone is now not enough; what is needed
is new thinking on how to engage "hard to reach groups"
and to help disadvantaged communities become part of the solution
not the problem.
January 2006
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