Chapter 3: Leadership from Government and proactive regulation
49.Financial services in the UK are provided within a regulated marketplace. The actions of regulators—particularly the Financial Conduct Authority (FCA)—have a major impact upon the nature and extent of financial services provision. Such regulators operate within a legal and policy context that is defined and shaped by the Government.
50.Wider Government policy—social as well as regulatory—also has the potential to limit or exacerbate financial exclusion. The final chapter of this report considers how recent welfare reforms might impact upon financial exclusion. In addition, publicly funded providers of advice and guidance services are responsive to the policy impetus and agenda that is set by Government.
51.The Government, therefore, has a significant number of levers and options at its disposal for addressing financial exclusion and promoting financial inclusion. Working with regulators, advice services and businesses, the Government can shape responses to these issues and help to promote a more inclusive society. In Chapter Seven of this report we give detailed consideration to recent reforms to the high-cost short-term credit sector, where Government leadership and proactive regulation have led to positive change. The reforms to high-cost short-term credit show what can be achieved, in a relatively short period of time, with political leadership, dedicated resources and a degree of focus.
52.While this is to be commended we were, unfortunately, told consistently that efforts to address financial exclusion suffered as a result of limited national leadership from Government, and insufficient co-ordination of policy across central Government departments. This chapter considers how the Government approach to addressing financial exclusion might be refined, in order to add up to more than the sum of its parts; it also gives consideration to the work undertaken by the FCA to address financial exclusion, and how this might be enhanced.
The need for Government leadership and co-ordination
Leadership from Government
53.As described earlier in this report, financial exclusion is a multi-faceted issue with numerous social, economic and financial causes and effects. As such, those initiatives which might help to address exclusion and promote inclusion do not sit easily within the purview of any one Government Minister. It is apparent that numerous Government departments have important roles to play:
- HM Treasury is of central importance given its responsibility for financial services policy and regulation.
- The Department for Work and Pensions runs the welfare system and, in doing so, seeks to enable people to achieve financial independence.
- Financial education and capability is a key building block in allowing people to manage their financial affairs appropriately and, as such, the Department for Education is a key actor.
- The Department for Business, Energy and Industrial Strategy is, through Postal Services Holding Company Ltd, the owner of the Post Office, with its extensive branch network offering an array of financial services.
- The Department for Communities and Local Government has oversight of, and is an important funder of, a range of locally delivered financial support and advice services.
Beyond central Government the devolved administrations, local authorities, voluntary organisations and the wider financial services sector are all involved in work to address financial exclusion.
54.In Chapter Two we discussed the creation of the Financial Inclusion Taskforce. The Taskforce was comprised of independent members drawn from across the industry, voluntary sector and academia. In addition to publishing research and evaluation, the Taskforce provided advice on the design and implementation of initiatives from different Government departments, in order that policy interventions could effectively support wider financial inclusion goals.54 In this way, the Taskforce served to promote co-ordination of activity in this field.
55.In March 2011 the Government chose to disband the Taskforce; we were told that this decision meant that financial inclusion should instead be embedded in policy making across different departments, with each department taking responsibility for the particular area of financial inclusion that falls within its remit.55 Where necessary, “normal channels of engagement” between departments were used to co-ordinate joint programmes; the Credit Union Expansion Programme was identified as one such example of joint working between HM Treasury and DWP.56
56.The loss of the Taskforce was, however, identified as a significant issue in much of the evidence that we heard. Leeds City Council told us that, since the Taskforce was wound up, there had been a breakdown in interaction between Government and regional and local authorities.57 The Money Charity suggested that certain initiatives from the Government were now “rudderless and piecemeal”.58 Toynbee Hall told us that:
“As we lost the Financial Inclusion Taskforce, the role of financial inclusion in each government department became mainstreamed. That meant that no one knew anything. It is quite a specialist subject. When there was a team in the Treasury who were leading on it, they felt quite comfortable directing that work. They had a lot of research, and they could commission research through the task force.”59
57.Martin Lewis bemoaned the lack of co-ordination more widely, stating that:
“I do not need to tell any of you that the problem with all government is lack of co-ordination. You meet one Minister who tells you one thing. The next will say, ‘I can’t do that, because half of the subject you’re discussing with me is under the control of somebody else who has a different priority at the moment.’ Certainly co-ordination right across the system would be very welcome. You will forgive me for being somewhat sceptical that that is actually possible.”60
58.The issue of co-ordination across Government cannot be divorced from that of leadership from Government. The aforementioned Taskforce conducted its work within the context of a clear Government focus on promoting financial inclusion, with a £130 million Financial Inclusion Fund used to promote initiatives across a number of departments. This clear impetus from the Government gave a degree of priority to addressing financial exclusion.
59.Witnesses consistently told us that clear leadership and prioritisation from Government on the issue of financial exclusion would be the most important factor in driving improvements in this area. The Money Advice Trust, Age UK, Toynbee Hall, the Financial Services Consumer Panel and M&S Bank, among many others, said that Government leadership was vital.61
60.The Financial Inclusion Commission considered these matters in detail when producing their 2015 report. In doing so, they concluded that the Government had not, in recent years, provided the leadership needed at national level to co-ordinate and monitor financial inclusion.62 They went on to state that “since the end of the Financial Inclusion Taskforce, there has been a lack of momentum and co-ordination at national level. There is no central repository of knowledge and best practice.”63
61.The President of the Commission, Sir Brian Pomeroy, suggested that the Government needed to be proactive in addressing this situation:
“It is really the lead from Government. It is responsibility and a palpable lead at ministerial level, backed almost certainly by some official support, which certainly proved important the last time there was such a lead. That is the first priority.”64
The Chair of the Commission, Sir Sherard Cowper-Coles, expanded upon this theme:
“The sum should be much greater than all those parts. That means a lead from government, a lead from the regulator and an effort across government—the Department for Education, the DWP, DfID and the Home Office—everyone part of such an effort, in which the third sector and the banks work alongside the Government.”65
62.The Commission set out a number of proposals to address this situation; chief among these was a recommendation that the Government should designate a senior Minister66 as the lead on financial inclusion and financial capability, with the title of ‘Minister for Financial Health’.67 The work of the Minister would be supported by ‘Ministerial Champions’ embedded in each relevant department, and in devolved administrations.68 A number of witnesses called for these recommendations to be implemented.69
63.The Minister for Welfare Reform70 was, however, strongly opposed to this proposal and suggested that the concentration of knowledge within departments around specific inclusion initiatives (such as Universal Credit) meant that it was more appropriate for inter-departmental conversations on key issues to take place as and when required.71 The Economic Secretary to the Treasury highlighted the various financial inclusion responsibilities that sat within his remit and told us that “as such, I am effectively the Minister for Financial Health.”72
64.Work to address financial exclusion cuts across a number of Government departments, and extends across the devolved administrations, local authorities, business and civil society. Since the demise of the Financial Inclusion Taskforce these initiatives have lacked central co-ordination and oversight; in addition, the loss of the Taskforce gives the unfortunate impression that financial inclusion is no longer a key priority for the Government. The Government needs to give greater leadership and central co-ordination to initiatives that seek to address financial exclusion.
65.We recommend that the Government should appoint a clearly designated Minister for Financial Inclusion. The Minister should have lead responsibility for promoting financial inclusion and should be supported with appropriate resources to co-ordinate effectively work to address financial exclusion. (Recommendation 1)
Developing and implementing a strategy
66.It is evident that the lack of central Government co-ordination on financial exclusion can lead to gaps in the provision of appropriate services,73 inconsistent objectives across different departments and overlap and duplication of effort between different service providers. We were told that one single body should be tasked with monitoring progress towards financial inclusion, and assessing the financial capability of the country as a whole.74
67.Professor Martin Upton told us that:
“There should be one body . . . which has responsibility for drawing together and co-ordinating all the initiatives aimed to reduce financial exclusion. We know from the work that we have done and the evidence that we have put forward that there need to be multiple solutions by a number of different bodies. If there is no co-ordination, the risk is things will slip between fingers.”75
68.In October 2015 the Money Advice Service (MAS) launched a 10 year financial capability strategy. The Chief Executive of MAS told us that the strategy was:
“Trying to get us from a position where one in five people cannot read a bank statement and 16 million people have less than £100 in savings. We are working with all organisations, across all sectors—government, regulators and banks—and bringing them together. The Money Advice Service’s role has been both to bring the organisations together and provide leadership”.76
69.In early 2016, however, the Government set out plans for the reform of financial guidance services and the replacement of MAS. These proposals were modified in October 2016, and have since been subject to consultation; we consider them in further detail in Chapter Four.
70.A number of witnesses described the capability strategy as a successful element of the work of MAS.77 The British Bankers’ Association (BBA) told us that they supported the principles of the strategy and the long-term goals contained within it, and felt that this work should continue following the implementation of the Government’s reforms to public financial guidance.78 The Money Advice Trust told us that the strategy provided a solid framework and a good start, but was missing measurable objectives against which implementation and progress could be tracked.79
71.We believe that the Financial Capability Strategy lends valuable co-ordination to provision in this field, and should continue following the closure of MAS. We believe, however, that this work should be led directly by the Government, as part of a wider strategy for addressing financial exclusion.
72.If the Government is to provide greater clarity and leadership on financial exclusion it will need to have a strategy of its own, in which aims, objectives and methods of implementation are set out, and a means of providing periodic reports of attainment against these objectives. In this respect, we believe that a useful parallel can be drawn with the work of bodies such as the Social Mobility Commission (SMC).80 The SMC monitors progress towards improving social mobility in the UK, and promotes social mobility in England. Its responsibilities81 include carrying out and publishing research into social mobility and publishing an annual report setting out the progress made towards improving social mobility in the UK.
73.In a similar vein, there are a number of other bodies which are required to publish annual reports to Parliament—such as the Professional Standards Authority, Care Quality Commission and the Office for Nuclear Regulation, among many others. These are all important matters, which merit regular monitoring of progress and activity.
74.We believe that tackling financial exclusion is a vital step towards delivering a more inclusive economy, and merits similar ongoing attention and reporting. Regular Government reports should provide detailed analysis of levels of financial exclusion and a co-ordinated, coherent assessment of Government, third sector and business initiatives that seek to promote financial inclusion. They should provide monitoring and review of progress against clearly defined objectives for addressing financial exclusion.
75.We recommend that the Government should set out a clear strategy for improving financial inclusion in the UK. The Government should lead and co-ordinate on the implementation and monitoring of this strategy. This should be one aspect of a wider Government strategy to address comprehensively the issue of financial exclusion. We believe that the recommendations in the remainder of this report should form a key part of this wider strategy. (Recommendation 2)
76.We recommend that the Government should also provide an annual report of the progress made towards addressing financial exclusion across the UK, with work on this led by the Minister for Financial Inclusion. The report should be presented to Parliament as a Command Paper. We recommend that the first such report should be presented to Parliament within 18 months of the publication of this Select Committee report. (Recommendation 3)
The role of regulators
The Financial Conduct Authority and financial inclusion
77.The Financial Conduct Authority (FCA) was established in April 2013, as a result of the Financial Services Act 2012, which abolished the Financial Services Authority. The FCA regulates the conduct of over 56,000 financial services firms in the UK; its strategic objective is to ensure that relevant financial services markets function well. This is supported by three operational objectives which are to protect consumers, to protect financial markets and to promote competition.82
78.The FCA told us that, under their statutory competition objective, they had regard to how easy it is for consumers to access financial services, including consumers in areas affected by social or economic deprivation. They also explained that, in fulfilling the objective of protecting consumers, the FCA had regard to the differing degrees of experience and expertise of consumers, and the general principle that consumers should take responsibility for their own decisions. They also recognised that consumers can only do this if they have access to appropriate financial services that meet their changing needs.83
Box 1: Co-operation between the FCA and the CMA
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The Competition and Markets Authority (CMA) has competition law powers which apply across the whole economy. Sectoral regulators such as the Financial Conduct Authority are able to exercise these competition law powers to enforce the prohibitions on anti-competitive agreements and on abuse of a dominant position, and to make market investigation references, concurrently with the CMA in those sectors for which they have responsibility. The powers of the FCA were enhanced in this regard by the Enterprise and Regulatory Reform Act 2013. In December 2015 the CMA and the FCA agreed a memorandum of understanding setting out how the two regulators would work together within the context of competition law. The memorandum committed the two regulators to close working, including through the sharing of expertise, information, ideas and experience. Adam Land, Senior Director at the CMA, explained to us how the two regulators worked closely together: “We work closely with the FCA and consulted them pretty extensively through our [payday lending] investigation. They now have competition powers and consumer powers, so we see our role as very much complementary to them. We have done one-off, large investigations where we create partly the evidence base they can then use as a standing regulator. We are putting in place remedies, but the long-term home for a lot of these issues will be the FCA because they can return to the issue. It is a close working relationship.” |
Sources: Memorandum of understanding between the CMA and the FCA, December 201584 and Q 191 (Adam Land)
79.In May 2016 the FCA published an ‘Occasional Paper’ on access to financial services; the paper was intended to promote debate on financial access by bringing together a range of key issues.85 Since the publication of this paper the FCA has held discussions with industry groups, research bodies, the Government and the third sector, in order to promote awareness of some of the issues raised. Previous Occasional Papers published by the FCA have also considered themes relevant to financial exclusion, such as consumer vulnerability; a February 2016 discussion paper also considered the financial services needs of the ageing population.
80.The FCA has, therefore, sought to undertake research and promote debate around issues relevant to financial exclusion. The work, initiative and proactivity of the regulator is, though, limited by the statutory objectives set out by Government. The FCA told us that:
“There are other aspects of access and financial inclusion that come under the remit of Government policy rather than market regulation. The FCA’s remit does not, for example, extend to imposing public service obligations, or compelling one group of customers to cross-subsidise another.”86
They went on to state:
“Progress requires a combined effort from Government, industry and consumer organisations as well as the regulator. We are able to act within our statutory remit but it is more appropriate and effective for other stakeholders to deal with the aspects of financial inclusion policy which do not overlap with our objectives.”87
81.The limitations of these objectives were highlighted during the course of our inquiry.88 In their 2015 report, the Financial Inclusion Commission reported that existing legislation did not give the FCA a clear enough mandate to take decisive action in encouraging the sector to develop services to meet the needs of consumers in vulnerable circumstances and on low incomes. They also noted a view that the FCA was putting little pressure on firms to widen access, since, understandably enough, this is seen as ‘social policy’ rather than a ‘regulatory’ issue.89 This interpretation of financial access was echoed by the Economic Secretary to the Treasury, who told the Committee that financial inclusion was “far more of a social, rather than a regulatory issue”, going on to state that it was therefore for “Government to decide what actions should be taken to ensure financial inclusion.”90
82.The Financial Inclusion Commission took a different stance, telling us that the Government should give the FCA a specific and clear direction to promote financial inclusion, in order to provide ‘political cover’ for actions that the FCA might undertake in this area.91 The Commission suggested that this should take the form of a new financial inclusion commitment, sitting within the FCA’s consumer protection objective, rather than within its competition objective. A number of other witnesses argued that such a commitment was required.92 Age UK stated that one of their priorities would be to:
“Place a statutory duty on the FCA to promote financial inclusion as one of its core objectives, as recommended by the Financial Inclusion Commission. This duty should include a mandate to require financial service providers to meet designated standards in relation to access and customer service. We identify the lack of safe, convenient and affordable access to payment and money management services as one of the first issues the FCA should address under such a duty.”93
83.The issue of ‘political cover’ for actions taken by the FCA also arose when considering recent measures taken to impose a cap on high-cost short-term lending.94 In this instance, the FCA told us95 that it might have been open to legal challenge on the imposition of a cap had it not been for the introduction of a new clause into the Banking Reform Bill, in November 2013, requiring them to implement such a cap.96 This example demonstrates that proactive regulation requires political cover and legal backing.
84.We recommend that the Government should expand the remit of the FCA to include a statutory duty to promote financial inclusion as one of its key objectives. Government leadership of the financial inclusion agenda must be supported by proactive regulation. At present, the work of the FCA in this field is limited by the objectives defined in its statutory remit. (Recommendation 4)
A duty of care to customers
85.In June 2015 the Financial Services Consumer Panel issued a paper suggesting that the FCA should be required, as part of its consumer protection objective, to make rules specifying what constitutes a reasonable duty of care for financial services providers to exercise towards their customers. In order to implement such a measure the Government would need to amend the Financial Services and Markets Act 2000.
86.Currently, the Act requires that the FCA must have regard to ‘the general principle that consumers should take responsibility for their decisions’.97 The Financial Services Consumer Panel told us that consumers could only reasonably be expected to take responsibility for their decisions if firms had exercised a duty of care towards them;98 they suggested that such a duty would oblige providers of financial services to avoid conflicts of interest and act in the best interests of their customers.99 The Panel proposed that the Act should be amended to require the FCA to make rules on a duty of care; the exact scope would be for the FCA to decide, but the Panel envisaged that the rules would be flexible, and depend on the complexity and risk of the product being sold. The primary intention would be to protect retail and smaller business customers.100
87.The Panel argued that the introduction of a duty of care would lead to cultural change in the banking sector:
“A duty of care would engender long-term cultural change in financial services providers. It would bring much-needed clarity to the rules governing the relationship between firms and their customers . . . Firms would no longer be able to adopt a ‘let’s see if we can get away with it’ approach, but would have to avoid conflicts of interest and take their customers’ best interests into account at every stage of their engagement”.101
They went on to note that, if properly applied, an over-arching duty of this kind might in fact offset the need for more detailed rules and regulations.102 The proposal could, therefore, have the potential to limit the overall costs and burdens of regulation.
88.The True Potential Centre at the Open University suggested that such a duty might strengthen the hand of the regulator when intervening on financial exclusion issues.103 The FCA told us that they did not disagree with the principle of a duty of care, but were not convinced that it would add significantly to the regulatory toolkit available to them; they stated that they were willing to continue to debate the proposal, both with the Panel and more widely.104 The Economic Secretary to the Treasury told us that he had an open mind on the matter, but that it was primarily a matter for the FCA.105
89.We recommend that the Financial Services and Markets Act 2000 should be amended, in order to introduce a requirement for the FCA to make rules setting out a reasonable duty of care for financial services providers to exercise towards their customers. Such a duty will promote responsible behaviour on the part of businesses and support sound financial decision-making by customers. (Recommendation 5)
54 HM Treasury, Financial Inclusion Taskforce, Terms of Reference (January 2010): http://webarchive.nationalarchives.gov.uk/20100104214853/http://hm-treasury.gov.uk/fit_terms.htm [accessed 14 March 2017]
56 Ibid.
61 See evidence from Q 12 (Joanna Elson OBE), Q 68 (Lucy Malenczuk), Q 112 (Sian Williams), Q 131 (Sue Lewis) and Q 230 (Sue Fox).
62 Financial Inclusion Commission, Improving the Financial Health of the Nation (March 2015) p 12: http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [accessed 14 March 2017]
63 Financial Inclusion Commission, Improving the Financial Health of the Nation (March 2015) p 21: http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [accessed 14 March 2017]
66 Sir Sherard Cowper-Coles suggested that this designation could perhaps be given to the Economic Secretary to the Treasury (Q 52).
68 Ibid.
69 See, for example, Q 9 (Joanna Elson OBE), Q 102 (David Orr), Birmingham Financial Inclusion Partnership (FEX0049), The Money Charity (FEX0061) and Toynbee Hall (FEX0073).
70 At the time this was the Rt Hon. Lord Freud; he retired from this position in December 2016.
80 The SMC is co-sponsored by the Cabinet Office, Department for Work and Pensions and Department for Education.
81 Social Mobility Commission, ‘About us’: https://www.gov.uk/government/organisations/social-mobility-commission/about [accessed 14 March 2017]
82 Financial Conduct Authority, ‘About Us’: https://www.fca.org.uk/about/the-fca. The full text of the objectives, as set out in sections 1B to 1E of the Financial Services and Markets Act 2000 (as amended by the Financial Services Act 2012).
84 Competition & Market Authority, Financial Conduct Authority, Memorandum of understanding between the Competition and Markets Authority and the Financial Conduct Authority – concurrent competition powers (December 2015): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/487999/CMA_FCA__MOU.pdf [accessed 14 March 2017]
85 Financial Conduct Authority, Access to Financial Services in the UK (May 2016) p 58: https://www.fca.org.uk/publication/occasional-papers/occasional-paper-17.pdf [accessed 14 March 2017]
87 Ibid.
88 Written evidence from Age UK (FEX0094), the Finance Foundation (FEX0079), Money Advice Trust (FEX0047) and Neyber (FEX0065)
89 Financial Inclusion Commission, Improving the Financial Health of the Nation (March 2015) p 23: http://www.financialinclusioncommission.org.uk/pdfs/fic_report_2015.pdf [accessed 14 March 2017]
92 Written evidence from Age UK (FEX0094), the Money Charity (FEX0061) and Consumer Finance Association (FEX0011)
94 This is commonly known as the ‘payday lending’ cap, introduced in January 2015, and is considered in more detail in Chapter 7.
96 Now section 131 of the Financial Services (Banking Reform) Act 2013.
97 Financial Services and Markets Act 2000, section 1C (as amended by the Financial Services Act 2012)
100 Ibid.
101 Ibid.
102 Ibid.