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Written evidence submitted by the Financial Conduct Authority

Rt Hon Mel Stride MP

Chair
Treasury Select Committee
House of Commons
SW1A 0AA

              22 April 2022

      Our ref: 220228C

Dear Mr Stride,             

Re: Future of Financial Services session follow up

Thank you for your letter of 1 March following the appearance by me and Edwin Schooling Latter before the Treasury Select Committee. You asked about our work on financial inclusion and the poverty premium in relation to insurance products and cash, and the data we collect on financial inclusion more generally. I will respond to your questions in this letter.

As set out in our Business Plan for 2022/23[1] and our three-year Strategy[2] published this month, we are committed to supporting consumer access to products and services under our consumer protection and competition objectives. We will continue to supervise firms against our expectations and work with the Government, consumer groups and other partners, including through the Financial Inclusion Policy Forum, to identify areas where changes may be needed.

Insurance products

Home and motor insurance are the two most commonly held types of insurance in the UK, and our market study in general insurance found that policies are widely accessible through a range of channels. However, not every consumer will choose to purchase insurance, and there may be many reasons for this.

Sometimes that could be due to the cost of insurance premiums. We are aware that some consumers who pay their insurance premiums in monthly instalments can face very high interest charges. We have introduced rules requiring firms to ensure that products provide fair value. These rules contain specific requirements for firms offering premium finance. We expect the cost of finance to be fair both in relation to prices available elsewhere in the market and also the credit risk, which is typically lower than for most other forms of credit. Firms must provide clear information about the cost of premium finance arrangements and make clear that this makes the product more expensive.

In the hearing we discussed the use of granular data on individuals in insurance. Our study did not find evidence that such practice has led to consumers being systemically excluded from insurance, but the risk around exclusion could increase in the future with more prevalent use of data on individuals. As insurers typically determine prices based on their assessment of risk, some consumers may pay more than others depending on their risk profiles.

In relation to access to home insurance products, we have met with officials from the Department for Work and Pensions to discuss how their advisors and others (such as social landlords) could potentially signpost consumers they deal with to home insurance providers, without the need for FCA authorisation. We know that, in the past, some of their advisors and social landlords have refrained from giving potentially helpful guidance around home insurance to those they engage with as they are fearful of the consequences of inadvertently carrying out FCA regulated activities without authorisation. We believe there are ways this can be done and will continue working with relevant parties so that consumers can access the insurance products they need.

Access to Cash

You have also asked what work the FCA has done to address access to cash, including the impact of bank branch closures.

Along with the Payment Systems Regulator, the Bank of England and the Treasury, we are committed to protecting access to cash, particularly for consumers in vulnerable circumstances who rely on it.

We regularly collect data to map and monitor the coverage of cash access throughout the UK.  Our latest findings[3] show that most people have reasonable access to cash through a combination of bank or building society branches, Post Office branches or ATMs. We found that 95.5% of the UK population is within 2km of a free cash access point and 99.7% within 5km. We have also undertaken consumer research[4] to provide insight into which consumers need cash and what the drivers are for that need.

We do however recognise that bank branch and ATM coverage may change and have therefore published guidance on our expectations of firms when deciding whether to close bank branches or to close or convert ATMs. Our guidance sets out that before making a final decision, we expect firms to provide a clear summary of their analysis of the needs of customers currently using the sites, the impact of their closure proposals on those customers, and alternatives that are, or could reasonably be, put in place by the firm. If a firm decides to go ahead with its proposals, it is expected to clearly communicate information about this and alternatives available to its customers no fewer than 12 weeks before the closure or conversion is implemented. This gives customers some time to take action, such as changing banking provider, with firms also required to demonstrate that they are supporting customers in accessing alternatives.

We have been supervising firms closely against this guidance. We have challenged firms to demonstrate how they are complying with it, and in some cases firms have paused closure programmes whilst they reflect on our feedback.

In February, we published examples of good practice and areas for improvement that we have seen when supervising this guidance. Sharing these examples should help all firms plan any closures or conversions in a way which takes better account of customers’ needs from the start.

In addition, we have committed to reviewing our guidance taking account of any legislative or industry developments. We are currently considering the recommendation by the Lending Standards Board that our guidance should build on the requirements of the industry’s Access to Banking Standard, so we become the sole regulator in relation to the oversight of branch closures and changes in branch service provision.

We will continue to work with banks that are planning to make branch closures to ensure that they are treating customers fairly, particularly those in vulnerable circumstances. We also continue to work with the Government on future legislation to give us the powers we need to protect access to cash for those who need it.

In advance of legislation, we are pleased to see industry taking steps to protect access to cash and trial alternative solutions, as seen with the Cash Action Group. We hope that this collective industry initiative proves successful, while individual firms remain responsible for ensuring their own customers are treated fairly. We continue to work closely with the industry to encourage them to develop solutions to cash access.

Data on financial inclusion

Finally, you asked about the data we collect around financial inclusion. 

Alongside our Business Plan for 22/23 and three-year Strategy, we have published, for the first time, outcomes we would like to achieve and the metrics we will use to measure progress.[5] As part of that we have committed to the continued tracking of access to cash. We also included a metric around the reduction of the proportion of consumers, who, in the last 2 years, have been offered a financial product or service they wanted, but at a price, or with terms and conditions, they felt to be ‘completely unreasonable’. 

We are currently undertaking collecting the data for the next edition of the Financial Lives survey.  Over 250,000 households from across the UK have been randomly selected to participate. We anticipate that the results of the survey will be published next year.

I want to end this letter by confirming our commitment to working with Government and other partners to support financial inclusion within financial services.

April 2022