Christians Against Poverty (CAP) – written evidence (FEX0014)

 

Summary

 

Definitions and causes of financial exclusion

 

 

Financial education and capability

Addressing financial exclusion

 

 

Accessing affordable credit

 

 

Government policy and regulation

 

 

Financial technology (Fintech)

 


Definitions and causes of financial exclusion

 

  1. Is financial exclusion the inverse of financial inclusion and, if not, how do the two concepts differ? What are the causes of financial exclusion?

 

Financial exclusion is when hardship is caused in some way from being unable to access the financial products or services that are needed to take part in society. This could be due to a number of factors, including problems with financial markets, personal circumstances and financial capability.

 

Often the discourse around financial exclusion and inclusion is too distinct. They are inverse and not discrete concepts, representing opposite ends of someone’s financial wellbeing scale. As a result, there are different levels of severity in financial exclusion. It is possible to be included in some ways but excluded in others at the same time. For example, lack of access to a bank account represents severe financial exclusion being a gateway to other financial services, in comparison to having access to everyday financial products but unable to get a mortgage.

 

The FCA’s Occasional Paper on Access to Financial Services in the UK helpfully classifies the causes of financial exclusion into the ‘maze’, ‘fog’ and the ‘void’. This emphasises that financial services can cause financial exclusion in a number of ways; being unable to access products (maze), struggling to understand and search for products (fog), or lack of products offered that meet needs or being excluded from suitable products (void). Both having access to financial products and the ability to use them are important elements to someone’s financial wellbeing.

 

The interaction between these factors and individuals’ personal circumstances adds another dimension. From CAP’s experience of working with those in unmanageable debt, financial exclusion is often exacerbated or arises when circumstances change. For example, entering financial difficulty often means an individual’s financial capability is diminished and existing financial products are no longer suitable or begin to cause detriment.

 

The Financial Inclusion Commission’s definition of financial inclusion is also helpful as it captures the importance of having a longitudinal perspective. As well as having access to products, financial inclusion is to be able to prepare the future, to protect your financial wellbeing and have financial resilience. This means that pensions, insurance, saving, advice and financial education are all contribute to someone’s financial inclusion.

 

 

  1. Who is affected by financial exclusion? Do different sectors of society experience financial exclusion in different ways? To what extent, and how, does financial exclusion affect those living in isolated or remote communities?

 

Financial exclusion is experienced by a wide variety of people, with some characteristics increasing the risk and meaning some groups are disproportionately affected. This includes; those on low incomes, over-indebted, pensioners, young people, and those with characteristics that make them more likely to be vulnerable. For many, financial exclusion can also be temporary, something they move in and out of as their circumstances change.

 

Those on low incomes are especially vulnerable to financial exclusion, being less financially resilient. Commonly perceived as unprofitable customers by mainstream financial services, they are often unable to access products that meet their needs, while at the same time targeted by marketing for more expensive sources of credit.

 

Remote communities certainly present a greater risk of financial exclusion through lack of accessibility, but the impact of this greatly depends on a number of factors, such as how digitally savvy a person is and internet speeds.

 

Different sectors of society inevitably experience financial exclusion in different ways. As highlighted by the recent FCA Occasional Paper on Access to Financial Services in the UK, different groups have different needs and barriers to being financially included. For instance, the experience of a person affected by physical barriers to accessing financial services is very different compared to someone who is financially excluded by their ineligibility for a financial service they require.

 

 

  1. What is the relationship between financial exclusion and other forms of exclusion, disadvantage or deprivation? What role does problem debt play in financial exclusion?

 

Financial exclusion is closely linked to other forms of exclusion and problem debt, with the cause and effect working both ways.

 

 

 

The relationship between financial exclusion and problem debt is more wide reaching.

While problem debt commonly affects those disadvantaged or experiencing deprivation, and therefore financially excluded already, others become financially excluded as a result of problem debt. From CAP’s experience, this includes people who had been very confident and capable at engaging with financial services, but financial difficulty means their needs change and exclusion occurs through stress, lack of money and diminished credit rating. This can then lead to other forms of exclusion and the ‘poverty premium’, such as restricting their ability to rent without upfront security deposits and the installation of a prepayment meter.

 

 

 

  1. Do individuals with disabilities, or those with mental health problems, face particular issues in regard to financial exclusion?

 

Those with disabilities or mental health problems, as well as learning disabilities, are not affected by specific issues with regards to financial exclusion, but are more likely to struggle with factors that lead to financial exclusion across the spectrum. Examples would be physical inaccessibility or confusing jargon. These factors may cause detriment to people with these characteristics disproportionately, but the impact entirely depends on the person’s personal circumstances, capability and level of support.


Financial education and capability

 

  1. Are there appropriate education and advisory services, including in schools, for young people and adults? If not, how might they be improved?

 

There are a substantial number of advisory services and financial education providers, but awareness and take up is low. Half of CAP’s clients wait over two years before seeking help with their debts and four in ten do so because they ‘did not think anyone could help’.

 

As well as awareness, the cultural attitude to talking about money also limits up-take. Money is a taboo topic, something that is not talked about and therefore people are less willing to seek the help that they need. Yet, advice is often needed to get the best out of the fast-paced changing financial landscape that brings many challenges, as well as benefits, for consumers. Charities, businesses and government need to make positive strides towards financial transparency and fostering a culture where it is more readily seen to be acceptable to seek help and advice to manage money well. Key to this is bridging the gap, so that those who are in a comfortable position financially are also part of this cultural shift, to avoid a perceived stigma for those where money is tight and talking about money is needed to stay afloat.

 

Despite the positive step to introduce statutory financial education in secondary schools, the curriculum does not specify the content or quality of this education and teachers are not sufficiently equipped to deliver this. In addition to this, many schools are not required to follow the national curriculum. The move towards free schools and academies risks large groups of students not receiving any financial education. Moreover, as attitudes towards money are shaped at an early age, financial education in primary schools is also vital.

 

Raising awareness of voluntary organisations that provide financial education sessions in schools would be beneficial, but there also needs to be resources to help teachers understand the importance of financial education, the range of topics that should be covered and how to help children of all ages engage with financial issues. The content and expectations of the quality and frequency of this should also be standardised to ensure that all young people receive enough financial education to have the basic skills to manage their money well and navigate financial decisions later in life, as well as knowing that further help and advice is available should they need it in the future.

 

There are also great general sources of advice available for adults, such as Money Saving Expert. However, low financial capability means that some need more support. To do this, CAP provides free face-to-face adult financial education through the CAP Money Course and is now the largest provider in the UK. Courses are run by trained volunteers from local churches and offer an opportunity for delegates to take an in-depth look at their finances over several sessions. There are currently 849 churches actively partnering with CAP to provide the CAP Money Course and in 2015, 11,508 people attended a course.

 

While the main focus of CAP’s financial education work continues to be adults, this is now complemented by course materials for children, youth and students, which are designed to lead on to financial education in adulthood as well. As well as CAP Life Skills, which is being piloted to offer wider support for those who need more time and support than the CAP Money Course provides to get to grips with managing money on a low income.

 

  1. How can financial literacy and capability be maintained and developed over the course of a person’s lifetime?

 

Financial education in schools provides the opportunity to give all children, regardless of background, a positive introduction to budgeting that can then be continued and built upon throughout their schooling and later life. However, it is unrealistic to expect children to remember everything they need to know in adulthood, for example how a pension works, and therefore life-long learning is needed. A key message of this early financial education needs to be that there is accessible budgeting and debt advice available later in life should it be needed.

 

To reinforce and complement this, there then needs to be general budgeting advice, promotion of financial resilience, as well as specific product information, streamlined with a consumer’s journey across their lifetime. Important education should be provided at the point it is most relevant, for instance information about pensions when first entering work.

 

There is a role here for the financial services industry to facilitate this by providing tools, products and communications that are simple to use and understand, and also to raise awareness of advice at key trigger points, but using voluntary organisations that specialise in financial education means financial education is impartial, without commercial interest.


Addressing financial exclusion

 

  1. What role should the concept of ‘personal responsibility’ play in addressing financial exclusion? Is appropriate support available for the most excluded and, if not, how should support be strengthened? What role should government, the charitable sector and business play in tackling financial exclusion?

 

It is important to recognise the role that wider deprivation and exclusion play in affecting access to and confidence engaging with financial services, particularly for those most excluded. Financial exclusion is not simply neglecting to take up services that are easily accessible to an individual and therefore ‘personal responsibility’ has a limited role. However, that is not to say that given the right level of support, individuals should not be expected to take positive actions once empowered to do so.

 

This interaction with wider exclusion also means that there is no quick fix. All three sectors have a role to play to tackle financial exclusion, as well as wider deprivation. Charitable organisations are perhaps best placed to get alongside and reach the most excluded groups, but government has near universal access to reach all affected. There has also been much good work done by local authorities through financial inclusion schemes and the Troubled Families Programme, for example. Furthermore, financial services have a vital role to provide affordable products and services accessible to all.

 

From CAP’s experience of providing financial education, for the most excluded that face a wider set of complex issues, support needs to be provided over the longer term to have a transformative impact. This has led to the development of CAP Life Skills. Currently in pilot stage, these groups build community and equip those on low incomes with the skills and confidence they need to survive on a low income. See page eight for more information about CAP Life Skills.

 

 

  1. Are appropriate financial services and products available for those who are experiencing financial exclusion? What might be done to address any deficit? What role should banks play in increasing access for those most at risk of exclusion? What is the role of the Post Office in providing access to financial services for such customers, and how might that role develop?

 

As a trusted brand, the Post Office has a very important role to play providing a face-to-face service for those who are excluded from or not confident with other access channels. However, it is important that accessing services via the Post Office is not a worse deal when these are typically used by low income consumers, and that branch closures do not further restrict accessibility.

 

There are also many other providers specialising in accommodating those at risk of financial exclusion, from not-for-profit hire purchase providers to Credit Unions. However, banks and mainstream service providers have an important role in offering mainstream products that meet the needs of those at risk of financial exclusion and promote wide take-up. These providers are also better placed to provide services to less profitable customers and social tariffs, as they have a broader customer base.

 

There has been good progress in the past year with the new Basic Bank Accounts launched in conjunction with HM Treasury, but these still fall short in practice. Many CAP clients still find the application process difficult to navigate, branch staff are unaware of these accounts and the detriment caused when they are declared insolvent.


Accessing affordable credit

 

  1. What has been the impact of recent changes to the consumer credit market – such as the capping of payday loans - on those facing financial exclusion? How can it be ensured that those in need of affordable credit can access appropriate products or services?

 

HCST credit is often used by those already financially excluded who are unable to access other more affordable forms of credit, but others prefer this type of credit for its speed and anonymity.

 

As those struggling with debt typically wait over two years before seeking help, the impact of the FCA’s price cap on high-cost short-term (HCST) credit is still widely unknown. The main concern is that those now excluded from HCST credit because of the price cap will face detriment and turn to harmful unregulated borrowing.

 

Research conducted by CAP in 2013 found that 77% of those who took out a payday loan had used it to pay for food, 52% for gas or electricity and 36% for rent or mortgage payments. This clearly represents unaffordable borrowing and the price cap brings important protection from excessive interest and charges for many of the most financially vulnerable. However, it does also highlight the importance of offering alternatives for high-risk consumers now unable to get a loan so that they can make these essential payments.

 

While affordable credit is preferable, borrowing to meet essential living costs is rarely sustainable and there is a need for earlier intervention; equipping people to budget and save so they are less reliant on credit as a safety-net. There is perhaps also a role for budgeting loans provided by Jobcentre Plus to be extended for non-physical items to meet urgent priority bill payments.

 

 


Government policy and regulation

 

  1. How effective has government policy been in reducing and preventing financial exclusion? Does the government have a leadership role to play in addressing exclusion?

 

The role of central government is very important to bring stakeholders together, especially to ensure markets provide for those where there is little incentive to do so due to profitability. The government has taken a leadership role to some extent, but there has been little legislation that CAP is aware of. There have been positive initiatives supported by government, such as the new Basic Bank Accounts, as well as much good work done by local authorities. Yet where concrete action has been taken, for instance the proposed Help to Save, this has missed key groups most at risk of financial exclusion, such as those on unemployment or disability benefits.

 

 

  1. What has been the impact of recent welfare reforms on financial exclusion?

 

Recent welfare reforms have undoubtedly exacerbated financial exclusion for some by reducing their income and increasing their risk of debt. There is also now less provision for crisis loans, which are a vital lifeline for those unable to afford or access other forms of credit.

 

Universal Credit has also increased the requirements for being financially included. For instance, by requiring claimants to budget monthly when some employers pay weekly. While budgeting support has been provided, it is concerning how low take-up has been and this has clearly not promoted financial inclusion. Even some of the extra accommodations, such as Alternative Payment Arrangements, which are paid one month in arrears, have caused detriment, by triggering the eviction process for some housing associations.

 

 

  1. How effectively are policies on financial exclusion coordinated across central government? Is there an appropriate balance and interaction between the work of central government and the work of local and regional authorities, and the devolved administrations?

 

Local authorities are doing a lot of great work to promote financial inclusion. This localised approach works well as financial exclusion can look different between locations and local authorities are able to bring together the many local organisations working to promote financial inclusion. However, support and funding from central government is essential, especially as financial exclusion tends to be concentrated in the most deprived areas. The success of local authorities’ initiatives has also been limited by lack of coordination between their departments in some cases, for instance Council Tax collections, and with central government. It seems that local authorities have been desperately trying to mitigate the impacts of central welfare reforms, while at the same time their budgets have been increasingly squeezed.


  1. To what extent is the regulation of financial products and services in the UK tackling financial exclusion? Are alternative or additional regulatory interventions required to address financial exclusion? What balance should be struck between regulations and incentives for financial institutions?

 

The Consumer Credit Sourcebook does cover provisions for vulnerable customers and seeks to ensure existing customers are treated fairly, but this does not address wider financial exclusion or encourage expansion to excluded groups. It is however, a topic that the FCA are currently looking into with the publication of their Occasional Paper on Access to Financial Services in the UK and some firms are addressing financial exclusion to gain reputational capital.

 

The most excluded are commonly the costly consumers in terms of customer service and risk profiles. Therefore, additional regulation is needed to ensure that the market accommodates them. However, this needs to come hand-in-hand with a culture that creates the right incentives to ensure this is done well. The new Basic Bank Accounts are an example of where high level intentions and policies in practice have been at odds and not fully address the issues faced by those financially excluded. 

 

 


Financial technology (FinTech)

 

  1. Does the government have a role to play in ensuring that the development of financial technologies (FinTech) and data capture helps to address financial exclusion? If so, what should this role be?

 

It has been great to see new players enter the financial services industry in recent years and leading the way in innovation. FinTech has the potential to bring many exciting new developments where the major traditional players have been slow to move. With lower running costs FinTech might also present the opportunity to offer products to more costly segments of consumers where there has previously been a void. However, the extent that these new technologies can lessen financial exclusion will heavily depend on the level of digital exclusion, both lack of access and skills, that co-exists with financial exclusion. The Government certainly has a role to play in this landscape, continuing the extension of good internet access to all and enhancing digital capability.

 

 

12 September 2016