Definitions and causes of financial exclusion
Financially excluded people are excluded from accessing mainstream financial services and products which other people may take for granted. These financial services and products include bank accounts, loans on favourable terms, appropriate insurance products, and availability of non- fee charging ATMs. These products and services are open to people who enjoy financial inclusion, and financial exclusion can be regarded as the inverse of financial inclusion.
At Citizens Advice Rossendale, we see many clients who are financially excluded. Factors that make financial exclusion more likely include: poverty, debt, isolation, a lack of financial capability knowledge and skills. Living on a low income in a deprived and disadvantaged community makes it less likely that desirable financial services and products will be easily accessible.
People on low incomes, both in employment and not in employment, are often affected by financial exclusion especially if they lack financial capability knowledge and skills.
For example: A single mum on a low income may want to buy a new washing machine to replace one that has just broken. With 2 small children she may consider a washing machine to be a necessity. Some years ago, she would have been able to request a crisis loan from the Social Fund. Nowadays crisis loans have been abolished; she may find there is some financial support available from her local authority but any scheme is discretionary and she would not necessarily receive help. As she is on benefits and has a low income, she will not usually be offered a loan from a bank on a favourable rate. (Also of course, the smallest loan banks offer is usually around £1000 –which is more than the woman needs for a washing machine, even if the bank were open to lending to her). If the woman is aware of Credit Unions, she might approach the Credit Union for a loan. The woman may find that the Credit Union cannot loan money to her unless she already has a CU account and has demonstrated a commitment to regular saving. If she is already a Credit Union member, she may be offered a loan but the APR is likely to be higher than a bank loan. If unaware of Credit Unions, the mother may consider other sources of credit. She may approach a ‘rent-to-own’ shop like BrightHouse or PerfectHome. She may find such shops welcoming and convenient: the washing machine will be delivered to her home address and the machine will probably also be plumbed in for her. The cost of the washing machine will be paid through relatively small, ‘affordable’ weekly payments which may be attractive to someone on a low income like her. When the woman finally pays off –and owns- the washing machine, it will have cost her far more than if she had been able to buy the machine outright. This woman may also have been able to get a loan from a Payday loans company or a doorstop lender. The terms of such loans will be less favourable than a bank loan would have been, meaning the woman would pay back more money than she would have done with a bank loan.
People living in isolated and remote communities may not have easy physical access to financial services such as banks; if they have no internet service or are able to access it only via a mobile phone they may not be able to access online financial services easily either.
People in poverty in rural communities are often unable to ‘shop around’ as there may only be 1 (expensive) shop in close proximity, travel costs may be prohibitive, and initiatives to promote financial inclusion may not happen in their locality.
There is a relationship between financial exclusion and other forms of exclusion and disadvantage. For example, an individual without access to digital services and skills in digital capability will be unable to access the internet and unable to utilise online information to research, for instance, what would be the optimum way of paying off credit cards with varying APRs, or would be unable to access price comparison websites such as Gocompare.com or Confused.com to find the cheapest, most appropriate house insurance or energy provider. Without access to digital services, the individual may find it harder to become (and remain) financially literate, as much of this kind of information is available via online sources such as Moneysavingexpert.com or the Money Advice Service. Some people who are reasonably well-off may not have regular access to digital services, but this may not be considered problematic by them if they have enough money to pay bills and fund their lifestyle.
A jobseeker who is claiming Universal Credit may have a bank account, but be reluctant to set up direct debits to pay bills including rent, for instance, due to worries about incurring bank charges if the UC payment is credited to his account late or is for less money than expected, as sometimes happens. People who are disadvantaged by very tight incomes –as single people on UC or Jobseeker’s Allowance are—risk accruing problematic debt if they incur unexpected or unbudgeted-for charges. Citizens Advice Rossendale worked with a client on UC who felt it necessary to withdraw a month’s rent money in cash from an ATM (over 2 days due to cash machine limits) in order to be able to pay her rent with cash (rather than by direct -debit). Regularly withdrawing hundreds of pounds from an ATM may have safety implications. If the jobseeker has to use a fee –paying ATM due to there being no free ATMs in the area (and the prohibitive cost of transport to access a free machine), she will lose money every time she withdraws money from the ATM, and be further disadvantaged.
There are many bank closures occurring in disadvantaged areas. In recent years, Rossendale has seen a number of banks closing branches. For eg, Bacup has recently lost Barclays and NatWest banks and their free-to-use ATMs. There is no HSBC bank in the whole of Rossendale— the nearest HSBC branches are in the neighbouring towns of Bury or Rochdale, both over 10 miles away.
Some people may be living in such straitened circumstances that they do not have surplus money to think about for example, buying contents insurance for their home. Such individuals may reasonably assume that they are so over-indebted that money cannot be found for contents insurance, especially if they consider they don’t have possessions of value, anyway. Of course, if these people’s homes were burgled or their property flooded, they might regret the lack of insurance but this may be seen as a moot point if they simply did not have the money. Citizens Advice Rossendale works with many individuals with little ‘spare money’.
The credit rating of people who are over-indebted may be poor and this often means that any further loans or borrowing will be at high rates, or on unfavourable terms, and total amounts to be repaid will be higher, often leading to further debt and the possibility of defaults and non- payment.
People with problem debt may be encouraged to use pre-payment meters to pay for gas and electricity. Whilst PPMs can help people to budget, people usually end up paying more for their energy. Standard credit meters usually offer a better deal than PPMs as there is a broader range of tariffs and discounts for direct –debit payments. Fuel poverty is an issue for a number of Citizens Advice Rossendale clients: individuals may ‘self- disconnect’ from their pre-payment meter as they do not have sufficient funds to put money on the meter after the emergency credit has been exhausted.
People with problem debt such as Council Tax debt may find further costs added to their debt after court action. If bailiffs are used for enforcement, claimants face extra charges. This will exacerbate the problem debt and not promote financial inclusion.
Citizens Advice Rossendale works with many clients with problem debt, and through debt advice helps clients explore the options open to them (such as a DRO for example) and helps clients to consider the implications of debt remedies— including how they might affect an individual’s credit rating and access to future credit.
Recent research (New Policy Institute) suggests that many households which include someone with a disability or long term health condition live in poverty. Lack of banks and free cash machines in close proximity to people’s homes may cause obvious difficulties for people with physical or mental disabilities, especially if they cannot afford to run a car or pay for other transport to access banks in other locations.
People with long-term health issues and disabilities may not have the physical or mental energy to ‘shop around’ for best deals and may, for example, find it is more convenient to apply for a loan from a doorstop lender who will call at their home every week for a payment (in the same way that the doorstep lender already calls at other houses in the neighbourhood) rather than try to research ‘a better deal’.
Individuals with learning disabilities and other vulnerable individuals may struggle to comprehend the nuances of various financial products and may, for example, value a financial relationship with someone who is friendly and chatty, even if that person works for an organisation that might not be providing the most affordable financial product.
Financial education and capability
The government needs to demonstrate a genuine commitment to Financial Capability education by making it an integral part of the curriculum from primary school and all through the school years. Funding and resources need to be made available to support schools in providing financial capability education, especially if schools consider that they require the expertise of external agencies.
More longer-term secure funding needs to be given to agencies, such as Citizens Advice, who provide financial capability work, to ensure they can offer this work consistently and in a planned way. Just as car owners know their car has to have a yearly MOT, people should be encouraged to review their financial commitments on a regular basis by high profile advertising and adequate funding for financial literacy and capability work. People could be offered support with financial capability and budgeting at different milestones in their life such as the birth of a baby or retirement.
Addressing financial exclusion
Personal responsibility is of course important in addressing financial exclusion. The general public is encouraged to exercise choice in buying financial products and services, ensuring that by reading terms and conditions carefully, and by comparing similar products and services, such choice is informed. However, appropriate support needs to be available for people who, for whatever reason, struggle to identify or access optimum financial services and products. Such support could be provided by trusted community agencies.
8. 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?
Many people experiencing financial exclusion have Post Office Card Accounts, which are designed to accept payments from government departments, and welfare benefits can be paid into these accounts. With no overdraft facilities, no charges and no credit checks post office card accounts are attractive to many financially excluded people. However, direct debits cannot be set up from post office accounts, and therefore people with such accounts are currently unable to access discounts for paying by direct debit on energy costs, for example. To withdraw money from this type of account, the individual has to take their card to a post office or a post –office branded ATM and the card is not a debit card.
Basic bank accounts are very useful for individuals who may not be offered a current account. However, basic bank accounts do not appear to be well advertised and therefore people who might benefit from them are not necessarily aware of them. Bank customers are currently being encouraged to switch current accounts via ‘switching offers’ which include cash payments of around £100 from some banks. There are no such ‘sweeteners’ for basic bank account switching.
Credit Unions can be a very useful community resource for people who may not have access to a bank account. As well as providing loans, Credit Unions promote savings, even of small amounts, which can help people who do not have much surplus income to build up a small savings pot. However, Credit Unions are often run mainly by volunteers and therefore may have limited opening hours and community presence. If Credit Unions were given more funding their role in tackling financial exclusion could be strengthened.
Accessing affordable credit
9. 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?
The capping of payday loans means that no borrower will now pay back more than twice what they borrowed, for example, due to spiralling interest charges and fees. Some applicants may find themselves turned down for pay- day loans if they are assessed as being unable to repay the debt. People without savings and resources need appropriate support if they face a financial emergency or crisis. Illegal money lenders target vulnerable people with limited options for accessing affordable credit.
Government policy and regulation
10. 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 government could consider setting up a financial guidance service, similar to Pensionwise, giving people the opportunity to explore issues of financial inclusion and capability.
11. What has been the impact of recent welfare reforms on financial exclusion?
Citizens Advice Rossendale works with many people for whom Welfare Reform has had many detrimental effects.
How could an individual be considered anything other than financially excluded if their pressing concern is not access to the right financial products and services, but rather access to the fundamental necessities: money to be able to buy some food or to top up the pre-payment meter and reconnect to the electricity supply?