A new report from cross-party think tank Demos finds that a lack of coordination between sectors involved in financial services provision and advice is stymying attempts to address the problem of financial exclusion.
Banking for All reveals the tremendous scale of the challenge, with 1.5 million British adults without a bank account, and thousands more building up problematic debt and falling prey to pay day loans each year. The report explains that many ordinary Britons also simply lack the financial and digital know-how to manage their money effectively. Financial exclusion can be a vicious cycle, as the under-banked miss out on deals that are only available online or through direct debit payments (such as energy bills, mobile phone contracts and internet plans), and often struggle to access the credit needed to make investments, such as buying property, or the financial products to help them plan and save for the future.
Those wrestling with problematic debt are also at risk of being unable to take out a mortgage or purchase a car in the future, and there are both short- and long-term implications for wellbeing and mental health, relationships and employment. Banking for All reflects the findings of a consultative process Demos has conducted, with the support of Lloyds Banking Group, over the first half of 2016 – bringing together politicians, civil servants, and representatives from commercial banking, credit unions and charitable organisations (including housing associations, financial education providers, debt advice charities, and food banks) to explore how financial exclusion might be tackled in a more coherent, coordinated way.
These consultations revealed a consensus of urgency to tackle financial exclusion and improve financial literacy – particularly because the historically low interest rates reduce savings incentives, discouraging households from accruing the ‘buffers’ they need in place to absorb financial shocks. The move to Universal Credit, which will be distributed through bank accounts, could also prove problematic for those currently without them. What’s more, the fact it will be paid monthly, in arrears, rather than weekly, and that housing support will be paid directly to tenants rather than landlords, will require welfare recipients to manage their money more effectively. So too will changes to student maintenance grants mean many young graduates will leave university with larger debts to handle.
1. All Sectors – Local charities, credit unions, bank branches and local authorities should work together to raise awareness of and refer to each other’s services. For example, banks should share anonymised data with credit unions to explore ways to target and effectively communicate with those most likely to use pay day loans, whowould be eligible for credit union services.
2. Charities – Demos’ report identifies local charities, in particular, as a key resource for targeting those most at risk. Local organisations that work with homeless people, food bank visitors, housing association tenants or ex-offenders have the potential to advise financially excluded people who would otherwise be hard to reach. But charity staff that Demos spoke to were reluctant to give basic financial guidance due to many believing the FCA regulations on organisations giving financial advice are more restrictive than they actually are.
3. Government – The Government should allow Lifetime ISA customers to borrow without incurring a charge if the borrowed funds are fully repaid, and encourage employers to offer to provide employee contributions to the Lifetime ISA through payroll. In the long-term, the Government should introduce an auto-enrolment requirement on employers for savings.
4. Education – Building on Demos’ extensive work on character education, Banking for All also highlights the importance of focusing on developing practical money management skills within and outside of schools, as well as placing a greater emphasis on the development of character traits – like self control – that are proven to be associated with positive financial behaviour in adulthood.
5. Banks – Banks should offer services – including nudges and ring-fencing – that help customers to separate out their savings without incurring a loss of earnings on interest. Banks should also offer finance tutorials to customers as a way of achieving better lending rates, and design and pilot money awareness courses to those who go into unarranged overdrafts or fall behind on loan repayments. As with driving awareness courses, where drivers can attend to avoid getting points on their licence, banks should offer to wave penalty fees if customers attend.
6. Digital Services –Digital services have helped many people track their money and manage their finances better, however many people remain IT-illiterate, and Demos suggests that the Money Advice Service and Doteveryoneshould work together to ensure efforts to build financial capability and the campaign to get more people online complement each other.
Commenting on the findings, Charlie Cadywould, Researcher at Demos said: “Everyone should have the opportunity to keep their money safe, to set it aside for a rainy day and to borrow carefully and affordably to invest in their future. Expanding access to financial services can be a huge help those struggling to get by. A huge part of the answer is helping people to manage their money effectively, to understand all the different options for saving and borrowing, to access impartial advice, and make informed decisions. Preparation for this can start at an early age and help should continue to be available throughout adulthood. To make this happen, we need a co-ordinated effort: banks, credit unions, charities, schools and government all need to work together to ensure everyone is equipped with the tools to manage their income and spending, to get the best deals and borrow and save most effectively.”