EXPERT HUB – POLICY PAPER: FAIR BANKING FOR ALL

by: Inclusive Growth Contributor | on: 18.10.23 | in: Uncategorised

𝐁𝐲 𝐒𝐚𝐦 𝐑𝐞𝐱-𝐄𝐝𝐰𝐚𝐫𝐝𝐬, 𝐃𝐚𝐦𝐨𝐧 𝐆𝐢𝐛𝐛𝐨𝐧𝐬, 𝐉𝐞𝐬𝐬𝐞 𝐆𝐫𝐢𝐟𝐟𝐢𝐭𝐡𝐬, 𝐚𝐧𝐝 𝐊𝐚𝐲 𝐏𝐨𝐥𝐥𝐞𝐲

Why the uk needs a fair banking act to tackle financial exclusion. a policy paper

Executive Summary

Financial exclusion in the UK

Exclusion from fair and affordable financial services and products is an entrenched problem in the UK for individuals, small and medium-sized enterprises (SMEs) and social enterprises. Financial exclusion for individuals can mean having difficulty in physically accessing services, facing ‘high-bar’ risk assessments, and lacking awareness of financial products. It also includes being subject to the poverty premium, whereby those on lower incomes pay more for essential services than their better-off counterparts, a situation affecting 14 million people in the UK. Lack of access to responsible and affordable credit is a major factor in this vulnerability, and risks pushing people towards illegal money lending. Financial exclusion is intersectional – certain groups with protected characteristics are more vulnerable to exclusion and the poverty premium than others, even within low-income households overall.

The cost of living crisis combined with the ongoing impacts of the Covid-19 pandemic is exacerbating the problem, with recent research showing 17.5 million people can now be considered ‘financially vulnerable’ in the UK. The consequences of financial exclusion have significant negative impacts on wellbeing, mental health and the ability to participate fully in society.

Exclusion from financial services and products also affects people trying to start or expand social enterprises and small and medium-sized enterprises (SMEs). SMEs are the lifeblood of local economies and a significant contributor of private sector employment (providing over 60% in 2020), yet they struggle to secure bank loans: the shortfall in finance facing the sector was recently estimated at £19 billion. Social enterprises also face difficulties in accessing finance, with their leaders identifying a lack of understanding among social investors of their operating and business models, despite a collective turnover of £60 billion. As with personal banking, some of the barriers faced by SMEs and social enterprises are intersectional, with enterprises led by women and people from Black and ethnic minority groups experiencing higher rates of being declined for products and services, and lower levels of investment, than others.

Addressing financial exclusion

The UK Government has made a commitment to tackling financial exclusion, and recognises the role of effective regulation, direct government intervention and partnership work with the financial services industry and civil society in doing so. This is also evident through a range of initiatives and policies. Many retail banks and building societies, too, have developed products and initiatives that address aspects of financial exclusion. However, a significant lack of data seriously hampers efforts to assess or evaluate the relative contributions of different retail banking institutions to tackling the problem. The scale of the problem, and the fact that it is growing, shows that far more needs to be done. The small, but expanding, purpose-driven banking sector could work powerfully and effectively with retail banks and building societies to comprehensively tackle financial exclusion for individuals, SMEs and social enterprises. These stakeholder institutions include Community Development Finance Institutions (CDFIs), credit unions, emerging regional mutual banks, ethical banks, and building societies (the latter can also sit within mainstream retail banking given their asset size). However, these institutions still face substantial challenges and barriers to establishing or scaling up, particularly to increase the supply of affordable credit at the national level.

A step change solution: a Fair Banking Act

Entrenched problems need policies that produce a step change in response: a Fair Banking Act for the UK would be a response commensurate with the scale of the problem. Under the Act, banks and building societies would be required to disclose the extent to which they are meeting the needs of financially excluded people and small businesses in the diverse communities they serve, determine the level of action needed to address the problem, and provide mechanisms for doing so. A Fair Banking Act would apply to retail banks with a banking licence in the UK – including challenger banks – and building societies.

It would provide a permanent, transformative and practical solution to the UK’s high levels of financial exclusion by providing:

• A true picture of every retail banking institution’s performance on financial exclusion, by mandating a transparent, publicly available and easily interpreted data disclosure framework.
• Clear ratings that show which banks are doing well and which need to improve. Ratings would be derived from the results reported under the disclosure framework.
• Identified ways banks in which can improve and thus help tackle financial exclusion. Major banks and building societies would be able to improve their rating by:
  • Expanding responsible lending: including expanding the provision of responsible, affordable and fair lending to underserved communities, demographics and protected[1]characteristic groups, either directly or via a partnership with a purpose-driven finance institution.
  • Providing fair services: to those who are underserved and excluded, either directly or via a partnership with a purpose-driven banking institution.
  • Partnering with purpose-driven banking organisations: partnership agreements between banks and purpose-driven banking institutions would enable these responsible, specialised organisations to expand their services and support for financially excluded people and businesses.

The Financial Conduct Authority would have the key role in determining the data disclosure framework and financial inclusion ratings awarded to obligated institutions. Those with the highest ratings would be publicly recognised for their positive impacts in addressing financial exclusion. The Government would need to consider what other suitable incentives could be put in place, including, if necessary, interventions to improve the performance of those who are contributing to financial exclusion rather than helping solve it.

The experience of the USA, which has had a similar piece of legislation – the Community Reinvestment Act- in place for several decades, shows how an Act of this kind can help lead to a transformation in services for communities that have been excluded. It also shows that positive outcomes exist for commercial banks, which gain opportunities for growth in areas they were not previously active in. And it offers banks the opportunity to improve their environmental, social and governance (ESG) performance, and help to become drivers of financial inclusion.

The scale of financial exclusion in the UK is truly shocking and is growing due to the cost of living crisis and increasing debt problems. It represents a major market failure that will require a transformative response to fix. A Fair Banking Act would provide a real opportunity to forge a partnership between banks and building societies, purpose-driven finance organisations and government that would create a step change reduction in financial exclusion. It would offer real hope to the millions of people who are struggling to access essential financial services, and the small businesses that can’t get the support they need from the financial system. It’s time to fix the UK’s financial exclusion problem: a Fair Banking Act is needed now, more than ever.

You can view the full policy paper, published March 2023, here:

Fair Banking for All: Why the UK needs a Fair Banking Act to tackle financial exclusion.pdf