Five Key Pillars of a National Financial Inclusion Strategy
The new Government is committed to the introduction of a National Financial Inclusion Strategy. The Financial inclusion Commission and the many groups who have been campaigning for such a strategy welcome this as a vital element in the Government’s drive for inclusive growth.
The need for such a Strategy has been highlighted in the report commissioned by FIC from CHASM, the leading researchers on household finances based at Birmingham University, bringing together research evidence with that of the lived experience of those affected. The report highlights that:
One in five (22%) adults have increased their borrowing to cover living costs due to a lack of affordable credit;
One in twenty still have no current bank account, rising to one in twelve in Northern Ireland;
Over 8 million adults are in need of debt advice;
One in five people in Wales face financial difficulties rising to one in three in the most deprived areas of Scotland;
More than one in six families have no savings
This note sets out the key pillars supporting such a strategy.
Pillar 1: Access to face-to-face banking services and cash
Pillar 2: Access to affordable and well-regulated credit
Pillar 3: Encouraging savings
Pillar 4: Access to affordable insurance
Pillar 5: Access to Free Debt Advice and Money Guidance
The Treasury should report to Parliament each year on progress in achieving greater financial inclusion. Clear outcomes and targets against these outcomes should be used to ensure the right focus in the key areas of financial inclusion. The use of time-bounded targets by the last Labour Government in areas such as bank accounts was instrumental in delivering progress so consistent data about levels of financial exclusion and the impact of different policies in reducing it should drive better policy making.
Pillar 1: Access to face-to-face banking services and cash
Banking Hubs, offering face-to-face banking services and access to cash, are a foundation stone of the National Strategy. They should be rolled out around the country as swiftly as possible and the services they offer should be expanded to provide a broader range of financial help, plus support in accessing financial services digitally. We cannot effectively challenge financial exclusion unless we also improve digital inclusion.
With the right funding, Banking Hubs could go further and incorporate money support agencies, including debt advice, and community finance services, to create community support hubs. Devolved administrations should be involved to ensure that services are tailored to local needs.
To deliver this vision, the funding model for Banking Hubs – currently based on only the big banks and the fragile Post Office Banking Framework – needs to be developed so that it is commercially viable and sustainable in the longer term. This policy should be underpinned by ongoing work on digital payments innovation, open banking, the development of the mutual sector and a central bank digital currency, to ensure that all options for viable commercial models are explored.
Long term, sustainable provision of cash withdrawal and deposit making services across the UK should be based upon a suite of services, including ATMs, the Post Office branch network, payments innovations such as cashback at the point of sale, and improved digital financial inclusion, access, and skills amongst the most vulnerable.
The Bank of England, the FCA and the PSR, working with financial services providers and the third sector, should continue the work on finding trusted digital alternatives to cash for those who want them which also meet the needs of primary cash users – security, a budgeting mechanism and convenience.
Access to cash should be maintained for all, not just the most vulnerable. The Banking Hubs, the Post Office Counter Service and the free-to-use ATM network all play a crucial role in sustaining this system and their funding arrangements must deliver efficiency and sustainability.
Pillar 2: Access to affordable and well-regulated credit
Greater support should be provided to community lenders, including credit unions and the broader community finance sector, and current restrictions on their ability to lend (including the Common Bond and limit on interest rates) should be reviewed.
Government should encourage a partnership between the community lending sector and conventional lenders to ensure that sufficient capital is available, as well as to improve the use of digital innovation by the sector, for example by offering Open Banking and Open Finance based services.
The Government should pilot a Small Loans Scheme, reflecting the lessons of the overdrafts offered during the pandemic, the US Small Dollar Loans Program and the No Interest Loans Scheme piloted by Fair4All Finance and Toynbee Hall. With evidence of the benefits such a scheme could bring and appropriate safeguards, the Government should mandate a wider rollout of the scheme, working with credit reference agencies to ensure that such a scheme did not result in over-indebtedness,.
Pillar 3: Encouraging savings
The Strategy should support innovation that will lead to improved access and appropriate take up of savings and pensions and access to workplace based savings options.
The Government should also consider how digital payments innovation and platforms, including in the Open Banking, Open Finance and Smart Data space can support access and take up of good value savings products.
The Government should support the roll-out of a workplace based ‘sidecar’ savings scheme alongside the success of pensions auto-enrolment. Incentives to save should be considered, building on lessons from the existing ‘Help to Save’ scheme.
The Government should build on the success of pensions auto-enrolment. In addition to a sidecar savings scheme, the Government should pursue other measures to engender a greater savings culture, resulting in fewer people having a financial position in retirement which is unexpectedly inadequate for many and which leads to a greater reliance on means tested benefits. The Government should consider whether employers should make mandatory pension contributions even when the employee cannot afford them.
The Government should review the savings penalties within the benefits system which discourage the maintenance of small savings pots.
Pillar 4: Access to affordable insurance
The Strategy should include measures to curb the spiraling cost of motor insurance which prohibits the ability of many, especially the young, to be economically active. This should include looking at whether the increased cost of claims is the main factor and addressing the causes of increased claims. It should ensure that non-claims related costs, such as distribution costs and the credit charge for paying by instalments are only those which are justifiable and represent fair value. Premium credit interest costs are often excessive (rates of up to 48% APR are not uncommon ), so any insurer/distributor seeking to charge an interest rate above 12% would have to justify it.
The Strategy should ensure that the pricing of risk in both home and motor insurance does not discriminate against minorities or unfairly exclude some neighbourhoods or areas.
Collective purchasing schemes for home and contents insurance by tenants should be developed, with options to include the costs with the rent. The FCA should continue its work to ensure that landlords get the best deal for their tenants when purchasing buildings insurance.
Pillar 5: Access to Free Debt Advice and Money Guidance
The Strategy should support increased and easier access to debt advice, with a funding model that allows not-for-profit debt advice organisations to plan and invest.
The regulatory boundary between advice and guidance should be further reviewed with a greater focus on the help which public and third sector organisations can give. The current restrictions make many organisations anxious about overstepping this boundary.
Commercial debt advice can often drive inappropriate solutions that may push people further into debt. Action should be taken to improve and align standards across the different regulators in this area and to ensure that advisers’ incentives support good outcomes for customers.
Debt collection practices in both the private and public sectors should be improved to give debtors the best chance of repairing their financial lives.
Government, business and regulators should implement co-ordinated policies to ensure high quality education, guidance and advice are available to all, so that people have the financial skills, knowledge, and understanding they need to access and manage the financial products and services that meet their needs over a lifetime. The FCA should continue to use the Consumer Duty to require that consumers engage with relevant information at the point of decision.
The Strategy should also consider how Smart Data and Open Finance can improve access to, and the quality of advice services, following the recent findings by the Centre for Finance, Innovation and Technology (CFIT) that by increasing the automation of manual processes, debt advice agencies would be able to support more people in dealing with financial problems. Their proof of concept, with Citizens Advice, indicated that through enhanced data sharing, advisers could assist up to additional 150,000 clients annually, reflecting over 40% increase in advisors’ capacity, helping some of the most vulnerable consumers.
Originally circulated in November 2024
