Today (18th May 2020), The Financial Inclusion Centre publishes a set of proposals to deal with the immediate and longer term financial impacts of the Covid19 pandemic. The report can be found here: FIC Covid19 Impacts May 2020
The pandemic has highlighted serious health and income inequalities in society. Recent analysis by the Office for National Statistics (ONS) shows that the Covid19 related mortality rate in more deprived areas is more than double the rate in less deprived areas. Similarly, Covid19 related mortality rates are significantly higher amongst BAME groups than the white British group.
At the Financial Inclusion Centre, we focus on economic and social justice, and financial inclusion issues. Covid19 threatens to cause devastating economic and financial shocks. The full extent of the impact is yet to unfold but it is certain to be worse than the aftermath of the financial crisis in 2008. Economists have been talking in terms of the worst recession in 300 years.
This crisis is also different to 2008 where there was a clear sequence – a financial crisis became an economic crisis, which was followed by austerity. This time we are seeing an economic crisis of a different order (where economic activity in key sectors has almost stopped), a financial crisis, and the public health crisis all happening at the same time.
Covid19 will lead to greater economic and financial exclusion and higher levels of detriment in financial services and the private rented sector unless effective interventions are deployed now to prevent this.
A range of large scale, temporary interventions have been needed to keep the economy and financial system working, maintain jobs and household incomes, provide reassurance to millions of vulnerable households, and ease the financial and emotional stress they face. Regulators have also introduced temporary consumer protection measures.
These measures are welcome but do not go far enough and must be enhanced. We must also prepare for the fact that the crisis will be far from over when these temporary measures are removed or phased out.
The crisis will play out in four phases:
Emergency phase While temporary government and regulatory measures are in place
Survival phase When support measures are removed/ phased out and households have to survive financially until a sustained economic recovery comes
Recovery phase When the economy begins to recover – but it will be some time after this before jobs and household finances recover
Rebuilding and restructuring phase When the challenge of rebuilding and restructuring the economy, financial system and household finances needs to begin, new reforms are put in place against the risk of future economic shocks, and existing public policy crises dealt with.
In this paper, we:
• Set out how households are likely to be affected during the different phases of the crisis, identifying which groups are most vulnerable to economic and financial shocks;
• Assess the effectiveness of temporary government and regulatory measures in place to protect households; and
• Propose a range of measures to protect households during the different phases of the crisis.
There are specific proposals aimed at:
• Improving the current income support and social security measures
• Providing access to emergency and recovery loans, and affordable long term credit options
• Protecting overindebted households including those in arrears on mortgages, consumer credit, and other debts such as council tax
• Rebuilding household finances, and building future financial resilience by helping people to save and insure
• Improving consumer protection and regulation in financial services
• Protecting renters
• Closing the rights and protection deficits in other sectors
In terms of structure, the proposals are split into three sections:
• Measures to close the gaps in the current set of government and regulatory protections
• More permanent measures needed to protect households during the survival and recovery phases when the current emergency protections are removed or phased out
• ‘Greenfield’ proposals to rebuild and restructure household finances, reform the financial system, and tackle major public policy crises
Social justice theory holds that the more vulnerable you are, the more protections and rights you should have. The crisis has revealed that principle has been inverted over the years and exposed a serious rights and protection deficit.
The ‘consumer’ protection provided to private renters is woeful compared to that available to financial (mostly better-off) consumers. Similarly, for many of the poorest households, the primary financial relationship they have is with the state through the social security system. Yet, it is very difficult for them to hold the state to account for mistreatment or poor service unlike their better-off counterparts who can rely on well-resourced regulators and Ombudsmen schemes. Council taxpayers who are in financial difficulty have less protection than borrowers who are in arrears on their mortgage or credit card.
We can expect industry lobbies to push for reductions in consumer protection using spurious arguments that regulation is a costly burden and holds back economic recovery. Brexit will give this push further impetus. So, civil society will have a fight on its hands protecting the gains made over the years never mind campaigning for much needed further reforms. But, we can improve the efficiency of regulation without compromising consumer protection.
Even if we get through the emergency phase with financial damage to households minimised, the challenges will not end there. The crisis has laid bare the precarious nature of our economy and the lack of a decent safety net for those who lose their incomes. We will need to rethink the role of the state, employers, financial services, and individual citizens in protecting against catastrophic risks.
Nor can we forget that the existing financial-related public policy crises (such as funding long term care, affordable housing, pensions underprovision, reforming the financial system so that it is more socially useful) have not gone away. Covid19 will make tackling these crises appear all the more daunting. But, these can and must be confronted. Remember that some of the greatest public policy achievements seen in this country happened in the aftermath of Second World War. Progress is possible. We must make progress or else face the prospect of even greater crises in future. We should not balk at using radical interventions to make progress.
It is not all about a more active role for the state or more regulation. Social entrepreneurship has a real chance to prove itself now. There will also be a greater sense of expectation on the financial sector itself to prove its social utility.
Some of the proposals outlined here are radical and others will have better ideas. But, we hope you will agree that extraordinary times need extraordinary measures and these measures are worth debating.
We would welcome comments on these proposals. For further information please contact: