We estimate that over 5 million vulnerable households are seriously affected in some way by financial exclusion. There is a real cost to this exclusion – it is estimated that vulnerable consumers could be paying between £800-£1,000 a year in higher costs because they are excluded from mainstream financial services (Source: Family Welfare Association).
There is a direct correlation between income inequalities and financial exclusion in developed economies. However, the problem is not restricted to traditionally excluded groups. There is evidence of serious underprovision amongst the general consumer population. The key areas of concern we have identified are:
- even though we are on average living longer, millions face the prospect of insecurity or indignity in old age because they have not been able or willing to make sufficient provision for retirement – living on seriously reduced incomes in retirement or unable to pay for decent long term care;
- as the state withdraws, state provided safety nets do not offer the same level of protection and consumers are increasingly expected to provide for themselves. Yet millions face uncertain or unpredictable financial futures, unable to protect themselves against the risks and shocks life throws at them. because they are underinsured or don’t have enough savings to see themselves and their families through difficult times;
- increasingly, consumers need to build up substantial assets to participate fairly in society or give their children a good start in life – for example, to pay for university fees or provide a deposit to get on the housing ladder. Yet savings rates are at historic lows and only a minority of consumers have built up investments;
- the most vulnerable in society face restricted access to basic banking services pushing up costs and resulting in additional detriment such as higher utility bills;
- as well as low levels of savings, the UK faces record levels of personal debt leaving millions vulnerable to the credit crunch, and the growth in the sub-prime markets. The sub-prime sector serves a purpose but detrimental practices such as high interest rates and penalty fees are widespread;
- access to objective financial advice is increasingly becoming the preserve of better off consumers, while not-for-profit advice sector agencies are finding it increasingly hard to cope with demand for advice;
- more generally, exclusion and underprovision will be a growing problem as a result of the credit crunch and as financial institutions become even more sophisticated in the way they segment consumers according to risk or profitability. More and more consumers priced out of the market or denied access to products and services altogether.
The following provide a synopsis of the scale of underprovision and exclusion in key financial services:
Overall, we believe that a concerted effort by policymakers and other stakeholders combined with development of innovative solutions are needed to combat financial exclusion and under provision in each of these key areas.
Data sources: Swiss Re:, Association of British Insurers, HM Treasury, Financial Services Authority, Bank of England, Council of Mortgage Lenders, Which?, The Financial Inclusion Centre.