The Financial Inclusion Centre

The main financial regulator, the Financial Conduct Authority (FCA), is reviewing its Handbook of rules and guidance following the introduction of the flagship Consumer Duty initiative. The FCA invited comments on issues including:
• which detailed rules or guidance could be simplified to rely on high-level rules, or
have interactions with other rules which could be clarified
• how any steps to simplify the rules and guidance affect its statutory objectives
• the appropriate balance between high-level and more detailed rules
• the potential benefits and costs from simplifying the rules

Financial Inclusion Centre supports efforts to restructure the FCA Handbook and streamline rules that produce no benefits for consumers and business, as long as consumer protection standards are maintained. But, we are very concerned about the potential risks with this initiative especially as it is happening at the same time as the Advice/ Guidance Boundary and Consumer Credit Act reviews.

Financial services lobby groups are using ‘Trojan Horse’ arguments that current consumer protection standards stifle financial innovation and competition, hinder financial inclusion, and hold back the competitiveness and growth of the UK financial sector and wider economy.

There is no evidence that current consumer protection standards have these effects. Yet, Government and financial regulators appear sympathetic to industry arguments. Government is pressuring the FCA to do more to support the growth and competitiveness of the UK financial sector.[1] The FCA uses unfortunate phrases such as ‘regulatory burden on business’,[2] which implies the FCA has already decided there is too much regulation even before the Call for Input or other reviews are completed. We are concerned the FCA will come under further pressure during this review to reduce consumer protection standards. We hope the regulator resists this pressure.

[1] Reeves to tell UK financial watchdog to prove it will support growth

[2] Financial regulator seeks to reduce burdens on firms and support growth | FCA

FIC response to this Call for Input can be found here: FCA Streamlining Rules FIC submission October 2024 Final

The Financial Inclusion Centre has submitted a response to the Financial Conduct Authority (FCA) consultation CP24/16, The Value for Money Framework which has just closed. The summary of our response and full submission can be found here:  FCA consultation on a pensions Value for Money Framework

The overall intention is to enable better scrutiny of value for money in workplace pensions which come under the FCA’s remit. There is a similar initiative for pension schemes which come under The Pensions Regulator (TPR).

Pension arrangements will assessed using this new VFM framework and rated red, amber, or green (RAG). We fully support the intention to ensure people saving for a pension get the best value for money possible. But, we have some serious reservations about the FCA’s approach. The proposed framework could encourage competition on spurious grounds. It threatens to reverse the progress made on reducing investment management costs and as a result risks reducing pension values.

The Financial Inclusion Centre today (10th April 2024) publishes a new report Making an impact or making a return? which evaluates the burgeoning social impact and sustainable finance sector and finds a significant risk of ‘impact washing’.

The summary report can be found here: FIC social impact finance April 2024 summary report The full report can be found here: FIC social impact finance April 2024 full report

The new report sets out six tests (see below) and policy recommendations to address these risks. The tests allow stakeholders to distinguish between finance that prioritises making a positive social impact, sustainable finance that makes a positive impact while making returns, socially harmful finance, and potential impact washing.

The financial sector increasingly tells us it is no longer just about making profits or generating returns for owners and investors; it says it wants to make a positive social impact as well as making financial returns.

This new report concludes that it is too easy for conventional return-maximising finance to masquerade as social impact or sustainable finance and too easy for financial institutions to impact wash activities to bolster reputations. Social impact washing does not get the same attention as its twin, greenwashing.

The lack of robust standards and scrutiny applied to the sector undermines the efforts of those financial institutions that do want to make a real social impact and the integrity of the market generally. Worryingly, the Centre fears the Financial Conduct Authority (FCA) flagship sustainable investment label[1] could actually enable impact washing.

The six tests cover: 

Forgoing market returns – To be classified as social impact finance, financial institutions should be willing to forgo market level returns.

The role of corporate welfare – To qualify as social impact or sustainable finance, there should be no corporate welfare involved.[2]

Standards of corporate behaviour – Financial institutions should drive the highest standards of corporate behaviours on social issues such as human rights, fair wages, diversity and inclusion, and working conditions in supply chains, not just meet minimum acceptable standards.

The Do No Harm Principle – Finance should follow the do no harm principle. Finance which produces a positive social impact in one area should not cause harm in another.

Social sector assets – Financing ‘social sector’ or ‘inclusion’ assets (e.g. social care, social housing, education, levelling up, and community lending) should not be automatically classified as social impact or sustainable finance unless the other conditions are met.

Development finance – Domestic or overseas ‘development finance’, such as investing in deprived areas of UK or Low and Middle Income Countries (LMICs), should not be automatically classified as social impact unless the other tests are met. This applies to catalytic and blended finance.

Malcolm Hurlston, Chairman of The Financial Inclusion Centre said: ‘Many investors want their money to make a difference as well as give them a return. The six tests set out in this report will help them invest with confidence.’

Mick McAteer, Co-Director of The Financial Inclusion Centre said: ‘If the history of finance tells us anything it is that harm follows the money. The growth of the sustainable finance market increases the risk of impact washing. With these new tests, impact washing can be spotted more easily by stakeholders.’

For further information please contact Mick McAteer on mick.mcateer@inclusioncentre.org.uk

Ends

Notes to editors

The policy recommendations are:

• The FCA should have a clear strategy for combatting social impact washing separate from greenwashing. Social impact should have its own specific sustainability label.
• The asset minimum to attract an FCA social sustainability label should be the 80% threshold used in other major financial jurisdictions.
• Robust social impact standards should be rapidly rolled out to other financial activities, not limited to investment funds.
• A comply or explain approach is not sufficient. Firms should be required to choose from an approved list of benchmarks when making claims about social impact or sustainability.
• The FCA’s labelling regime provides firms with too much leeway to mark their own homework on compliance. Civil society organisations should develop a ‘gold standard’ for financial and corporate behaviours on social issues. Compliance with this gold standard should be independently verified.
• UK policymakers should develop a regime to allow evaluation of offshore and overseas funds given the international nature of finance based in the UK.
• UK policymakers should consult with civil society organisations to develop a similar framework and tests for development finance, catalytic and blended finance targeted overseas.

[1]  Sustainability disclosure and labelling regime | FCA

[2] Corporate welfare includes financial commitments being deregulated, ‘de-risked’, or incentivised by governments and others such as non-governmental organisations (NGOs).

The FCA’s Financial Lives Survey is a great research resource for researchers and campaigners working on financial inclusion and economic and social justice issues. There are some incredibly worrying findings in the reports.

Financial Lives 2022: Key findings from the FCA’s Financial Lives May 2022 survey

We have seen real progress on reducing the number of people without access to a basic transactional bank account and increasing the numbers contributing to a pension. These successes were down to effective campaigns for legislation, not market based solutions. But, more generally, we have made little progress in building financial resilience and inclusion post the 2008 financial crisis.

This failure to build financial resilience has left millions of people very vulnerable when economic crises happen. We’ve seen this recently with the Covid-related economic crisis followed in short order by the cost of living crisis. Can we learn the lessons from previous failures to help people build financial resilience against future economic shocks, which will surely happen?

Let’s look at some of the stand out findings.

• 9 million people had low financial resilience in May 2022-an increase of one million since February 2020.
• 9 million said they were not coping financially or were finding it difficult to cope.
• 9 million either had no disposable income or had seen their disposable income decrease.
• 44% of minority ethnic adults said the amount of debt they owed on credit products increased in the 6 months to January 2023, compared with 27% of adults not in minority ethnic groups.
• Minority ethnic group adults were over 1.5 times more likely in January 2023 (52%) to say they were not coping financially or finding it difficult to cope, compared with adults not in minority ethnic groups (33%).
• More Black adults (44%) had low financial resilience than the national average of 24%.
• Black adults were twice as likely as the national average to have high-cost credit or loans (20% vs. 10%).
• Black adults (16%) were over twice as likely to be in financial difficulty than White adults (7%).
• Fewer Black (53%) and Asian (52%) adults had a savings account than White adults (74%).
• 32% of minority ethnic group adults had no general insurance policies compared with just 13% of adults not in minority ethnic groups.

Those findings on the situation facing minority ethnic groups show us that this is more than an issue of financial inclusion – it is an economic and social justice issue.

Let’s face it, the main cause of low levels of financial resilience and high levels of financial exclusion is poverty. But, we have also just failed to implement policies/ interventions to build inclusion/ resilience. Why is that? There are several key reasons.

The scale of low levels of financial resilience, financial exclusion and discrimination is determined by three main factors = economic (poverty/ low or irregular incomes)+supply side factors (how the market operates)+demand side (eg. low levels of financial capability, lack of consumer confidence and trust and so on). For a fuller explanation see:

Essay – Rethinking consumer policy theory | The Financial Inclusion Centre

Tackling the primary cause, poverty, is a matter for governments. But, there is much that could be done through regulation to make markets more inclusive. However, our system of financial regulation isn’t geared up to tackle financial exclusion/ discrimination.

Policymakers take the view that it should be up to the market to decide whether consumers should be provided with products and services, and on what terms. The FCA is a market regulator, not a social policy regulator. It doesn’t have the mandate to require firms to serve consumers who are not economically viable. With the exception of people having a legal right of access to a basic bank account, we generally don’t have universal service obligations in financial services. Nor do we have anything like the US Community Reinvestment Act (CRA) which imposes obligations on financial institutions to support inclusion initiatives.

But, despite the limitations placed on the FCA, the regulator could do more to tackle exclusion and discrimination. It could use effective interventions like product regulation to make financial services more efficient and bring down prices so making products more affordable. It could use the forthcoming Consumer Duty to ensure that firms treat people fairly and remove barriers to inclusion.

The FCA could do much more to expose the degree of financial exclusion and discrimination and hold firms to account. As mentioned, Financial Lives is a great resource. It provides useful data on how many people hold financial products. But, we don’t have anything like the levels of disclosure and transparency provided through the CRA. We argue that the FCA should:

• produce regular financial inclusion audits assessing the performance of the industry (and sectors) against financial inclusion metrics with a special focus on households with protected characteristics;
• report to Parliament and government on the extent to which commercial financial services is able to meet the needs of vulnerable and excluded groups (especially those with protected characteristics) and on the impact of policy decisions on financial inclusion – for example, changes to the Universal Credit system; and
• require firms to produce financial inclusion audits.

However, even if the FCA did make financial services as efficient as possible, there would still be a cohort of consumers that commercial for-profit financial providers cannot serve. We need alternative, non-profit solutions for the most excluded. Indeed, a thriving non-profit sector could benefit all consumers, not just excluded or marginalised consumers.

Civil society and the non-profit financial sector has had some success in providing alternatives to the for-profit commercial sector. Yet, this is nowhere near enough. Why is this the case? It is not as if we are short of good ideas. Ever since The Financial Inclusion Centre was set up in 2007, the same debates and ideas have come round time and time again. Even with the advent of fintech/ big data, the same basic ideas are promulgated.

But, what we have failed to do is bring these good ideas to underserved households. For example, credit union payroll savings schemes are clearly effective at helping low-medium income workers build financial resilience. Getting Workforces Savings-Payroll Savings with Credit Unions | The Financial Inclusion Centre We need to expand the number of employers offering payroll schemes.

Similarly, credit union deduction lending schemes (whether through payroll or social security) are effective at providing people with affordable loans. New research shows deduction lending adds up for low income borrowers and lenders | The Financial Inclusion Centre These need to be rolled out to meet the need for fair and affordable credit.

For the most part, exclusion is a question of distribution. Good products aren’t much help if they sit on the shelf and don’t reach those who need them. We need to turn ideas into action.

The Financial Inclusion Centre (FIC) has published a new report today entitled Time for action: the Devil is in the policy detail – Will financial regulation support a move to a net
zero financial system?  It argues that greening the UK economy cannot happen without major reform of financial regulation to compel UK financial institutions to take climate responsibilities seriously.

The summary report can be found here: FIC DEVIL IS IN THE POLICY DETAIL SUMMARY REPORT FEB 2023

The full report can be found here: FIC DEVIL IS IN THE POLICY DETAIL FULL REPORT FEB 2023

A radical change of approach is needed by the government and UK’s main financial regulators, the Bank of England, the Prudential Regulatory Authority, the Financial Conduct Authority and the Financial Reporting Council. The regulators need new objectives and powers to put protecting the environment from harmful financial activities at the core of their work.

Moreover, the government is pushing through deregulation in the hope that this will incentivise financial institutions to finance the green transition. FIC issues a stark warning this will just weaken regulatory defences against future financial crises, undermine the security of people’s pensions, and allow financial institutions to extract higher fees from savings and pensions without requiring those  institutions to stop financing climate damaging activities. The report explains there are better ways to make financial firms take their environmental responsibilities seriously without compromising consumer protection and the financial system.

The report, sponsored by the Friends Provident Foundation, is entitled: “Time for Action: The Devil is in the policy detail – Will financial regulation support a move to a net zero financial system?” was researched and written by FIC directors Mick McAteer, a former non-exec at the FCA and Robin Jarvis, Professor of Accounting and Finance at Brunel University.

Equal status with other regulatory goals

The UK is failing to meet its ambitious climate goals, and will not, unless powerful financial institutions change their behaviours. It will not happen without a new approach by financial regulators. The report argues that environment-related financial regulation should be given at least equal status to financial stability, prudential regulation, financial market integrity, and consumer protection. The Bank of England should be given a new statutory objective to promote financial market behaviours that contribute to environmental sustainability. The other main regulators should be given new obligations to support and have regard to the impact of their policies on the Bank of England’s sustainability objective.

The FIC team undertook an extensive analysis of the approach and policies adopted by the UK government and regulators to align financial markets with climate goals. It concludes that the existing and planned regulatory powers and initiatives fall well short of what is needed to ensure that financial markets and institutions fully support the green transition of the UK economy.

Some regulations even risk investor confusion and perverse incentives with the FCA’s planned sustainable fund-label a particular cause for concern. The report argues it could mislead investors without adequate thresholds for emissions and independently verified data.

The report argues that the full range of regulatory powers including prudential and conduct tools need to be deployed by UK regulators to deter financial institutions from contributing to climate damage. Financial regulators should require banks, insurers, asset managers and pension funds and shadow banks to adopt clear plans for transitioning from climate-damaging assets towards climate-positive assets.

New regulations must target both new asset flows and existing books of assets, and hold financial institutions to account for continuing to finance climate damage.

To underpin this, plans for listed and large private companies to disclose their climate-damaging activities including their carbon footprint should be accelerated, driven by the FRC, with disclosures independently verified and included in company report and accounts. Where sustainability claims cannot be proven, auditors should qualify the report and accounts.

In turn, this will provide reliable data to financial services firms and facilitate plans for much better regulation of financial entities in terms of the drive to net zero.

FIC director and report author Mick McAteer says: “UK financial institutions continue to finance climate damaging activities at scale. Protecting the environment needs equal status with protecting consumers and preventing financial crises if we are to achieve net zero. We need a radical shake up in financial regulation and company reporting to align financial markets with critical climate  goals

“The Bank of England should have a statutory duty to promote financial market behaviours that contribute to environmental sustainability. The government needs to provide regulators with sufficient powers and better targeted mandates to align the behaviours of financial markets and real economy firms with climate goals.

“We are at a fork in the road on climate-related financial regulation. The government wants the UK to be a global centre of green finance. It remains to be seen whether the UK competes on the global stage as a beacon of high standards on green finance or establishes a weaker regime so risking a regulatory race to the bottom. Signs are not good. The decisions the UK makes could undermine efforts to green the global financial system. ”

Commenting on the report, Friends Provident Foundation said: “At Friends Provident Foundation we welcome the ‘Devil is in the detail policy report’ by the Financial Inclusion Centre. It is clear from this report that the UK financial regulation lacks appropriate policies, tools, and culture to align finance with sustainability goals. The report recommends radical but necessary changes to centre sustainability in UK financial regulation. We hope this report can start discussions about how we can achieve sustainability, in a fair and equitable way.”

For further comment, interviews or to discuss opinion articles and other features please contact Mick McAteer at mickmcateer92@gmail.com or mick.mcateer@inclusioncentre.org.uk

This is a follow up report to “Time for Action – Greening the Financial System” published in March 2020. Time for Action – Greening the Financial System | The Financial Inclusion Centre

As part of our research, we also published a series of Podcasts – Podcasts: The Devil is in the policy detail – will financial regulation align financial market behaviours with climate goals? | The Financial Inclusion Centre

The Financial Inclusion Centre has submitted its response to the Financial Conduct Authority’s important consultation on Sustainability Disclosure Requirements (SDR) and Investment Labels CP22/20.

Robust regulatory interventions are needed if we are to move to a net zero financial system. Protecting the environment from harmful financial activities needs to be given at least equal status in the regulatory system as protecting consumers, preventing money laundering and financing of terrorism, and maintaining market integrity and financial stability.

The FCA’s initiative for a sustainable investment label to help investors make informed decisions about green finance could have made a useful contribution to that effort. But, this is a missed opportunity. We think the FCA’s proposals are confused, too narrow in scope, would allow the investment industry too much leeway to ‘mark its own homework’ on compliance with green goals, are unlikely to stop greenwashing (or impact washing), and won’t hold financial institutions that continue to finance climate damaging activities to account.

Our submission can be found here: FIC FCA SUSTAINABLE LABEL CP22-20 FINAL COPY

We were pleased to see our financial vulnerability dashboard we developed for the Local Government Association (LGA) referenced in this new government guide on health and well being. See ‘Understanding local needs’ in this link Financial wellbeing: applying All Our Health – GOV.UK (www.gov.uk)

The financial vulnerability dashboard can be found here:

Financial hardship and economic vulnerability in England | LG Inform (local.gov.uk)

It provides an overview of financial hardship and economic vulnerability at local authority area. It has been designed for viewing at local authority geographies. Users can select individual councils at the top of the report and compare it on a range of criteria against different peer groups – for example, within a city or across England.

It is intended that this insight can be used to help stakeholders understand the issues at local level, inform the design of support services, encourage greater partnership working, help make the case for resources and funding as well as aid the development of an effective response.

The report includes a range of indicators designed to provide an indication of how households and their finances have been impacted or are likely to change in the near future. Moreover, these indicators are presented alongside data on pre-existing levels of financial vulnerability, to identify how and where the scale of financial hardship is increasing and thus where relevant support services such as hardship grants and money / debt advice are required or may need scaling up.

The LGA, with consultancy support from the Financial Inclusion Centre, has been working with a group of seven Local Authorities on the Reshaping Financial Support programme  www.local.gov.uk/topics/welfare-reform/reshaping-financial-support – looking how to design and implement early intervention financial support and services that can prevent low income households developing further financial issues.  Participating authorities: Brighton and Hove City Council, Bristol City Council, Leeds City Council, London Borough of Tower Hamlets, London Borough of Barking and Dagenham, Newcastle City Council and Royal Borough of Greenwich.

COVID-19 has seen the programme refocus specifically on the unfolding response to economic vulnerability working collaboratively to explore their experiences and challenges and develop new solutions/approaches. The group widened to include representatives from: Birmingham City Council, Devon County Council, Gateshead Council, Hertfordshire County Council, Kent County Council, London Borough of Islington, London Borough of Southwark, Nuneaton and Bedworth Borough Council and Stevenage Borough Council.

For further information on the work we do on financial exclusion please contact: Gareth Evans (Co-Director) gareth.evans@inclusioncentre.org.uk

Please contact lginform@local.gov.uk should you have any feedback.

The Financial Inclusion Centre has made a submmission to the Government’s consultation on the English portion of the Dormant Assets funding (for a description of the Dormant Assets Scheme, see below). So far over £800 million has been committed through the scheme to support social and environmental initiatives across the UK. Now, a further £880 million is expected to be unlocked – £738 million of that in England.

The Financial Inclusion Centre argues that financial inclusion should definitely remain a cause for the Dormant Assets Scheme. Overall, limited progress has been made in promoting financial inclusion and resilience in the UK.

To be fair, as a result of legislation and regulation, real progress has been made in two areas. The number of people without a basic bank account has been significantly reduced (although concerns have been raised about ‘cash deserts’ emerging across the UK as banks close branches). Moreover, millions of people are now contributing to a pension as a result of pensions autoenrolment (although more needs to be done to increase the amount people are saving for retirement and improve pension provision for groups such as the self-employed, workers in the gig economy, and carers).

But, very limited progress has been made towards achieving the other main goals of financial inclusion and resilience – that is, building savings; expanding access to affordable, socially useful credit and insurance; and meeting the need for advice and support on financial issues.

The failure to build financial inclusion and resilience has meant that financially vulnerable households and individuals have been exposed to ongoing financial problems such as being unable to pay for essentials such as household bills or emergency needs such as replacing basic goods such as a cooker.

Financially vulnerable households can be caught in a vicious cycle. Low levels of savings, lack of insurance, or affordable and accessible credit options to cover emergency costs contributes to over-indebtedness and/ or forces households to turn to damaging high cost/short term credit. This in turn makes it harder to save against future needs – and so on.

Households have been left seriously exposed to the wider economic shocks created by recurring crises (the 2008 financial crisis, the economic crisis caused by Covid, and most recently the cost of living crisis).

Financially vulnerable individuals can find their independence and life choices restricted due to lack of resources and viable options, often trapping them in dangerous circumstances. Financial exclusion and vulnerability, and associated money worries, contributes to wider social problems such as poor mental and physical health, family breakdown, and undermining workplace productivity.

Particular groups in society, including those with protected characteristics, are still disproportionately affected by chronic, serious levels of financial exclusion.

In our submission we said the priorities for the Dormant Assets Scheme is to support interventions to:

• Help vulnerable households build savings to create a financial cushion;
• Promote access to affordable credit;
• Promote access to affordable, basic insurance; and
• Expand access to advice, support, and information including debt advice, and help with navigating financial and social security systems (a cause of financial hardship and therefore exclusion is the difficulty many people face trying to navigate social security systems).

We make the point that there is no shortage of good, innovative products and ideas for promoting financial inclusion and resilience. But, the problem is that many of the best ideas and initiatives have been ‘left on the shelf’. The priority now is to make sure these products and ideas reach as many excluded or underserved people as possible.

Similarly, we believe that a much more proactive approach should be adopted to take emergency and pre-emptive support, advice, and information to those who need it, rather than rely on those in need finding their way to charities that provide support.

There needs to be a focus on turning ideas into action. The submission can be found here: Financial Inclusion Centre Dormant_Assets_Spend_Consultation FINAL

What is the Dormant Assets Scheme?

Dormant assets are financial assets, such as bank accounts, that have been untouched for a long period perhaps because owners have simply forgotten about them, or moved house and not informed their bank. Rather than continue to let those assets lie dormant in banks, the Government set up The Dormant Assets Scheme.

The main aim of the Scheme is to reunite people with these financial assets. But, where this is not possible, the Scheme unlocks this money for social and environmental initiatives across the UK. So far over £800m has been committed to support social and environmental initiatives across the UK. The money is split between England, Scotland, Wales and Northern Ireland, and each nation makes its own decisions on how the money is spent.

The Dormant Assets Scheme was recently expanded from bank accounts to include the insurance and pensions, investment and wealth management, and securities sectors. This is estimated to unlock around £880 million for good causes across the UK, £738 million of which will be made available for England over time.

The Financial Inclusion Centre offers its condolences to The Royal Family on the death of Her Majesty Queen Elizabeth II. As Monarch, she embodied the value of public duty in service to the whole nation.