Why have we made so little progress on financial inclusion and resilience?

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.

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To achieve net zero, financial regulators must give protecting the environment equal status with protecting consumers and preventing financial crises

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

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FCA’s consultation on Sustainability Disclosure Requirements (SDR) and Investment Labels CP22/20.

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

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Financial hardship and economic vulnerability in England

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.

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Consultation on the English portion of dormant assets funding

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.


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Statement from Malcolm Hurlston CBE, Chairman, The Financial Inclusion Centre

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.

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Submission to HM Treasury Review of Solvency II consultation

Post Brexit, the government is set on reforming a critical piece of EU financial regulation called Solvency II. This is designed to protect consumers by making sure that insurance companies hold a cushion of assets to be able to withstand financial shocks and honour commitments to policyholders – for example, pay pension annuities.

The reform of Solvency II should be seen in conjunction with other reforms to financial regulation intended to align financial market behaviours with climate goals. We have two primary concerns in relation to the proposed government reforms of Solvency II and wider financial market reform.

  • The prudential regulation of UK insurers (and therefore consumer protection available to policyholders) should be robust and maintain trust and confidence in the sector over the long term; and
  • Market, prudential, and conduct of business regulation should align UK financial market behaviours with climate goals.

The insurance lobby is arguing that post Brexit provides an ideal opportunity to relax some of the measures contained in Solvency II, claiming this would free up investment to support the green transition. We think this is disingenuous and the real intention of the insurance lobby proposals is to weaken regulation to provide a windfall for shareholders, not finance the green transition.

In our submission we conclude that the state of some of our major insurance companies means regulatory standards need to be toughened, not weakened. There are more effective ways of directing the financial resources of financial institutions to support the green transition without compromising consumer protection and undermining long term trust and confidence in the insurance industry and pensions.

Moreover, overall, we conclude that the proposals in Solvency II would do little to align behaviours in the UK financial system and markets with climate goals.

Our submission can be found here: FIC HMT BoE PRA Solvency II consultation response final 210722

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HM Government: Update to the Green Finance Strategy – Call for Evidence

The UK government has recently issued a Call for Evidence to support the update of its Green Finance Strategy. The strategy has three objectives:

  • Greening finance by supporting the financial services sector to align with the UK’s net zero commitment, the need to adapt to climate change and the UK’s commitment to nature’s recovery.
  • Financing green by mobilising private investment at scale to support clean and resilient growth.
  • Supporting financial services to capture the opportunity presented by the transition to a net zero and nature-positive economy, cementing UK leadership in green finance and ensuring that businesses can benefit.

Financial Inclusion Centre has submitted its response to the call for evidence. See here: Financial Inclusion Centre Submission Government Green Strategy Update FINAL VERSION 0622

We are concerned that the legislative and regulatory framework, and specific regulations, rules, and guidance are not fit-for-purpose and will not drive the necessary change in the financial system and markets. A different approach is needed if UK financial markets are to support climate goals and if the UK is to be a leading effective, trusted, and reputable global centre of green finance.

For further information on our work on financial markets and climate change, please see: Financial markets, climate change, economic and social utility

Our report Time for Action [1] contains more detailed analysis of the structural, market, institutional, infrastructure, and regulatory issues that inhibit the alignment of financial market activities and behaviours with climate goals.

For further information, please contact Mick McAteer, Co-Director, Financial Inclusion Centre on mick.mcateer@inclusioncentre.org.uk or mickmcateer92@gmail.com



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The FCA’s new Consumer Duty proposals

The Financial Inclusion Centre has submitted its response to the Financial Conduct Authority’s important consultation paper CP21/36 on proposals for a new Consumer Duty for the financial services industry. Our response can be found here: Financial Inclusion Centre Submission FCA Consultation CP21-36 A New Consumer Duty FINAL VERSION

We very much welcome the intent behind the new Consumer Duty. If it was implemented properly, and robustly supervised and enforced, it could improve the way the financial services industry is regulated.

But, there are serious flaws in the proposals. As it stands, we do not think the Consumer Duty will make much difference to how well financial services meet consumers’ needs. Indeed, taking into account the government’s Future Regulatory Framework (FRF) Review,[1] consumer protection in the UK could take a backward step. The government wants to give the FCA an international ‘competitiveness’ objective. This is likely to compromise the independence of the FCA and the ability of the regulator to focus on its primary consumer protection objective.

The positive aspects of the Consumer Duty 

There are a number of potentially positive aspects to the Consumer Duty. The FCA intends to apply the Consumer Duty throughout the financial services distribution chain, and to unregulated financial activities which are ancillary to regulated activities. The Consumer Duty would apply to existing products and services and products or services sold or renewed after the Consumer Duty comes into effect.

The FCA wants to improve the way firms pre-empt and mitigate harm. It wants to toughen up rules and guidance on how financial services firms: test and approve products before marketing them; and better identify target markets (including those with vulnerabilities).

The FCA would expect firms to: monitor and regularly review the outcomes customers are experiencing; ensure products and services they provide are delivering the outcomes that they expect in line with the Consumer Duty; identify where they are leading to poor outcomes or harm to consumers and take appropriate action.

Moreover, the FCA would expect a firm’s board, or equivalent management body, to consider a report produced by the firm assessing whether it is acting to deliver good consumer outcomes consistent with the Consumer Duty, at least annually. So, it is positive that boards will be expected to pay more attention to ensuring that their firm’s activities are not causing harm, and are delivering better value.

The flaws in the FCA’s proposals

But, there are serious flaws in the proposals which will undermine the new Consumer Duty.

Data, metrics, and reporting  

The main concern relates to how the FCA intends to monitor and evaluate the impact of the Consumer Duty. The FCA’s proposals for monitoring and reporting could seriously undermine the effectiveness of this flagship reform.

It must be said that, even now, we cannot actually tell whether the FCA is doing a good job at making markets work for consumers due to the lack of meaningful performance data and metrics.

There is much data in annual reports and business plans on how much the FCA spends each year, how many people it employs, how much activity the FCA is engaged in. But, this does not tell us how well financial services are delivering against the consumer outcomes.[2] And if we cannot tell how well financial services are performing, we cannot tell how well the FCA is performing.

To be fair, we can observe that the FCA has been effective in reducing the number of systemic misselling scandals.[3] So, it is has been doing well on ensuring markets treat consumers more fairly.

But, there is little meaningful data or metrics on how well financial markets are performing on the other outcomes such as financial inclusion, the quality and social utility of financial products, the efficiency of financial markets, and value for money.

The Consumer Duty should have provided the ideal opportunity for the FCA to fundamentally change its attitude to transparency and holding markets to account.

Greater market transparency helps drive up standards of behaviour and practices in markets. It is an aid to better policy making and regulation, and promotes regulatory accountability.

The FCA is delegating far too much responsibility to firms’ boards to ‘mark their own homework’ on compliance with the Consumer Duty. The FCA should stipulate that reports to the board (or equivalent management body) should be independent and published.

Moreover, the FCA is not specifying what metrics firms should collect and report on. This will make it more difficult for the FCA to gather information on a consistent basis to allow for meaningful comparisons.

But, the most worrying aspect is that the FCA will not require firms to report to the regulator on compliance with the Consumer Duty. The FCA would expect firms to collect suitable data and information to assess consumer outcomes, and be able to give the FCA evidence of such actions if requested [our emphasis] by the FCA.

We are at a loss to understand the FCA’s thinking on this. The FCA says it wants to be a ‘data led’ and proactive regulator. But, relying on requesting information will make it more difficult for the regulator to obtain performance data and metrics.

Intermittent and inconsistent data (or after-the-event thematic reviews and market studies) is an inefficient way to identify detriment at an early stage and to monitor the effectiveness of the Consumer Duty.

Moreover, it will make it very difficult for external stakeholders (including Parliament) to identify whether the Consumer Duty is having the intended effect so undermining regulatory and corporate accountability.

Therefore, we are proposing that:

  • firms should be required to report regularly to the FCA on compliance with the Consumer Duty, based on data and metrics specified by the regulator after consultation with stakeholders;
  • the FCA should produce regular reports on how well markets are meeting the needs of consumers (based on the established consumer outcomes);
  • the FCA should produce regular audits of how well the financial services industry is complying with the Consumer Duty;
  • 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;
  • the FCA should report to Parliament and government on the extent to which the  commercial financial services industry is able to meet the needs of vulnerable and excluded groups (especially those with protected characteristics);
  • the FCA should report to Parliament and government on the impact of policy decisions on financial inclusion – for example, changes to the Universal Credit system; and
  • individual firms should be required to produce financial inclusion audits similar to those produced by US financial services firms – see below.

Firms acting reasonably, delivering fair prices and value, and product regulation

The FCA wants firms to act reasonably to deliver good outcomes. The FCA talks about firms addressing problems with: ‘products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay’.

But, it is not clear what is meant by fair value or reasonable relative to the price paid. There is a worrying lack of ambition from the FCA on improving the price and value of financial products and services.

The FCA’s approach is unlikely to make a difference in markets where poor practice and value is standard. A firm selling a high price product could be considered to be offering a fair price and value because the rest of the market is doing so. So, the FCA’s approach risks embedding existing market inefficiencies, high prices and poor value.

The payday lending market was an example of this. Payday lenders used to argue that costs were so high because of the higher risk associated with the target market. They argued the price was fair value. But, the poor value and detriment was intrinsic to the payday lending business model.

Another example can be found now in the overdraft market. Quoted rates for new overdrafts stand at 34% compared to the 10 year average of 22%[4] despite the FCA recently introducing rules to try to promote competition in the market. With the FCA’s Consumer Duty approach, a firm providing overdrafts at high rates could be considered to be acting reasonably because the rest of the market was providing overdrafts at these high rates.

Competition theory holds that products are fairly priced and represent good value if product margins are low (the theory is that market forces compete away high margins).

But, in key market sectors, product margins may be low, yet the product still offers poor value for consumers – because the market overall is inefficient. In this case, the final price paid by the consumer may represent fair value from the provider perspective (as margins are low). However, the products would not represent fair value for consumers.

Therefore, the FCA should make it clear, in the guidance, that acting reasonably must be judged on its own terms not according to what are standard pricing practices in the market. If the assessment tells firms that the products do not represent fair value, then the firm must stop selling those products.

It is very unfortunate that the FCA has not taken this opportunity to make greater use of product regulation such as price capping, and product approval and banning. Direct interventions such as price caps have been shown to be a much more effective method for constraining harmful market practices and dealing with market inefficiencies than indirect methods such as promoting competition or tackling information asymmetries.

Despite competition interventions having little impact on making markets work, the FCA sees product regulation as a last resort preferring to wait to see if its competition or market led remedies take effect. The FCA’s reluctance to use product regulation leaves consumers exposed to harm for longer than is necessary.

Consumer responsibility and the precautionary principle

The FCA reiterates the point that the new proposals do not mean that consumers can or will be protected from all harm or remove the principle of consumer responsibility. But, this is only reasonable if firms have taken necessary steps to comply with the relevant regulatory requirements (in this case the Consumer Duty requirements). Ideally, the definition of consumer responsibility in legislation[5] should be amended to say this. In the meantime, FCA should make this clear in regulatory guidance.

It would be more effective if the FCA required firms and intermediaries to adopt the precautionary principle when determining whether products and practices are likely to cause harm. Firms and intermediaries, with all the huge financial and technology/ data resources at their disposal, are well placed to determine the likelihood of harm. They should be required to take steps to proactively prevent or minimise harm occurring, and report to the FCA on how they have done this.

The FCA might say that the pressure of competition will prevent harm. But, this is not realistic. Indeed, fierce competition can increase the risk of harm as providers compete to acquire business.

Acquisition costs push up prices. The dynamic of competition can compel providers to use harmful marketing practices to persuade consumers to buy their products or services (made easier by the adoption of digital and data based market research and advertising practices).

This aggressive-competition dynamic is the main cause of harm in financial services. This is what a new Consumer Duty must seek to constrain. If the Consumer Duty is to make markets in financial services work better for consumers, it must set new, objectively higher standards. It should not embed and retain unreasonable or aggressive practices in dysfunctional markets.

We are particularly concerned about the increased use of digitalisation and digitisation in financial services. The FCA should require boards of regulated firms to pay more attention to the risks created by the use of digitalisation and digitisation in financial product design, promotion, and distribution. This is particularly important when it comes to the use of technology and big data to target vulnerable consumers and exploit behavioural biases – see below.

Financial inclusion

In our response to HMT’s Financial Services Future Regulatory Framework Review, we proposed that the FCA should be given a new statutory objective to promote fair access to financial services.

We appreciate that the FCA is not a social policy regulator. It is for Parliament and government to mandate policy solutions where markets fail to deliver.

But, there is still much the FCA can do to promote inclusion. In particular, the lack of data and information on financial inclusion in the UK is holding back efforts to promote financial inclusion. The approach in the UK is contrast to the obligations faced by US financial institutions under the Community Reinvestment Act (CRA)[6] and Home Mortgage Disclosure Act (HMDA).[7] To support our fair access objective, we argued for a rethink on the type and relevance of data published on market access and inclusion – see above.

Unnecessary complexity is retained

It is currently difficult to understand the boundaries of the regulatory ‘perimeter’[8], which rules apply to different types of financial consumer (including SMEs) and, therefore, what consumer protections apply.

The FCA’s proposals would retain the unnecessary complexity and confusion in the current system. We urge the FCA to introduce a single standard definition of client which should incorporate retail consumers, SMEs, and a category of non-professional clients such as pension fund trustees, local authorities, and charities.

Technology and big data

The Consumer Duty proposals are weak on protecting consumers from harmful use of technology and big data. Increasingly financial services use technology and big data to design, market, and distribute financial products and services. There are growing concerns that digital techniques are being used to exploit consumers behavioural biases and vulnerabilities, and can exacerbate financial exclusion and discrimination.

But, digital services firms are not regulated to the same standards as financial services firms. We are asking for clarification on how the Consumer Duty applies to digital firms, and for the FCA to issue clear guidance for boards of financial firms to pay more attention to the risks created by the use of digital and data services in financial services.

The FCA should require firms to do more to ensure consumers understand the products and services sold. Observing how consumers actually behave is the best way to measure consumer understanding of products and services.

Firms, through the use of digital services and big data, now have the capacity to analyse the behaviours of vast numbers of consumers on an almost real-time basis. They are able to identify patterns which can show that product design and marketing practices are causing harmful consumer behaviours.

Firms should be required to test the impact of digital marketing techniques on consumer behaviours and take remedial action where there is evidence that these techniques are causing consumers to behave in a suboptimal way.

Non-UK and unregulated products and services

UK financial services firms sometimes use non-UK regulated products and services. It is important that consumers be made more aware of the risks associated with this. The FCA should also require UK regulated firms who use non-UK firms to provide additional support to consumers in the event of misselling or administrative failures.

Regulated firms can facilitate access, and provide a ‘halo effect’, to providers, intermediaries, products, and activities which might fall outside the regulatory perimeter.[9]

The FCA should emphasise that the proposed enhanced Consumer Duty applies to non-regulated activities where the regulated firm has an influence over consumer behaviour and decision making. Boards of regulated firms must pay much more attention to activities that are not regulated by the FCA, but which are integral to the design, promotion, and distribution of regulated financial products.

ESG products

ESG financial products have become very popular with the growing attention paid to the environment. Third-party information and ratings agencies (who rate the green credentials of products) will play a significant role in the marketing and selling of ESG products to consumers.

But, these intermediaries and ratings agencies are largely unregulated. There is a clear risk that regulated financial product providers and intermediaries will select third party providers with the least onerous rating standards.

It is to be hoped that the FCA will soon regulate these third party intermediaries and agencies. Until then, the FCA should protect consumers by making it clear that, as part of the Consumer Duty, regulated financial providers and intermediaries must exercise due diligence when selecting third party providers of ESG information and ratings.

The steps firms take to check the integrity of third party ESG information and ratings should form part of the FCA’s Consumer Duty supervision regime.

Consumers in financial difficulty

The FCA did a very good job protecting consumers affected by the Covid financial crisis. But, the Consumer Duty proposals do not place enough weight on the need for firms and others in the market to treat consumers fairly throughout the whole of the firm/ customer relationship especially when consumers might be in difficulty.

An example of this, relates to the very low level of county court judgments (CCJs) that are marked as ‘satisfied’ on the Register of Judgments. Only 15% of CCJs are marked as satisfied. It is not common knowledge that CCJs are marked as satisfied only if the debt is repaid and proof of payment is supplied to the courts in England and Wales (and to Registry Trust for other jurisdictions).

This problem could be addressed by the FCA and other regulators[10] requiring creditor firms within their remit to notify the courts when a debt has been repaid as part of treating customers fairly obligations (and now as part of the proposed Consumer Duty).

Closed products

Closed products such as older insurance based personal pensions continue to cause harm to consumers with high charges, low net returns, and punitive exit penalties which mean that consumers continue to be, in effect, locked into these products.

Firms should be required to review closed products to assess what remedial action can be taken to protect consumers from further harm and report to the FCA on how they intend to redress the harm caused.

Private Right Of Action (PROA)

The FCA is not going to introduce a PROA alongside the Consumer Duty. We do not understand the logic of the FCA’s arguments. Of course, we agree that the existing redress framework will remain the more appropriate route for almost all consumers to seek redress. Consumers can indeed pursue redress in a way that is low cost and consumer friendly.

But, this does not negate the argument for a PROA. A PROA can only act as a further deterrent against poor corporate behaviours and practices. The FCA’s decision to not allow a PROA is also likely to limit the opportunity for collective redress in the form of class actions.

The timetable

Allowing firms until end of April 2023 to fully implement the Consumer Duty would seem reasonable. However, we would urge the FCA to publish a schedule for firms to follow to ensure that the timetable does not slip.

The FCA should resist arguments from the industry to delay the implementation. If the FCA has identified a need for the new Consumer Duty, this means that consumers are currently exposed to poor practices. The longer it takes to implement the Consumer Duty, the longer consumers are left exposed to these poor practices.

Moreover, there are some elements of the work which the FCA could begin immediately such as requiring creditors to inform the courts when a CCJ has been settled and developing performance metrics to judge the success of the Consumer Duty.

[1] Future Regulatory Framework (FRF) Review: Proposals for Reform – GOV.UK (www.gov.uk)

[2] access to products and services that meet consumer needs (economic and social utility of products and services); affordability and value for money; quality of products and services; fair treatment of consumers; security of products and services; access to appropriate information and advice; and rights to redress.

[3] These still occur. The defined benefit transfer misselling scandal is a case in point. But, the number and scale of system wide misselling scandals have been reduced.

[4] Financial Inclusion Centre analysis of Bank of England data on quoted household interest rates

[5] See s3B(1)(d) FSMA 2000

[6] Community Reinvestment Act (CRA) | OCC

[7] The Home Mortgage Disclosure Act | Consumer Financial Protection Bureau (consumerfinance.gov)

[8] which defines what products and which types of financial users are covered by FCA regulation

[9] See, for example, the Gloster Report into the regulation of London Capital & Finance (LCF) Gloster_Report_FINAL.pdf (publishing.service.gov.uk)

[10] Such as OFGEM, OFWAT, and OFCOM

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Marlene Sheils OBE joins board of The Financial Inclusion Centre

For Immediate Release

1st September 2021


Marlene Sheils OBE joins board of The Financial Inclusion Centre

The Financial Inclusion Centre announces today that one of the best known and most respected figures in the UK credit union and wider financial inclusion sector, Marlene Sheils OBE, has joined its board as a non-executive director.

Marlene has been Chief Executive of Edinburgh based Capital Credit Union since 2001 and has grown it into one of the biggest credit unions in the UK.  She is also Chair of the Financial Conduct Authority (FCA) Smaller Business Practitioner Panel, the first woman to hold this position, and Chair of the Money and Pensions Advice Service (MaPS) Nation of Savers Challenge Group.

Previously, Marlene was Chair of the Building Societies Workplace Savings Committee, and was one of the founders of the UK Credit Union Development Education Programme. Marlene was Advisor to HRH the Duchess of Cornwall in matters relating to Credit Unions and financial inclusion. She was elected to serve on the Board of Directors of the World Council of Credit Unions (WOCCU), the only British person to hold a board seat on WOCCU.

Malcolm Hurlston, Chairman of The Financial Inclusion Centre said: “We are delighted and honoured to have Marlene on the board.  She is a committed advocate for creating a fair financial system and supporting households in building financial resilience and wellbeing. Her passion for promoting financial inclusion and, crucially, her experience in making things work will be a huge asset to The Centre’.

A full biography of Marlene Sheils OBE is attached: Financial Inclusion Centre Marlene Sheils biography.docx

For further information please contact: Mick McAteer, Co-Director, Financial Inclusion Centre on 0783 779 7748 or mick.mcateer@inclusioncentre.org.uk, or mickmcateer92@gmail.com

About The Financial Inclusion Centre

The Financial Inclusion Centre (FIC) is an independent, not-for-profit policy and research group (www.inclusioncentre.org.uk). The Centre’s mission is to promote financial markets that work for society. We work at two main levels advocating for system change and to ensure households’ core financial services needs are met. We research the causes of market failure, formulate policies to address market failure, develop alternative solutions where the market cannot deliver, and campaign for market reform. We focus on households who are excluded from, face discrimination in, or are underserved by financial markets and services.


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