Financial Lives 2022: Key findings from the FCA’s Financial Lives May 2022 survey
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.
In the absence of legislation, we have made little progress on building financial inclusion and resilience post 2008
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?
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 (the nature of the market and market inefficiencies – see below)
- 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
Moreover, if we are to make financial markets work for society, it is also important to better understand the nature and causes of consumer vulnerability in financial services. It is surprising how many consumers can be vulnerable at different points of their lives. The FCA, in its Financial Lives Survey 2020, estimated that 46 percent of UK adults display one or more characteristics of being potentially vulnerable. Financial Lives: The experiences of vulnerable consumers (fca.org.uk)
We wouldn’t dispute that figure. But, it is such a large number as to make it very difficult to target policy and regulatory interventions. If we are to target interventions to greatest effect, it is important to understand which specific groups are most vulnerable to failures at system, market, and individual firm level. For a fuller explanation, see: FINANCIAL INCLUSION CENTRE – FINANCIAL VULNERABILITY BRIEFING PAPER FINAL
Why have we made so little progress?
Let’s face it, the main cause of low levels of financial resilience and high levels of financial exclusion is poverty. Tackling that primary cause is a matter for governments.
But, we have also just failed to implement legislative and regulatory policies/ interventions that are effective at building inclusion/ resilience and tackling discrimination. Why is that? There are several key reasons.
Much of the focus has been on trying to improve the demand side through financial capability/ education initiatives aimed at changing individual level behaviours. But, it must be said these have not made much of an impact in driving standards of corporate behaviour or positive behaviours amongst excluded/ underserved consumers.
This is not to say demand side behaviours can’t be improved, just that interventions aimed at individual empowerment don’t seem to be that effective. However, we know that the intervention of trusted intermediaries can change consumer behaviours. For example, there is compelling evidence workplace payroll savings schemes work – see below.
Moreover, we can address what appear to be demand side barriers to inclusion through targeted interventions aimed at firms. For example, it is estimated 4.6 million people have at least one county court judgment (CCJ). This affects their credit rating and their ability to get affordable credit and other services. Many people are able to pay off their outstanding debt after receiving a CCJ. But, it is not well known that to ‘satisfy’ a CCJ, the consumer has to settle the outstanding debt with the creditor and provide the courts with proof of payment. Not surprisingly, many people under financial stress don’t realise they must provide the courts with proof of payment. Currently, only 15% of CCJs are marked as satisfied. This could easily be addressed by requiring the creditor firms to email the courts saying that the debt had been settled. A small change to supply side behaviour that could significantly help the demand side. See: The Data That Matters (registry-trust.org.uk)
On the supply side, policymakers and regulators have been reluctant to address the fact that the nature of markets can result in discrimination and/ or create exclusion or directly intervene to drive through efficiencies that would bring more people into the market.
Can we do anything about the supply side?
But, there is much that could be done through legislation and regulation to make markets more inclusive. This will take a different approach as our system of financial legislation and regulation isn’t geared up to tackle financial exclusion/ discrimination.
If we are to address the supply side barriers to inclusion, then we need to better understand why the market itself is such a barrier. This is down to two main reasons.
The nature of markets Markets dominated by for-profit firms are driven by the profit motive, not consumer needs. For-profit financial services firms prioritise optimising profits for shareholders and rewards for boards/ executives. Financial services are built on consumer segmentation and profiling (which will be exacerbated by the growth in the use of tech/ data). Not surprisingly, the priority for commercial firms is to identify consumers who are the most profitable and/ or lowest risk (according to their models). So, left to its own devices the financial services market will not seek to serve low income/ ‘risky’ households. It requires some external intervention to ensure access – for example, the legal right of access to a basic bank account and measures have been introduced to maintain access to cash in communities. Actually, to be precise, markets will sell to anyone – if the price and regulatory conditions are right. In poorly regulated markets, they can extract high revenues and profits even from the lowest income/ ‘riskiest’ consumers. We saw that with payday lending. But, what’s good for markets is not necessarily good for consumers. This is not a criticism, it is just the nature of the beast.
Market inefficiencies The financial services industry could serve more consumers if it was more efficient and fit for purpose. The supposedly sophisticated and efficient financial services industry still struggles to serve hard to reach/ underserved communities and consumers. There is a proliferation of providers and products which pushes up costs (competition in financial services is not effective at creating the right consumer outcomes and is unlikely to ever be). Too many products are overly complex. Poorly designed products and services which create barriers for consumers, and mistrust of financial services, cause consumers to self-exclude.
So, the combined effect of poverty, the nature of markets, and market inefficiencies cause financial exclusion and discrimination. Millions can’t afford financial products and services and/ or the commercial financial services industry just isn’t interested in them under properly regulated conditions. Inefficient, oversupplied markets struggle to serve consumers who could be commercially viable.
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.
So, any comprehensive attempt to tackle exclusion and discrimination will require government giving the FCA the authority and duty to address the root causes. If we are serious about the challenge, it will require interventions such as a Fair Banking Act and some form of universal service obligations or minium provision.
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 Consumer Duty should cause the FCA to have a laser focus on discrimination in financial services.
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 ‘middle England’ 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.
When it comes to market based provision, alongside tackling the nature of markets, exclusion is primarily 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.
Conclusion
So, despite poverty being the main cause of exclusion and discrimination, there is much that could be done to make progress on inclusion, resilience, and social justice in financial services. This will require government intervention, tougher regulation, and civil society focusing on turning ideas into action.