A new Consumer Duty proposed by the Financial Conduct Authority

The Financial Conduct Authority (FCA) is proposing to introduce a new consumer duty that would set clearer and higher expectations for financial firms’ standards of care towards consumers. Financial Inclusion Centre (FIC) recently submitted its views to the consultation paper CP21/13: A new Consumer Duty in which the FCA set out what the new duty could mean for firms and, critically, the difference it could make for consumers.

FIC’s full submission can be found here: FIC submission FCA CP21-13 A New Consumer Duty FINAL

Summary of FIC submission

We very much support the principle of, and the intent behind, a new Consumer Duty. In theory, a powerful Consumer Duty could help enhance consumer protection and real competition, and could advance the FCA’s consumer protection and competition objectives.

A properly implemented Consumer Duty would also help improve confidence and trust in the financial services industry. It could also promote real competition by helping those firms who want to treat customers fairly, and allow the FCA to penalise those firms which do not.

We do not foresee any negative unintended consequences if the Consumer Duty is implemented properly. No doubt, some in the industry will claim that a Consumer Duty would stifle innovation, creativity, choice, and willingness of firms to market and sell to consumers with consequences for inclusion. This would be disingenuous.

So much innovation in financial services is not actually socially useful and is designed for the benefit of firms’ business models, to meet sales targets, and to exploit complexity. A robust Consumer Duty may well reduce the proliferation of products on the market that just add to search and distribution costs, and destroy value. It may reduce the degree of choice in the market but improve the quality of choice by forcing firms to become genuinely creative and develop socially useful products that represent fair value. That would be a good outcome.

Competition cannot be relied on to drive out bad providers and products in financial services. A properly structured and enforced Consumer Duty could introduce real competition by allowing more efficient, consumer focused firms the space to thrive thereby supporting inclusion.

Moreover, a new Consumer Duty (if properly implemented) represents to us a set of standards that society has the right to expect of well-run businesses. If some firms cannot trust themselves to engage with consumers on those terms and withdraw from the market, then that would be a good outcome.

The new Consumer Duty should ensure that firms act in the best interests of consumers. We have no particular views on how this requirement to act in their interests should be labelled. What matters are the steps the FCA requires firms to take to ensure they are acting in the best interests of consumers. These requirements should ensure firms and others treat consumers fairly and act in their interests throughout the whole of the firm/ customer relationship not just at the interaction point where firms are competing for custom.

We are concerned about calls from some quarters that the FCA should introduce a duty of care. This could undermine the intention of the Consumer Duty if the legal definition of duty of care becomes the standard for assessing whether firms are acting in consumers’ best interests. The generally accepted legal meaning of a duty of care is an obligation to exercise reasonable care and skill when providing a product or service. Obliging firms to exercise reasonable care and skill in our view would not have the same direct beneficial effect on firm behaviours as the defensive/ precautionary and positive measures we advocate to make a new Consumer Duty work.

To make financial markets work for consumers and wider society, a Consumer Duty should be supported by robust rules and meaningful outcomes. The FCA should have greater ambitions for the Consumer Duty. The FCA’s definition of what an effective market looks like appears to be quite limited. A recurring theme throughout our submission is that the FCA has to make markets work. The Consumer Duty should not be seen as another mechanism designed to create the conditions for competition to drive up standards. We are concerned about the continued reluctance of the FCA to use proven, necessary interventions such as price caps.

Critically, if a Consumer Duty is to have the desired effect, it should enable: more effective, responsive, and agile regulation; more effective supervision of markets and firms; and more effective enforcement and use of sanctions to deter harmful corporate practices. It should enhance the ability of consumers to obtain redress.

Unfortunately, the emphasis in CP21/13 on consumer responsibility, tackling information asymmetries, and intention to use tests of reasonableness is unlikely to make markets work significantly better than is the case now.

We are concerned about the phrasing that accompanies the FCA’s proposals for a Consumer Duty. It could set expectations with regards to firm behaviour that could undermine the intended effect of the overarching duty. Phrases such as  ‘reasonable expectations’ and ‘causing foreseeable harm’ are likely to be open to abuse by firms and intermediaries. These phrases could be open to interpretation and introduce a degree of uncertainty around the intent. This could make it difficult for the FCA to supervise markets, enforce against breaches and impose sanctions, and for consumers to obtain redress.

It would be more effective if the FCA adopted a much tougher approach by requiring firms 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 resulting.

It is unclear how the new duty as proposed by the FCA would deal with emerging risks at the intersection between FCA regulated financial services and non-regulated digital and data services and ‘Big Tech’ platforms. Regulated financial firms increasingly use digital and data services to target consumers and sell products. The FCA should emphasise that regulated firms must apply the Consumer Duty when using non-regulated digital and data services. Similarly, regulated firms should apply the Consumer Duty when associating with products and services outside the regulatory perimeter.

It is not clear how the FCA’s proposals on price and value would work. The FCA talks about ‘products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay’. This is unlikely to result in significant improvements in prices and value for consumers. In many key financial services sectors, value is poor across the board. Product margins may be low because of high distribution costs so the end price for consumers will be high. But, with the FCA’s approach, a firm selling a high price, poor value product could still be considered to be offering a fair price and value because the rest of the market is doing so.

In other sectors, there may be a significant amount of choice available, so it looks as if there is competition in the market. But, industry margins can be high and significant value extracted from consumers. The result is that the market generally offers poor value. Actively managed investment funds are a case in point. It is genuinely difficult to see how actively managed funds (which tend to have higher prices) represent fair value if passive funds with similar investment objectives are available. In this case, would the FCA  expect asset management firms to reduce prices or not sell products, or advisers and platforms to not recommend products?

Consumers, particularly vulnerable consumers, cannot afford another experiment with competition as the primary mechanism for making markets work. So, we would urge the FCA to be more prescriptive on what concepts such as fair price and value mean and make it clear that it is ready to use price caps and other product interventions as a first resort not a last resort.

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Local Welfare Assistance Schemes in London – an evaluation framework

As well as undertaking research and policy development on financial exclusion and its causes, The Financial Inclusion Centre (FIC) has a strong track record in providing robust, independent evaluation of interventions.

This new research provides an assessment of the feasibility of carrying out a robust financial and social/societal evaluation of local welfare assistance (LWA) schemes that links back to a Theory of Change.

The report can be found here: Developing an Evaluation Proposition for LWAS in London – Final Report July 2021

The research was commissioned by the Greater London Authority (GLA) and London Councils (LC) to feed into the work of the London Recovery Board. FIC undertook a best practice review covering the use of data and evaluation within local welfare support schemes, and assessed current approaches to measuring social impact and cost benefit analyses. This was done via desk research and consultation with councils participating in the Local Government Association’s Reshaping Financial Support programme.

From this research and assessment, FIC has proposed an approach for developing a robust evaluation framework that would allow the impact of LWA schemes to be evaluated.

Most councils now deliver some form of LWA scheme which, despite the differences in name, are broadly similar in terms of the type of support they provide in helping households deal with immediate hardship. Undertaking a robust evaluation of schemes requires the right data, the right evaluation model(s), and a Theory of Change.

There is limited use of robust or systematic data collection amongst Councils to effectively drive delivery or allow for evidence-based targeting of specific cohorts for support. As it stands, data is utilised primarily for the purposes of assessing LWA scheme applications. Evaluation of LWA schemes is very limited.

The research identified only a handful of examples where formal models are used, or systematic measurement of the impacts and cost-benefit generated by the delivery of support undertaken, to maximise value of local support schemes. Notwithstanding the limited use of formal models or systematic approaches, the research did identify examples of data monitoring and a range of metrics within local welfare support schemes that could be utilised to: assess the effectiveness of local welfare schemes; better identify and target the most vulnerable residents ahead of a crisis; better understand clients and identify wider support needs; and contribute to an effective overall evaluation of LWA support provision.

There are a handful of well-developed tools / models that could be utilised to formally measure the impact of LWA schemes in terms of both: social value – with five outcome measures identified as being most relevant that could be adopted to determine the benefit to the household of the local welfare support schemes through changes in: financial comfort, relief from being heavily burdened with debt, higher levels of confidence, feeling in control of life, and relief from depression/anxiety.

Calculating the value for money achieved by LWA interventions using an established cost benefit analysis (CBA) tool allows the ‘financial case’ to be made by quantifying economic benefits that are generated for individuals and organisations.

Eligibility to hardship funding for No Recourse to Public Funds households appears to be limited across the Councils consulted with access having mostly been a temporary change made in response to Covid-19.

Wider research and learning on the behavioural and psychological impacts of poverty is important to inform the evaluation approach to LWA schemes. A new Theory of Change (ToC) for LWA schemes would need to be established that addresses the outcomes and goals the organisations are trying to achieve and the parameters or limitations for the intervention as well as determining the evaluation framework and type and amount of data to be collected to allow evaluation.

The research identifies a number of appropriate data categories that would allow for an evaluation of: operational outputs, targets, and goals; organisational benefits; and policy outcomes and goals.

There appears to be no single evaluation framework that could be lifted directly and used for LWA schemes. An evaluation framework that is fit-for-purpose for LWA schemes could be developed by drawing on elements from the handful of models identified above plus building in elements that are specific and relevant to LWA schemes.

The adapted framework would consist of the identification of: the baseline set of conditions prior to intervention; costs of that intervention; outputs, organisational goals, and policy outcomes that are to be measured to evaluate the intervention; data that is to be used to evaluate the intervention (pre and post intervention, ongoing intervention); sources of that data and who is responsible for collecting and analysing data; methods for quantifying the impact and actual model to be used to evaluate the impact; and limitations of any evaluation framework.

To undertake proper comparative analysis of an LWA scheme it is important to contextualise the environment in which the intervention operates. An LWA scheme operating in a particular local authority area which scores badly on multiple deprivation indicators or is intended to support individuals with multiple challenging issues might find it more difficult to make an impact than a similarly constructed scheme operating in a less deprived area or designed to support individuals with comparatively simple, less difficult issues.

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Building financial resilience: Workplace Payroll Savings Schemes

Today (11th February 2021) the Financial Inclusion Centre publishes a new research report called Getting Workforces Saving: Payroll Schemes with Credit Unions.

The report contains the findings from a two year project funded by the Money and Pensions Service (MaPS) designed to evaluate: the effectiveness of payroll savings in promoting positive savings behaviours and financial resilience amongst workers (with the emphasis on low income workers); and different ways of encouraging workers to sign up to payroll savings.

A summary of the report can be found here:

The full report can be found here:

The project was undertaken with two major employers in the Yorkshire region (Leeds City Council and NHS York) and Leeds Credit Union (where the savings of participating workers are paid into).

The research concluded that payroll savings is effective at encouraging positive savings behaviours and promoting financial resilience amongst lower-medium income workers (earning £17,500-£24,999 a year). The research found these workers were typically saving £50-70 a month.  

Importantly, payroll savings is a relatively simple concept which could be scaled up given the right support and effort. Backing payroll savings could make a significant contribution to MaPS strategic goal of getting two million more people who are either squeezed or struggling to start to save by 2030.

Therefore, to accompany the research report we have published a report with over 40 policy recommendations for government, employers, credit unions, and other stakeholders designed to expand the take up payroll savings schemes. That policy report can be found here:

For media enquiries please contact media@inclusioncentre.org.uk

For enquiries about the report please contact: gareth.evans@inclusioncentre.org.uk or mick.mcateer@inclusioncentre.org.uk

There are three separate Annexes with additional data not contained in the main report. These can be found here:

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Consumer Rights in the Private Rented Sector

The Smith Institute has published a new report, entitled Consumer Rights in the Private Rented Sector (PRS), sponsored by the Wates Family Enterprise Trust.

The Financial Inclusion Centre undertook the ground-breaking research and analysis and drafted the report. The report was edited, and an Introduction provided, by Lewis Shand Smith. Leading politician John Healey provided the Foreword.

We think this is one of the most comprehensive attempts to compare and contrast how well the PRS performs against other major consumer sectors and the rights and protections available to millions of private renters with those available to consumers in other sectors of the economy.

The report can be found here: Consumer Rights in the Private Rented Sector

A summary of the key findings and recommendations can be found below and in this briefing: Consumer Rights in the Private Rented Sector SUMMARY REPORT

Summary of the report

How did we assess the detriment in the private rented sector?

In the report, we deliberately chose a consumer rights model to highlight just how poorly private renters are protected, and how few rights they have. The lack of protection and rights is all the more glaring given the share of household income renters spend on rent and the level of financial vulnerability facing millions of renters.

But, it is not just the fact that spending on rent is one of the largest transactions millions of households make, we must remember that access to decent housing is a fundamental human right.

It is worth stating that a social justice case, rather than consumer rights case could be made for improving the protection and rights available to private renters. The right to a decent home, to be treated fairly while living in that home, and to be protected from unfair practices is a basic human right in, and of, itself. Indeed, the right to an adequate standard of housing is recognised in international human rights law.

However, we live in a world where people are treated as consumers of services rather than as citizens. So, it seemed appropriate to use a consumer rights model to expose the gaps and weaknesses in the current system of consumer protection available to private renters.

The team used the established consumer outcomes framework (access, choice, quality, value for money, safety, competition, complaints and redress, voice and influence, and externalities) to assess how well the PRS market works for renters.

The report concludes that the PRS is failing ‘consumers’. Details of our analysis can be found in Section 2: How well-functioning is the private rented sector? A consumer perspective on page 24. The comparative analysis is summarised in a table on page 29.

How did we assess consumer protection and rights in the PRS?

We set out to answer the question:

  • How does the consumer protection regime in the private rented sector compare to those in the comparator sectors – financial services, utilities, telecoms, transport, and general consumer rights provided as part of the Consumer Rights Act?

To do this we considered in detail:

  • The level of rights, protections and support afforded to consumers – in this case private renters.
  • The regulatory framework.
  • The objectives, powers and duties given to those regulatory bodies, the design of the regulatory system.
  • The standards expected of the providers in the market – in this case landlords and other market participants (e.g. letting agents).
  • The resources available to regulatory bodies with authority and responsibility for monitoring and enforcing compliance with legislation and regulation.
  • The ‘culture’ of regulation in the sector e.g. the willingness of the regulator to set standards for those providing services and enforce against non-compliance.
  • Monitoring, supervision, and enforcement.
  • How aware consumers are of their rights (if consumers are not aware of their rights, they will be less empowered to exercise those rights, providers will be under less pressure to maintain decent standards, regulatory bodies will be under less pressure to enforce those rights and standards).
  • How easy it is for consumers to exercise their rights and obtain redress (having a body of legislation and regulation conferring rights is one thing but if it difficult for consumers to exercise those rights – for example, if it onerous or too costly – then the benefits are undermined).
  • Consumer representation (it is accepted that having mechanisms for representing the consumer interest improves the efficacy of regulatory bodies – the regulators that cover the major consumer sectors each have formal and informal mechanisms for representing the consumer interest).

The report concludes that consumer protection standards in the private rented sector compares poorly with that available in other markets, such as financial services, utilities, telecoms, transport, and even basic discretionary consumer goods.

Compared to consumers in the main comparator sectors considered here, private renters are poorly protected. Regulation is not used effectively to maintain standards in the market. Consumers are often better protected when buying discretionary consumer products, as a result of the consolidated Consumer Rights Act 2015 and reasonably competitive market forces for consumer goods.

The contrast with the protections available to consumers in financial services is particularly marked.

More details can be found in: Section 3: Cross-sector comparison of consumer protections in the private rented sector on page 32. The comparative analysis is summarised in a table on page 37.

Policy recommendations

Following the analysis, the report makes a series of policy recommendations to level up the protection and rights available to private renters. These can be found in Section 4: Steps to improving consumer protection for private renters, on page 40 of the full report.

The key recommendations are:

  • Establish a new Private Rented Sector Regulator with a primary objective of ensuring renters are treated fairly. The Regulator would use a risk based approach to regulation[1] to oversee compliance with standards, supporting local authorities in their enforcement role, and ensure both tenants’ and landlords’ voices are heard.
  • Introduce a new open-ended Private Residential Tenancy, with measures to control excessive rent increases, remove no-fault evictions, and increase notice periods for longer term tenants.
  • Reform redress and dispute resolution by introducing mandatory membership of the Housing Ombudsman Service for private rented sector landlords and lettings agents.
  • Build on the powers local authorities already have and introduce mandatory registration of landlords and letting agents. This would contribute data to a national, searchable register which would be accessible to tenants and enforced by local authorities.
  • Build on the Homes (Fit for Human Habitation) Act 2018 and develop a new Private Renting Quality Standard that all tenants can expect their rental property to meet.
  • Review the impact of mandatory use of third-party deposit schemes. If found to be insufficiently robust, introduce a new National Tenancy Deposit Scheme.
  • Give local authorities the power to levy more substantial fines and tougher penalties for breaches, including the ability to confiscate properties from those landlords whose business model relies on exploitation of vulnerable tenants.
  • To better empower renters, the Government should establish an independent Private Renters Panel to represent interests of renters and engage with Government and the new Regulator on policy development.
  • Require all landlords to provide better information for tenants, setting out terms of the tenancy, information about the property, information about the landlord and responsibilities of tenants and landlords, and how to access redress through the ombudsman service in the event of a dispute.
  • Develop an industry wide information hub – for landlords, tenants, local authorities, and advice agencies – and to use data to underpin a national drive to raise standards.
  • Require all local authorities to ensure good quality advice is available locally for private renters and landlords about rights and obligations.

We believe these recommendations are proportionate to the scale of the detriment facing private renters. The regime we outline here is the least this vulnerable group of citizens should have the right to expect in a modern consumer society.

Please note that there have been a number of legislative and regulatory developments in the PRS and other sectors in response to Covid-19 pandemic. Our comparative analysis was based on the relevant legislation and regulation in place at the time of writing some of which may have since been revised. However, the case for fundamental reform of the consumer protection regime for private renters has not changed.

If you have any comments or questions please contact: mick.mcateer@inclusiocentre.org.uk or on mickmcateer92@gmail.com

Dealing with Covid-19 impacts

This new report was researched and written before Covid-19 pandemic happened. The measures in this report are intended as longer term reforms of consumer protection in the PRS. Clearly, the economic and financial impacts of Covid-19 on renters requires a separate response. We have also produced a series of recommendations which need to be urgently implemented to protect renters. These can be found on page 20 of our report: Extraordinary times need extraordinary measures: Proposals to deal with the immediate and longer term financial impacts of the Covid19 pandemic. This can be found here: FIC Covid19 Impacts May 2020

There is also a separate briefing which highlights our recommendations for protecting renters in the near term. See: Financial Inclusion Centre Covid19 RENTERS BRIEFING

[1] Based on the how many rental properties landlords own/ agents manage, and the risk of harm to renters

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Dealing with the immediate and long term financial impacts of Covid19

Today (18th May 2020), The Financial Inclusion Centre publishes a set of proposals to deal with the immediate and longer term financial impacts of the Covid19 pandemic.

The report can be found here: FIC Covid19 Impacts May 2020

The pandemic has highlighted serious health and income inequalities in society. Recent analysis by the Office for National Statistics (ONS) shows that the Covid19 related mortality rate in more deprived areas is more than double the rate in less deprived areas. Similarly, Covid19 related mortality rates are significantly higher amongst BAME groups than the white British group.

At the Financial Inclusion Centre, we focus on economic and social justice, and financial inclusion issues. Covid19 threatens to cause devastating economic and financial shocks. The full extent of the impact is yet to unfold but it is certain to be worse than the aftermath of the financial crisis in 2008. Economists have been talking in terms of the worst recession in 300 years.

This crisis is also different to 2008 where there was a clear sequence – a financial crisis became an economic crisis, which was followed by austerity. This time we are seeing an economic crisis of a different order (where economic activity in key sectors has almost stopped), a financial crisis, and the public health crisis all happening at the same time.
Covid19 will lead to greater economic and financial exclusion and higher levels of detriment in financial services and the private rented sector unless effective interventions are deployed now to prevent this.

A range of large scale, temporary interventions have been needed to keep the economy and financial system working, maintain jobs and household incomes, provide reassurance to millions of vulnerable households, and ease the financial and emotional stress they face. Regulators have also introduced temporary consumer protection measures.

These measures are welcome but do not go far enough and must be enhanced. We must also prepare for the fact that the crisis will be far from over when these temporary measures are removed or phased out.

The crisis will play out in four phases:
Emergency phase While temporary government and regulatory measures are in place
Survival phase When support measures are removed/ phased out and households have to survive financially until a sustained economic recovery comes
Recovery phase When the economy begins to recover – but it will be some time after this before jobs and household finances recover
Rebuilding and restructuring phase When the challenge of rebuilding and restructuring the economy, financial system and household finances needs to begin, new reforms are put in place against the risk of future economic shocks, and existing public policy crises dealt with.

In this paper, we:
• Set out how households are likely to be affected during the different phases of the crisis, identifying which groups are most vulnerable to economic and financial shocks;
• Assess the effectiveness of temporary government and regulatory measures in place to protect households; and
• Propose a range of measures to protect households during the different phases of the crisis.

There are specific proposals aimed at:
• Improving the current income support and social security measures
• Providing access to emergency and recovery loans, and affordable long term credit options
• Protecting overindebted households including those in arrears on mortgages, consumer credit, and other debts such as council tax
• Rebuilding household finances, and building future financial resilience by helping people to save and insure
• Improving consumer protection and regulation in financial services
• Protecting renters
• Closing the rights and protection deficits in other sectors

In terms of structure, the proposals are split into three sections:
• Measures to close the gaps in the current set of government and regulatory protections
• More permanent measures needed to protect households during the survival and recovery phases when the current emergency protections are removed or phased out
• ‘Greenfield’ proposals to rebuild and restructure household finances, reform the financial system, and tackle major public policy crises

Social justice theory holds that the more vulnerable you are, the more protections and rights you should have. The crisis has revealed that principle has been inverted over the years and exposed a serious rights and protection deficit.

The ‘consumer’ protection provided to private renters is woeful compared to that available to financial (mostly better-off) consumers. Similarly, for many of the poorest households, the primary financial relationship they have is with the state through the social security system. Yet, it is very difficult for them to hold the state to account for mistreatment or poor service unlike their better-off counterparts who can rely on well-resourced regulators and Ombudsmen schemes. Council taxpayers who are in financial difficulty have less protection than borrowers who are in arrears on their mortgage or credit card.

We can expect industry lobbies to push for reductions in consumer protection using spurious arguments that regulation is a costly burden and holds back economic recovery. Brexit will give this push further impetus. So, civil society will have a fight on its hands protecting the gains made over the years never mind campaigning for much needed further reforms. But, we can improve the efficiency of regulation without compromising consumer protection.

Even if we get through the emergency phase with financial damage to households minimised, the challenges will not end there. The crisis has laid bare the precarious nature of our economy and the lack of a decent safety net for those who lose their incomes. We will need to rethink the role of the state, employers, financial services, and individual citizens in protecting against catastrophic risks.

Nor can we forget that the existing financial-related public policy crises (such as funding long term care, affordable housing, pensions underprovision, reforming the financial system so that it is more socially useful) have not gone away. Covid19 will make tackling these crises appear all the more daunting. But, these can and must be confronted. Remember that some of the greatest public policy achievements seen in this country happened in the aftermath of Second World War. Progress is possible. We must make progress or else face the prospect of even greater crises in future. We should not balk at using radical interventions to make progress.

It is not all about a more active role for the state or more regulation. Social entrepreneurship has a real chance to prove itself now. There will also be a greater sense of expectation on the financial sector itself to prove its social utility.

Some of the proposals outlined here are radical and others will have better ideas. But, we hope you will agree that extraordinary times need extraordinary measures and these measures are worth debating.

We would welcome comments on these proposals. For further information please contact:


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FCA temporary proposals to protect consumers affected by Covid19

Today, 6th April 2020, The Financial Inclusion Centre publishes its response to the FCA’s consultation: Proposals for temporary financial relief for customers impacted by Coronavirus.

We very much welcome the FCA’s intention to extend protections available to mortgage customers to borrowers. The FCA should be commended for producing a range of important measures so rapidly in what must be very difficult times for the regulator.

But, we are concerned that there are some gaps in the protection available to consumers and some of the proposed measures need to be more robust.

Three month period
It is highly unlikely the economy and household finances will have recovered within three months. Rather than keep the emergency protection measures in place for three months followed by a review, the default should be to presume the measures will be in place for six months unless there is clear evidence that household finances have recovered and the measures can be safely removed before then.

£500 interest free buffer
The three month, £500 interest free buffer for pre- arranged overdrafts should provide many borrowers with a degree of protection and reassurance. But, this is unlikely to be enough for the most vulnerable borrowers.

As mentioned, it should be extended for six months. Moreover, it should not be restricted to already arranged overdrafts in place. It should also be made clear to lenders that as part of TCF if the circumstances of the borrower require it, the limit should be higher than £500.

Banks are receiving significant support from the state and should be expected to play their part in protecting the most vulnerable. Elsewhere, we are recommending the establishment of a lending reserve fund to provide loans/ backing for loans to vulnerable consumers.

Under our proposals, if it becomes clear that certain banks would be disproportionately hit (eg. if they have a greater proportion of lower income/ high risk overdraft customers), they would be able to apply to this lending reserve fund for support. We urge the FCA to work with HMT in developing such a reserve lending fund.

Pre overdraft reform benchmark
The FCA has said that firms should ensure that overdraft customers are no worse off on price when compared to the prices they were charged before the recent overdraft changes came into force. This is welcome.

But, it is worth noting that the FCA’s seminal work on the overdraft market found that banks were exploiting what was, to all intents and purposes, a captive market of vulnerable overdraft customers by imposing unjustifiably high charges. These customers included those who lived in the most deprived areas of the country, disabled households, single parents, BAME households, and the unemployed. So, for these vulnerable households, the costs imposed pre the overdraft reforms are not a very helpful benchmark.

The FCA has made reference to charging a ‘responsible rate of interest’. But, this will be hard to monitor and enforce. The FCA’s overdraft reforms have failed to promote effective competition (there is clear evidence of price clustering). There already is a compelling case for a price cap on overdraft charges. But, the case for a price cap during the emergency is all the more urgent. We cannot rely on self-restraint by lenders – even if many lenders are behaving admirably. A price cap is the surest, most effective way of protecting vulnerable consumers.

Credit ratings
We support the FCA’s proposals on credit ratings. But, this measure should be extended to six months.

Gaps in coverage
There are some worrying gaps in the coverage of the FCA’s measures. In particular, high cost short term (HCST) credit, car finance, and debt management/ collection services. Mainstream lenders will be under the media spotlight and will be pressured to show restraint. As we know from experience, the subprime lending industry does not labour under the same reputational constraints. We urge the FCA to close these gaps immediately.

In the more extreme cases, vulnerable households will be at risk of being targeted by illegal loan sharks. We would urge the FCA to step up its work with partner organisations and Illegal Money Lending Teams working in this field to closely monitor activity and take necessary enforcement action.

FCA statements needed on standards of behaviour, enforcement, and consumer rights
On a more general point, it is obvious that during the emergency and survival phases many small businesses and households are going to face serious cash flow problems including those who have applied for social security and are waiting for claims to be processed. They will need to be treated with sympathy by regulated unsecured lenders and other creditors. They will be at risk from being targeted by unscrupulous regulated subprime lenders and unregulated loan sharks.

At times like this, the FCA should be making clear public statements to the market about the standards of behaviours it expects with guidance and examples. The FCA should also make clear public statements that it will mercilessly enforce against firms (and individuals under the SMCR) who breach regulations during the crisis.

The FCA and MAPS should also be issuing clear advice and information to consumers about their rights during these difficult times.

Planning for the next phases of the crisis
Finally, it is important to note that the economic and financial crisis caused by the Covid19 pandemic will play out over four phases:

• Current emergency;
• Survival phase;
• Recovery phase; and
• Rebuilding and restructuring phase.

It is critical that policymakers, regulators, and civil society recognise that the effects on households and financial consumers will be felt for some time after this emergency period. We need to understand which households/ consumers will be affected during these phases, how they are likely to be affected, why they are vulnerable, and develop appropriate timely responses.

We appreciate the FCA is focusing on the emergency phase. But, additional measures need to be developed now in readiness to protect consumers during the dangerous survival and recovery phases.

We have made it clear that we are willing to assist and support the FCA in developing a response to the ongoing crisis.

Our response can be found here: FIC FCA COVID TEMP PROTECTION MEASURES 06042020

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Time for Action – Greening the UK Financial System

Today (10th March 2020), the Financial Inclusion Centre publishes its new report, called Time for Action, looking at the degree to which the financial system (financial markets, financial institutions, and individual consumers) contributes to tackling the climate crisis.

The report also assesses the daunting barriers holding back the financing of what we term sustainable, responsible, and social impact (SRI) activities; and makes over 40 policy recommendations to ‘green the financial system’ and increase the level of SRI financing. Some of these interventions are radical and far-reaching. But, the scale of the climate crisis, and need for the financial system to play its full part in tackling that crisis, requires radical interventions.

We are hugely grateful to Friends Provident Foundation for sponsoring this report and the support provided throughout the project stages.

We look forward to engaging with stakeholders on our findings and recommendations over the coming months.

The key findings and recommendations are summarised below. The report itself can be found here: Time for Action – Greening the Financial System FIC FPF Report


There would seem to be a growing consensus that, to tackle the climate crisis, we need to change the way:

We live: the choices we make about how and what we consume.
We work and produce: the nature of economic activity and the corporate behaviours society expects.
The financial system works: the allocation of resources by financial institutions, and the choices we make about how our money is used.
Global markets are governed and regulated: the climate crisis is a truly global issue and so requires a global, collaborative approach to governance and regulation.

Our new report focuses on the role of the financial system. It is certainly an interesting time to be considering the role of the financial system. The social utility of financial markets and their contribution to the climate crisis is under intense scrutiny. The credibility of, and trust in, the sector remains low due to the role it played in the financial crisis of 2008, and a litany of misselling scandals.

Benchmark interest rates and government bond yields were driven down in the aftermath of the 2008 crisis. The effects are still being felt today. Savers, investors, and pension scheme members are exposed to new financial risks, while the allocation of financial resources to the real economy has been distorted.

The financial system is under renewed stress driven by fears of the potential economic impacts of the Coronavirus and disruption in the oil markets. It is likely to be some time before interest rates and bond yields return to typical pre-crisis levels (if they ever do).

But, this ‘new normal’ of low interest and bond rates should also create opportunities for finance for good – sustainable, responsible and social impact activities which we refer to collectively as SRI. Financial institutions and households are looking for ways to generate decent returns to offset the low yields on deposits and bonds (the ‘search for yield’). The sheer scale of the assets available in financial markets and savings, investment and pensions portfolios creates a huge pool of potential resources to be channelled into SRI activities.

This report, therefore, set out to assess the potential for SRI growth. To do so, we asked two questions:

• Do previous behaviours give us hope for the future? Specifically, in the post 2008 low rate world have financial institutions and investors significantly increased the amount of resources allocated to SRI activities?
• What are the barriers that limit the financing of SRI activities, and what policies are needed to promote greater levels of SRI financing?

Key findings
Our findings confirm that SRI has indeed moved up the agenda, attitudes have become more positive, and there has been some growth in assets allocated to the sector. But, it must be said, there is a long way to go before SRI is mainstreamed into financial markets.

The proportion of total assets held by financial institutions and households in SRI remains very low – particularly seen against the amount invested in alternatives (such as hedge funds or private equity), banks have lent to other parts of the financial system or to the property market, and households have invested in the buy-to-let property market. On the retail investment side, just 1.4 percent of total assets under management are invested in ethical funds.

Globally, the value of funds managed with explicit environmental, social, and governance (ESG) criteria is still under one percent of total global assets under management. ESG assets under management would seem to be growing at a slower rate than mainstream assets under management. Similarly, specific green bonds represent a small fraction of the vast global bond markets.

UK company boards are not coming under sustained pressure from shareholders to realign company operations to SRI goals. The UK scores poorly on issuing green bonds for domestic use compared to other countries with smaller financial centres. The UK has regularly failed to meet its targets for direct investment in clean energy projects. Bank direct lending to green projects has also been disappointing, while the Bank of England’s QE programme has been skewed towards high carbon sectors of the economy. It is not surprising therefore that the level of economic activity in the green sector has also been disappointing still representing around one percent of total economy turnover.

The barriers and factors constraining SRI financing
What explains the disappointing performance so far? There are daunting barriers to overcome if we want to see the necessary level of financial resources allocated to SRI.

Specific nature of SRI projects Long payback periods and the perceived higher risk of SRI assets can be unattractive to risk averse, short-termist financial institutions and markets.

Institutional factors A range of factors including the type of liabilities institutions face, tolerance to risk, and the need for liquidity reduces the viable pool of resources available for SRI.

Financial regulation Misconceptions about legal duties can constrain willingness to finance SRI. Gaps in consumer protection means that less sophisticated investors are vulnerable to misselling of supposedly ‘green’ financial products which could undermine confidence and trust in SRI. Growing awareness of SRI increases the risk of ‘greenwashing’ in the financial system and the real economy.

Information and perception barriers There is a lack of clear definitions and criteria for determining whether an economic activity complies with SRI goals, and a lack of trustworthy benchmarks and inconsistent ratings to judge how well loans and investments comply with SRI criteria. Data and research on risks and rewards associated with SRI assets is very limited. The amount of effort and cost required to identify potential SRI financing opportunities can deter financial institutions.

Limited market infrastructure to support SRI This includes a lack of an appropriate primary and secondary market infrastructure for raising capital and trading of SRI assets, and collective investment vehicles for managing the risk of investing in smaller scale SRI projects. But, promoters of SRI face a catch 22 situation. Sufficient resources are unlikely to be committed to developing the necessary research base and infrastructure unless those asset classes become more popular. But, SRI is unlikely to become mainstream without the necessary research and supporting infrastructure. This is a particular problem for smaller or early stage SRI ventures.

Dominant culture of short termism and shareholder value Market short-termism is at odds with the long payback periods associated with direct investment in SRI, and is a constraint on listed companies who wish to spend time and money ‘greening’ their operations. Greening the UK economy will require significant investment in research and development (R&D). But the UK has a low level of spending on R&D and corporate investment compared to other major economies. The emphasis on shareholder value appears to lead to lower levels of investment and holds back innovation.

Limited availability of suitable SRI ventures The lack of viable SRI ventures creates a natural barrier restricting the amount of SRI finance that can be channelled into economic transformation.

Other market factors Passively managed funds now represent 25 percent of total UK assets under management in UK. Passive funds automatically include shares of companies from energy-intensive sectors in their portfolios, and are not actively managed so fund managers do not seek out potential SRI opportunities not listed on markets. Investment consultants influence investment and asset allocation decisions on £1.6 trn of pension assets (out of a total of around £2 trn). Similarly, nearly 80 percent of money managed on behalf of retail investors is done on an advised basis. Persuading these influential gatekeepers of the merits of SRI will be a priority.

Policy recommendations
So, what needs to be done? There are a number of existing civil society and market-led initiatives designed to promote greater use of SRI which we support. But our analysis of the structural barriers tells us these are unlikely to go far enough to mainstream SRI into financial markets. We make 41 specific policy recommendations grouped around the core policy aims of:

– Increasing the availability of consistent, trustworthy SRI information, research, and analysis
– Raising awareness of and promoting confidence in SRI assets
– Encouraging investors, lenders, and intermediaries to engage with SRI
– Embedding SRI into decisions made by lenders, investors, and financial intermediaries
– Better aligning financial market behaviours with SRI goals
– Creating a more supportive regulatory architecture
– Ultimately, increasing the resources allocated to SRI by the public and private sector.

Details of the policies can be found in the report. The key recommendations are:

• Stakeholders should collaborate on developing a central repository of information, research, and risk analysis on SRI. This should be accessible to financial institutions, regulators, pension trustees and citizen-investors.
• Post Brexit, UK stakeholders should prioritise the development of a UK SRI classification system to help regulators, lenders, and investors identify the degree to which economic activities, sectors of the economy, and individual listed and larger private companies comply with SRI goals. To address the risk of greenwashing, stakeholders should develop a new SRI compliance rating system based on the new taxonomy published on an accessible, central database. For retail investors, an SRI rating label should be developed and included in comparative information tables.
• SRI funds/ financial products, and firms that provide and promote those funds/ products, should come under the same FCA regime as mainstream financial products and covered by the Financial Ombudsman Service (FOS), and Financial Services Compensation Scheme (FSCS).
• Regulators should introduce deterrence factors for ‘brown assets’ and penalties for financing economic activities that damage SRI goals, not incentivise through ‘green supporting’ factors.
• Financial institutions should be mandated by regulators to assess how lending, investment, and insurance decisions contribute to SRI goals; and publicly report the results of those assessments using the SRI classification mentioned above.
• Government should consider new tax structures including a financial transactions tax (FTT) to encourage long term investment horizons, early stage SRI financing, and long term investment in research and development (R&D) with a focus on climate related projects and cleantech.
• Stakeholders should develop collective investment and lending schemes to allow institutional and retail finance to be channelled into early stage/ small scale SRI ventures in a way that minimises costs and diversifies risks. Stakeholders should work with investment industry experts to develop a wider range of SRI index funds.
• The market on its own will not deliver the necessary financing. The state needs to play an active role. There is a strong case for a national SRI Investment Bank to finance early stage SRI ventures and take equity stakes in established ventures. The British Business Bank should also be given a specific new objective to finance SRI projects. Government should issue Green Sovereign Bonds to finance larger scale SRI initiatives. National Savings and Investments (NS&I) should offer Green Finance and Social Housing Bonds to allow citizens to play a role in financing SRI. Government should support local authorities in developing community Green Finance and Social Housing Bonds.
• The Bank of England should be given a new statutory objective to promote financial market behaviours that contribute to economic and environmental sustainability. The FCA and Prudential Regulation Authority (PRA) 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 FCA should be given responsibility for overseeing how financial institutions, listed companies and larger private companies disclose compliance with SRI criteria. Reporting on SRI compliance should be made a statutory requirement rather than voluntary, with appropriate sanctions for non-compliance with reporting standards.
• Government and Bank of England should establish a Financial Sustainability Committee (FSC) along the lines of the Monetary Policy Committee (MPC). The FSC should take responsibility for the Bank’s new statutory objective described above and coordinate the work of all the regulators involved in managing climate related risks – the Bank of England, PRA, FCA, and The Pensions Regulator (TPR). The FSC should publish an annual report on its activities plus a wider triennial review on progress against its objectives. The FCA, PRA, and TPR should also publish an assessment in their annual reports on how their activities have contributed to the objective of the FSC.
• The government should lead a new strategy to green the ‘real economy’. Building on the work of the Committee on Climate Change (The CCC), government and relevant regulatory authorities should undertake a ‘transformation audit’ of the main economic sectors to assess the contribution each sector has made to the greening of the economy; and develop a transformation action plan for each sector. Government should establish a single agency to coordinate this strategy. This new agency, along with the National Audit Office (NAO) should develop new metrics to judge the performance of each sector, and publish annual updates and a formal triennial review of progress made against the transformation strategy.
• It is not yet clear how Brexit will affect initiatives to develop SRI financing. Therefore, policymakers and civil society should collaborate on analyses to assess the implications of Brexit on UK initiatives to promote SRI. In particular, this should consider the effect if the UK is no longer a key player in the European Union’s ambitious Capital Markets Union (CMU) project and Action Plan for Financing Sustainable Growth.


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Can Payroll Deduction Schemes via Credit Unions Get Workforces Saving More?

Today the Financial Inclusion Centre publishes a new Interim Report ‘Getting Workforces Saving’. The report is funded by the Money and Pensions Service and tests how effective payroll deduction is at encouraging greater levels of savings and positive financial behaviours in comparison to other saving approaches.

For the Summary Report please click here:  Getting Workforces Saving – Credit Union Payroll Deduction Summary Report Final October 19

For the Full Report please click here: Getting Workforces Saving – Payroll Deduction Schemes with Credit Unions – Full Report Final October 19

Payroll saving research
The importance of fostering a savings habit and building a financial buffer is gaining recognition with the workplace. Yet, while the rationale to harness automated payroll deduction as a mechanism for workers to develop regular savings is clear, there seems to be little research on the topic.

This 18 month study, with Leeds Credit Union (LCU) and employers NHS York and Leeds City Council, will help determine how effective payroll deduction schemes are in getting employees to build and retain savings. The study will also evaluate the wider impacts on employee wellbeing.

Key findings
As part of the initial scene setting report, we conducted extensive baseline surveys completed by over 1,600 staff across the two participating employers. This baseline data will be used to evaluate the impact of payroll deduction schemes over the lifetime of the project. But there are some important findings worth sharing now.

Employees saving with a credit union via payroll are much more likely to save regularly. The workforce survey found that 78% of payroll users with the credit union consistently put aside funds every single month, compared to 55% amongst other non-payroll credit union members, and 47% amongst those staff that are not members of the credit union.

Payroll deduction schemes with credit unions appear almost universally popular amongst existing users – 96% stated that they would recommend this method to their co-workers.

Ease and simplicity is the principal driver for participating in a payroll deduction scheme – 79% stated it was the main reason for saving via this method with the credit union.

There appears to be a distinct lack of awareness about opportunity to save via payroll deduction. Almost two-thirds (62%) of those not already saving via payroll were unaware they could make regular savings via their employer in this way.

Overall, the findings from these questions on savings are encouraging and would seem to indicate a positive relationship between credit union membership within workforces and more frequent and persistent (or disciplined) saving habits compared to their non-credit union member colleagues.

The research also highlighted the wider financial struggles facing these workforces.

More than half of workers report that their current financial situation makes them feel worried – the baseline results show that 51% of non-members and 48% of LCU members (which drops to 47% amongst just those with payroll deductions) reported a high level of anxiety about financial circumstances.

Financial worries are detrimentally impacting upon employees’ lives. The workforce survey found:

• Well-being: 39% of non-members and 34% of credit union payroll members strongly agreed or agreed that it has affected either physical or mental health over the last 12 months.
• Family relationships: 32% of non-members and 28% of credit union payroll members strongly agreed or tended to agree that money worries had affected their family relationships over the past year.
• Work life: 19% of non-members compared to 15% of credit union members with a payroll deduction tended to agree or strongly agree that their money worries had affected their work over the past year

Next steps
The practical delivery of the test and learn research is set to be completed by February 2020 with the final Evaluation Report published towards the end of summer 2020. The findings will be used to ultimately encourage more employers across the UK to offer similar initiatives.

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Brexit and the regions

There has been much heat produced by political debate since the UK voted to leave the EU. But little light has been shed on the potential impact Brexit might have on vulnerable households in the UK. To address this gap, today the Financial Inclusion Centre publishes its new report assessing how vulnerable households in the nations and regions of the UK are in the run up to Brexit.

The consensus is that the economy of the UK will take a hit from Brexit – the harder the Brexit, the bigger the hit. But, this report, funded by Barrow Cadbury Trust, warns that weak economic performance in the North East, Wales, Northern Ireland, Yorkshire and Humberside, the North West, and the West Midlands – compounded by high levels of household financial vulnerability – leaves households in these regions particularly vulnerable to the potential effects of Brexit.

The report highlights that these regional economies have been performing very poorly on key measures of economic activity creating a gap with the powerhouse economies of London and the South East which has widened still further since the financial crisis.

The Government’s own economic analysis has concluded that these regions would be hit hard by Brexit – particularly a hard Brexit. The regions expected to be hit hard by Brexit also have high proportions of households who are overindebted, are in financial difficulty or just surviving, or who are considered to be financially vulnerable.

Unless mitigation strategies are adopted by national and local government with civil society and industry stepping up to the plate, Brexit will make the situation even worse. This will have serious consequences for the millions of households across the regions who are already financially vulnerable.

The report, for the first time, brings together data on economic performance, household financial vulnerability, and assessments of Brexit impacts to paint a compelling, worrying picture of regional vulnerability in the run up to Brexit.

Key findings include:

  • Over the 10 years since the financial crisis, weekly earnings averaged £510 in the North East, £486 in Wales, and £467 in Northern Ireland compared to £753 in London – and that gap has widened post the financial crisis.
  • In the 10 years before the financial crisis, economic output per head[1] in the North East was on average £4,800 lower than the UK average – that gap grew by £1,400 to an average of £6,200 after the crisis. The gap for Wales widened by £2,000, while Northern Ireland saw the gap grow by £1,600.
  • In the 10 years before the financial crisis, the North East received fiscal support[2] equivalent to an average of £2,600 per head per year. Since the crisis, that rose to an average of £4,300 per head per year. For Wales, that level of support rose from £2,900 to £5,000 per head per year. For Northern Ireland, from £3,600 to £5,500 per head per year.

Author of the report Mick McAteer said: “The potential impact of Brexit on the UK economy is obviously front of mind. But, this is the first real attempt to understand how Brexit could affect vulnerable households across the regions at a time when real average earnings in the UK are still 3% lower than 10 years ago.

“If the Government’s own economic predictions are correct, Brexit will cause these gaps between the various countries and regions of the UK to widen still further.

“It is only in London and the South East where we see the amount of public revenue generated being greater than public expenditure. This has potentially serious implications for the weaker UK regions. If the powerhouse economies are hit hard by Brexit, this will undermine their ability to finance these levels of fiscal support which have played a significant role in minimising inequality in the UK.

“In the worst-case scenario, some of the most vulnerable regions could suffer a ‘triple whammy’. First, a very significant loss of potential economic output. Second, these regions also face the loss of EU funding and third, unless fiscal transfers from stronger parts of the UK economy can be maintained at the same level to mitigate these impacts, the combined economic shock could be severe.”

Malcolm Hurlston, Chairman of the Financial Inclusion Centre added; “Mitigation strategies are needed immediately to protect vulnerable regional economies from the impact of Brexit. Indeed, the results of our in-depth report suggests that renewed efforts should be made to tackle the problems even if Brexit didn’t actually happen.”



[1] As measured by Gross Value Added (GVA) per head

[2] This measures the difference between the public revenue spent and public revenue generated in a region

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Financial Inclusion Centre response to the FCA’s high cost credit review including overdrafts

The Financial Inclusion Centre responded to two important consultation papers which formed part of the FCA’s High Cost Credit Review. These covered overdrafts (CP18/13) and rent-to-own, home collected credit (doorstep lending), catalogue credit and store cards, and alternatives to high-cost credit (CP18/12).


We commended the additional research and analysis the FCA has undertaken to help us understand the scale and nature of the detriment experienced by vulnerable people who have to use unarranged overdrafts. We also support many of the proposals in CP18/13. No doubt, some consumers will benefit from these measures and act more effectively in the market. Moreover, the supply side measures proposed should have some effect on making current account providers behave more responsibly.

But, considering the overall package we are not convinced that these measures go far enough. We are, of course, interested in making the current account market work for all consumers. However, our focus is on the detriment experienced by the most vulnerable households – in particular, the harm experienced by groups of households with protected characteristics which the FCA’s excellent analysis has highlighted.

The nature and extent of financial harm and discrimination in the overdraft market

The FCA’s new research exposes the extent of financial harm faced by vulnerable households as a result of practices by banks and building societies. These households are facing a serious form of financial discrimination.

Charges on unarranged overdrafts are significantly higher than on arranged overdrafts. Borrowers in more deprived areas are less likely to have an arranged overdraft in place and, when they do, they have a lower overdraft limit. Households in more deprived areas of the country are much more likely to have to use unarranged overdraft than other consumers. These borrowers tend to:

  • have lower incomes;
  • be from Black, Asian and minority ethnic (BAME) communities; and
  • have a higher probability of being vulnerable due to poor health or a disability.

The fact that these households are more likely to be harmed by high unarranged charges is perhaps not surprising. After all, we know these households are disproportionately likely to be poor and have low levels of financial resilience. But the extent of the harm revealed by the FCA’s analysis is shocking. To summarise the findings from CP18/13:

  • People living in more deprived areas are 70% more likely to use an unarranged overdraft than those living in the least deprived areas. They also tend to use that unarranged facility more frequently. The repeated use of unarranged overdrafts by many vulnerable people suggests their incomes are so low that they regularly run out of money. The FCA research confirms a clear link between unarranged overdraft use and vulnerability.
  • They are paying twice as much in charges and fees as those living in less deprived areas.
  • Banks are making over 10 times as much (per £ lent) from unarranged overdrafts as from arranged overdrafts. Unarranged overdrafts account for, on average, around 30% of all overdraft revenues. Tellingly, the FCA sees firms using unarranged overdraft fees as a source of revenues to fund other parts of their current account business. In other words, the most vulnerable borrowers including those with protected characteristics are cross-subsidising better off households. This is a significant recognition by the FCA.
  • The majority of fees levied are concentrated on only 1.5% of customers who pay on average £450 a year in unarranged overdraft charges. To put this into context, third decile gross household incomes in the UK are around £340 a week[1]. So, lower income households could be losing more than a week’s income due to high overdraft charges.
  • Charging structures are asymmetric and cause significant harm to vulnerable borrowers. Fixed fees mean that a small amount of additional borrowing on an overdraft can lead to significant additional charges.
  • People living in the most deprived areas are also more likely to be hit by refused payment fees. On average, they pay 3.5 times as much each year in refused payment fees as those in less deprived areas. These refused payment fees are also highly concentrated with 10% charged for declined transactions – the majority of charges paid by 1.2% of consumers.
  • Historically, banks justified the higher level of costs and fees by the fact that unarranged overdrafts were more expensive to operate. But, as the FCA now points out, because of technology, there is no longer any justification for banks to have such different levels of fees and charges on arranged and unarranged overdrafts.

Better off, ‘lower risk’ consumers can switch away to better deals. That option is just not open to the most vulnerable households. Moreover, they are more likely to be hit by unforeseen events out of their control which push them into debt. They are already struggling to make ends meet with little room to reduce spending any further, or do not have savings to fall back on. In effect, these consumers are a captive market and are being exploited by the use of indefensible charging practices.

The conclusion must be that banks are exploiting the vulnerability of groups who are in effect a captive market with few realistic options to take their business elsewhere or qualify for other more affordable forms of consumer credit. New technology means the unfair treatment of vulnerable households through the imposition of such high costs cannot be justified. These groups are being exploited to cross subsidise better-off households.

FIC recommendations

Overall, the package of remedies does not go far enough to protect vulnerable households – particularly those groups with protected characteristics. Therefore, we make a number of calls on the FCA:

  • Price caps: we call on the FCA to undertake to cap interest rates and other charges (such as refused payment fees) on overdrafts. We suggest a daily interest cap with a backstop cost ceiling is the most appropriate method.
  • Interim consumer protection measures: the fact that banks impose such high costs on vulnerable borrowers (who are by definition already in financial difficulty) is surely in contravention of the key regulatory principle which requires firms to act in the interests of customers and treat customers fairly. Indeed, these charges must exacerbate the financial difficulty borrowers face. Until a cap on interest rates and fees is introduced, the FCA should target its supervisory activities to ensure that banks are treating vulnerable borrowers fairly. In practice, that means using supervisory powers to stop the use of these charging practices now. This would be a particularly good opportunity for the FCA to use its temporary product intervention powers.
  • Greater transparency: we have long argued for the introduction of financial inclusion legislation similar to the US Community Reinvestment Act (CRA) and Homeowners Mortgage Disclosure Act (HMDA). We advocate greater transparency on how well individual financial institutions perform against financial inclusion metrics. Our understanding is that due to legal constraints contained in FSA 2012/ FSMA 2000, we would need new legislation to force publication at the level of individual financial institution. We urge the FCA to communicate to HM Treasury the benefits of greater transparency. In the meantime, we would urge the FCA to build on its important Financial Lives initiative and publish more granular data on which communities are facing high levels of financial exclusion and discrimination.

Our response can be found here: FCA CP18 13 Financial Inclusion Centre submission

[1] For example, see:  https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/adhocs/006770grosshouseholdincomebyincomedecilegroupukfinancialyearending2016


As with the work on overdrafts, we commended the level of additional research and analysis the FCA has undertaken to help us understand the scale and nature of the detriment experienced by vulnerable people who are targeted by suppliers of various forms of high-cost/ sub-prime credit.

We very much support many of the proposals in CP18/12 aimed at improving the information provided to consumers in these markets. No doubt, some consumers will benefit from these measures and act more effectively in the market.

Moreover, the supply side measures proposed to influence the behaviour of high-cost/sub-prime credit suppliers could have some effect on making them behave more responsibly.

But, considering the overall package we are not convinced that these measures go far enough. The FCA seems to see its role in being a referee, or creating a level playing field, between consumers and suppliers in the market rather than making the market work. Regulators are best placed to make this market work – not consumers.

The nature and extent of financial harm in the sub prime lending market

The analysis in the Equality and Diversity Assessment shows how much detriment groups with protected characteristics experience given their reliance on high cost, high risk, poor value products such as RTO, door step lending, and catalogue lending. We make a similar point in our response to CP18/13. The poorest, disabled, and BAME households are more likely to be paying unjustifiably high prices for consumer credit due to circumstances beyond their control.

The margins on extended warranties sold with RTO products are extremely high. The FCA’s own analysis found that providers are making profits of £25m-£40m a year on £40m-£45m of sales. Claims ratios are low. Only £4 is paid out for every £10 in premiums paid – this is a very poor value product and looks like it is being sold to many consumers who do not need it.

As FCA analysis shows, the median level of debt held by rent to own and home credit borrowers more than doubled in two years; the median level of debt held by catalogue borrowers has not risen so much but it still grew by 30% over two years[1]. This could be exacerbated by a range of external factors. The continued squeeze on wages and the roll out of universal credit (UC) are major concerns. We have already seen evidence that households with UC are much more likely to be in rent arrears than households generally. Nearly three-quarters of households on Universal Credit are in rent arrears compared to 26% of all households[2]. Similarly, households on UC are more likely to have debt problems than households on legacy benefits[3].

However, many of the more complex UC cases have yet to be rolled out – households on existing benefits or tax credits will be transferred from July 2019. The FCA’s interventions in the payday lending market has resulted in a much better functioning market and has helped promote more sustainable borrowing. But, we are concerned that these improvements may not be sustained. We fear that the UC roll out – along with the continued squeeze on wages – will leave growing numbers of households vulnerable to being targeted by the high-cost/ sub-prime consumer credit industry (regardless of which form it takes).

FIC Recommendations

We argue that the overall primary objectives for this review should be to:

  • Reduce the cost of credit paid by consumers
  • Reduce the amount of high-cost/sub-prime credit used by consumers, and ensure that credit is used sustainably
  • Force lenders to treat consumers fairly
  • Ensure consumers get redress and are protected from the consequences of tougher regulation

In order to achieve a well-functioning consumer credit market, we need to change the default setting from the current setting in which credit is aggressively sold by suppliers to one in which consumer credit is actively and knowingly bought by consumers.

To achieve this, we call for:

  • Consistent regulation: we need a consistent approach to regulating high-cost/ sub-prime consumer credit. Therefore, we call on the FCA to cap costs in these sectors and bring in a general rule that no borrower should repay more than twice the original amount borrowed – regardless of the form of consumer credit.
  • Limits on loan refinancing: we support the proposals in this condoc to improve the way information is provided to borrowers. But, this will not be enough to constrain supplier/ intermediary behaviours or promote sustainable borrowing. Therefore, there is a need to limit the number of times loans are refinanced.
  • Change the default setting: as a general principle, we should move towards a system where consumers have to proactively ask for credit limit increases, refinancing, or to be contacted by credit suppliers or intermediaries. We must change the default setting in the consumer credit market away from one where consumer credit is sold to one where consumers actively buy consumer credit.
  • Product governance: the FCA needs to make greater use of its product governance powers – particular the temporary product intervention powers to constrain the market and protect vulnerable consumers until a wider, more permanent set of reforms are introduced.
  • Greater transparency: the FCA has been producing some excellent analysis recently – for example, the analysis to support the payday lending review and now this analysis to support the high-cost/sub-prime credit review. Furthermore, the Financial Lives initiative has added significantly to the corpus of research on financial behaviours and vulnerability. We would urge the FCA now to use the schedule for the roll-out of UC to monitor and supervise the behaviours of high-cost/ sub-prime credit providers located in those areas which have already seen a roll out of UC and which are about to see a roll out over the rest of 2018 and during 2019.
  • Reviewing the FSCS: although not covered in this consultation process, we also urge the FCA to urgently review the remit of the Financial Services Compensation Scheme to ensure that consumer credit firms are covered. As the recent experience with Wonga shows, consumers who are entitled to redress may not get that redress once secured and preferential creditors are paid. There is a risk that this will be repeated with other firms in the high-cost/ sub-prime sector as regulation takes effect.
  • Debt buying/ debt collection: as the example of payday lending shows, regulation has consequences. Analysis revealed that much of the revenues were dependent on inherently detrimental business models. As a result, many firms have exited the market and/ or debt books have been sold on or collections outsourced. The activity of buying loan books and debt collection has not received enough scrutiny. Payday lenders, RTO, and doorstep lenders have been guilty of some egregious practices. But, at least they are relatively well known and in the public eye. This is not the case with firms which buy debts or collect debts on behalf of another firm. We call on the FCA to review these activities to establish whether firms are appropriately regulated and are treating borrowers fairly.

Our submission can be found here: FCA CP18 12 FInancial Inclusion Centre submission

[1] https://www.fca.org.uk/news/speeches/high-cost-credit-what-next

[2] https://www.localgov.co.uk/Housing-bodies-warn-of-increase-in-Universal-Credit-rent-arrears/45655

[3] https://www.citizensadvice.org.uk/about-us/policy/policy-research-topics/debt-and-money-policy-research/universal-credit-and-debt/

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