The Financial Inclusion Centre

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

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

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

The positive aspects of the Consumer Duty 

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

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

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

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

The flaws in the FCA’s proposals

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

Data, metrics, and reporting  

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

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

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

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

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

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

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

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

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

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

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

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

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

Therefore, we are proposing that:

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

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

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

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

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

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

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

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

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

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

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

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

Consumer responsibility and the precautionary principle

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

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

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

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

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

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

Financial inclusion

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

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

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

Unnecessary complexity is retained

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

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

Technology and big data

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

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

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

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

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

Non-UK and unregulated products and services

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

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

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

ESG products

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

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

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

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

Consumers in financial difficulty

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

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

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

Closed products

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

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

Private Right Of Action (PROA)

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

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

The timetable

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

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

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

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

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

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

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

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

[6] Community Reinvestment Act (CRA) | OCC

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

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

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

[10] Such as OFGEM, OFWAT, and OFCOM

For Immediate Release

1^st September 2021

PRESS RELEASE

Marlene Sheils OBE joins board of The Financial Inclusion Centre

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

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

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

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

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

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

About The Financial Inclusion Centre

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

ENDS

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.

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.

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:
getting-workforces-saving-payroll-schemes-with-credit-unions-summary-report-110221-3

The full report can be found here:
getting-workforces-saving-payroll-schemes-with-credit-unions-final-publication-report-110221

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:
Financial-Inclusion-Centre-Making-Payroll-Savings-Work-Policy-Recommendations.pdf

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:
getting-workforces-saving-payroll-schemes-with-credit-unions-annexs-110221

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

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:
mick.mcateer@inclusioncentre.org.uk

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

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

KEY FINDINGS AND RECOMMENDATIONS

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.

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.