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:


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




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Insight into Credit Union Membership

Today the Financial Inclusion Centre publishes a new report analysing the attitudes and behaviours of credit union members. To the best of our knowledge, this is the largest ever survey of credit union members, based on responses from over 12,500 users in 29 different credit unions across the country.

Attitudes to credit unions

The results were very impressive and encouraging for credit unions. 88% of respondents thought that their credit union provided good (38%) or very good (50%) value services. Just 1% said their credit union provided poor or very poor value services – a net positive score of 87%. Similarly, 85% of total respondents thought that their credit union’s customer service was good or very good. Only 3% said the customer service was poor or very poor – a net positive score of 82%.

We also asked members about their experience if they had applied for a loan and how well they understood the application process. Of those who had applied for a loan, 83% of respondents said they found the application process good or very good. Only 4% said the process was poor or very poor, while 12% said it was fair. This equates to a net positive score of 79%.

In terms of overall satisfaction levels, 81% said they were extremely satisfied or very satisfied with their credit union. Just 6% were slightly satisfied or not at all satisfied. This gives a net positive score of 75%.When asked if they would recommend their credit union to a friend, 84% of respondents said they would be likely or very likely to recommend with only 11% said they would be unlikely or very unlikely to recommend their credit union. This gives a net positive score of 73%.

A recent Which? survey found that mainstream banks average overall customer satisfaction score was 68% (these surveys are not directly comparable but they do set the impressive results achieved by credit unions in context).

Financial capability

The analysis also found that these credit union members scored well compared to the general population on a range of self-reported financial capability measures, saying they feel they have their finances under control and are confident in dealing with money matters.

However, analysis of the questions on actual financial knowledge (rather than self-reported answers), paints a more mixed picture – a large proportion of respondents either got the wrong answer, or didn’t know the answer to some fairly basic questions. A particular concern is the number of respondents who were not able to choose the best deal on a loan, or were unsure about what to consider when taking out a loan. This should be an area of focus for financial capability interventions.

Opportunities and challenges

The research also demonstrates the importance of the broad range of financial services being delivered by these not-for-profit financial providers, with the majority of respondents using their credit union as an affordable and fair source of borrowing – an invaluable alternative to high-cost credit such as payday loans, rent-to-own firms and door-step lenders.

If the credit unions covered in this report are representative of the wider credit union sector, the findings suggest very strongly these important not-for-profit lenders should be able to thrive. They are held in high regard by their members, customer service generates high levels of satisfaction, and large numbers of loans are being made.

But, despite everything they appear to have going for them, it is clear that (in England and Wales at least) credit unions and other community lenders have, so far, played a marginal role in meeting the financial needs of consumers and local communities.

If credit unions (and other community lenders) are to play a major role in tackling financial exclusion and providing more consumers with a viable, sustainable alternative to high cost lending, we need to understand why the impact has been so marginal. This is even more critical with the growth in fintech and big data. Financial exclusion is likely to grow as it becomes even easier to identify low profitability/ high risk borrowers.

Tougher regulation has been very effective at constraining the ability of high cost payday lenders to target vulnerable households and, in doing so, has cleared space for community lenders to thrive – for now. But, the same fintech and big data, which will exacerbate financial exclusion, allows high cost lenders to develop new business models to target vulnerable households.

The challenge now is to build capacity in the community lending sector. Our analysis at the Financial Inclusion Centre suggests that much work is needed to improve the economic viability and sustainability of the sector without losing the values of the sector. The key areas to focus on are:

  • improving the efficiency of revenue generation;
  • developing new distribution channels and shared platforms (including harnessing fintech and data for socially useful purposes) to generate economies of scale;
  • improving back office infrastructures to reduce costs and improve efficiency;
  • improving governance and risk management capabilities; and
  • developing new ways of channeling long term patient capital into the community lending sector.

We look forward to working with the sector itself and other stakeholders to build the capacity of these vital lenders so they can make a real difference to the financial lives of greater numbers of consumers.

The summary report can be found here: An Insight into Credit Union Membership – Barclays CU Programme Summary Report final

The full report with details of results and methodology can be found here: An Insight into Credit Union Membership – Barclays CU Programme Full Report final

NOTES: There are currently 442 credit unions across the UK with just over 1.5 million members accessing a range of saving accounts, affordable loans and other financial services.

The membership survey was undertaken as part of the wider Barclays Credit Union Programme that will have invested £1 million over four years to support the expansion of the credit union sector to improve its effectiveness and sustainability and reach more financially excluded households.

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The FCA’s Approach to Competition paper – Financial Inclusion Centre response

The Financial Inclusion Centre has submitted its response to the FCA’s Approach to Competition paper. This is a very important paper as it sets out how the FCA intends to use competition interventions to meet its statutory objectives.

We have registered our concerns that the regulator now seems to place too much emphasis on the potential for competition interventions (particularly demand side interventions) to fix harm and improve markets. There seems to be a worrying ‘dialing down’ of the regulator’s determination to use robust, effective regulatory interventions, and the emergence of a competition mindset.

It is important to understand the sequence in which improvements in markets take place. Failure to ensure markets operate to consistently high standards of conduct means that firms that behave badly can take advantage of firms which try to behave in a consumer-centric way – a race to the bottom.

In other words, good conduct is a prerequisite for real competition. But, we also know from experience that good conduct has not provided firms with a competitive advantage. Therefore, if we want to see real competition, tough regulation is needed to embed the right conduct and cultures across the market – only then is the platform created for effective competition to take place.

The FCA’s use of market studies is a particular concern. These can be very slow – in terms of the time taken from inception to actual interventions and changes in market behaviour taking place. Moreover, by their very nature, market studies:

  • further inculcate a competition mindset in the regulator;
  • rely on theories of harm derived from competition theory to explain market failure and detriment; and
  • lead the FCA towards interventions to create the conditions for competition rather than robust, direct regulatory interventions proven to make markets work.

We conclude that the emergence of this competition mindset, and emphasis on competition and demand side interventions, is a retrograde step and could be threat to the effectiveness of the FCA.

We have urged the FCA to reassure consumer advocates that it is not relying on competition interventions to make markets work. We have called on the FCA to:

  • continue to prioritise direct regulatory interventions which have improved the culture in financial services;
  • make greater use of proven regulatory tools such as product governance and price caps; and
  • use tougher sanctions to drive out bad practice and create a clean market for firms which want to compete fairly.

Our response can be found here: Financial inclusion centre response to FCA Approach to Competition final

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A tale of two scandals

Two financial scandals have dominated the news over the past few days. Concerns have been raised for some time now about a major pensions misselling involving defined benefit pension scheme transfers. These concerns have been highlighted by the publication of the Work and Pensions Committee report on the matter. The other involved the treatment of small business clients (in distress following the financial crisis) by the infamous RBS GRG unit.

Central to both these scandals has been the role of the Financial Conduct Authority (FCA), which has been on the receiving end of fierce criticism. These scandals raise two core questions:

  • Are the criticisms of the FCA justified in both cases; and
  • Do these scandals point to the need to reform our system of financial regulation?

The FCA, as with any regulator, deserves to be criticised when this is justified (and we have been fierce critics of the FCA on a range of issues). But is the criticism deserved in these two high profile cases?

By definition, the issues involved in both scandals (especially the RBS scandal and the FCA’s handling of it) are complex. Care must be taken not to oversimplify what can be important subtleties in legislation and regulation. But, to summarise the answer is:

  • With regards to the pensions misselling issue, yes, the FCA clearly does have real questions to answer and has been criticised with some justification.
  • The behaviour of the RBS GRG unit was appalling. It is hard to see how that can be disputed. But, as to the question of how the FCA handled the scandal, the regulator does not deserve the vitriol poured on it. The response by many external stakeholders (much of it seemingly based on misunderstanding of legislation and regulation) has been unfair and unreasonable. More worryingly, ultimately, it could potentially damage the ability of the regulator to operate effectively and in the interests of consumers[2].

The reasons are set out in the Commentary which can be found at the link below.

But what do the scandals say about the need for regulatory reform? It is never a good idea to launch into reform as a knee jerk response to a crisis. Flaws need to be identified, reforms considered properly (including whether reforms are actually feasible), and unintended consequences understood.

We have been thinking about this for some time. The work we do on evaluating the economic and social utility of the financial system, our work on financial inclusion and discrimination, and the growth in fintech/ big data lead us to conclude that there are significant weaknesses and gaps in our system of financial regulation. With Brexit on the horizon it seems like an ideal time to give reform serious consideration (the form of Brexit will, of course, determine the nature of any reform).

Moreover, working on the principle that we should never let a good crisis go to waste, these scandals do create an additional reason and new impetus for a proper, considered debate on how to reform our system of financial regulation.

We can never design a regulatory system that meets the unrealistic expectations of some politicians and the media who tend to pay attention only when things go wrong – there is no glory or story when things are going well.  The UK’s financial markets and services are just too vast and complex for that. But, the system of financial regulation can, and should, be improved.

Based on our analysis, the areas that stand out for reform are:

  • the objectives, duties and remit of financial regulators;
  • regulatory approach and culture;
  • regulatory tools and powers (including authorisations, supervision, enforcement and sanctions);
  • improving transparency around ongoing supervision and important investigations (such as the RBS GRG scandal) – without compromising natural justice and human rights of market practitioners accused of wrongdoing;
  • the capacity of regulators to respond more quickly and effectively to crises and emerging problems in markets;
  • the relationship between Parliament and regulators; and
  • regulatory governance and accountability, and stakeholder representation.

But it is not all down to regulation. Financial institutions (particularly the boards and senior managers) have a major role to play in improving the corporate governance and culture in their organisations.

We look forward to working with interested parties on these important issues.

The link to the Commentary can be found here: A tale of two scandals – FIC commentary

[1] see

[2] We use a wide definition of consumer here to include retail consumers, micro-enterprises and SMEs, ad institutional clients

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The challenges facing CDFIs and other social lenders

Community Development Finance Institutions (CDFIs – now also known as Responsible Finance Providers)  have a proud legacy and have made a useful contribution to promoting financial and social inclusion in the UK.

But, it has to be said that, up to now, the contribution has been fairly marginal. Can CDFIs make a bigger contribution? We have identified a number of major economic, technological, and regulatory trends which will create opportunities and challenges for CDFIs.

We think that financial exclusion in the UK will grow as a result of economic, technological, and commercial trends and the continued squeeze on household finances – unless the effects are mitigated and social lenders step in to fill the gap in the lending market.

This should present opportunities for CDFIs – if they are able to respond. However, economic, technological, market and regulatory trends also create real challenges for CDFIs which, when combined with a number of operational and organisational barriers, could severely limit the ability of the sector to thrive and take advantage of those opportunities.

In this discussion paper, we describe those challenges, the implications for CDFIs (and other social lenders such as credit unions), and what needs to be done if CDFIs are to thrive and fulfil their potential.

We look forward to working with CDFIs and other social lenders, and wider stakeholders who have an interest in promoting social lending, on meeting the challenges ahead.

The discussion paper can be found here: Personal Lending in the CDFI Sector – discussion paper final

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Fintech – beware of ‘geeks’ bearing gifts?

There has been much hype recently about the potential for fintech[1] to transform financial services, and improve consumer welfare. But, there have been few objective assessments of the potential impact. Therefore, today we are publishing a discussion paper to generate better informed debate.

In the paper we consider: what is changing and not changing in financial services due to fintech; the potential benefits and risks; and conclude with a set of policy questions which need to be answered to ensure the benefits are harnessed, and risks mitigated.

The primary roles of financial services (banking and payments, asset allocation, credit creation, insurance and risk management) will not fundamentally change. But, what is changing is how these primary roles and activities are carried out. The complex ecosystem of financial institutions and financial professionals will change and new types of organisation, roles, and professionals with different skill sets are emerging. Consumers will be forced to change, too, and they will have to develop new skills.

All the main retail financial sectors (banking and payments, credit, pensions and asset management, life and general insurance) are being ‘disrupted’ by fintech – some more than others. The huge capital, wholesale, institutional and reinsurance markets that make up the global financial system and markets and sit behind more visible retail finance are also affected. Fintech is also becoming an economic success story for the UK – particularly the City of London.

But we cannot assume fintech is beneficial just because it is new and exciting. We must objectively consider: the potential risks and benefits; and whether fintech will improve the economic and social utility of financial markets and services by enabling those primary roles and activities to be undertaken more effectively for the benefit of households and real economy.

Proponents have been almost evangelical in their beliefs about fintech – and we agree that there will be real benefits for some consumers able to access better value, more suitable, personalised products and services. Used effectively fintech could reduce the costs of gathering and processing information so aiding financial inclusion. Fincapps[2] could be deployed intelligently to improve financial behaviours to bolster financial capability and financial resilience. Fintech also has the potential to help consumers better understand how their money is invested to promote more sustainable markets and hold corporates to account.

But, despite the claims about fintech (particularly about blockchain technology), not much tangible benefit has emerged yet. At the aggregate level, so far we see little reason to believe fintech will produce the same stepchange as, for example, the humble ATM, debit card, and direct debit. To be fair, it’s early days. We hope we are wrong and fintech delivers the much needed transformation of retail financial services. But the hype does not match even a cursory objective assessment of the potential.

However, there are numerous very serious potential risks and detriments which have not been considered in any real detail. We group these risks and detriments into: outright scams and fraud; greater difficulties with rights and redress; higher costs, greater value extraction in the supply chain; major conduct of business risks including greater risk of misselling and misbuying by consumers[3]; transition risks, disruption of established financial services; greater financial exclusion and discrimination; corporate governance and cultural risks; and regulatory risks. These risks and detriments exist in the ‘analogue’ financial world. But, fintech and big data analytics will heighten these risks.

Open Banking and the coming into force of the 2nd Payment Services Directive (PSD2) presents a serious imminent risk which regulators, the financial services industry, and consumers are not prepared for.

In an era of more complex, fragmented, fast moving financial services, financial regulators face a much more difficult challenge protecting consumers and making those markets work for consumers and the real economy. We need to upgrade our analogue financial regulation for the digital finance world.

Growth in fintech isn’t occurring because fintech is guaranteed to generate beneficial creative destruction or is truly ‘progressive’[4]. Nor will it be consumer demand led. Rather, fintech will grow because so many opinion formers and influencers (investors, fintech developers, policymakers, regulators, media, and consumer groups) believe in it. The fintech genie cannot be put back into the bottle but it should be contained. The challenge now is to harness the potential for good, and identify more precisely how risks will materialise in different sectors, the potential scale of the risks (which all depends on take up), and how to manage the risks.

We have set out a series of questions which we believe will help us deal with those challenges. We look forward working with partners over the coming year on this hugely important issue.

The Summary Discussion Paper can be found here:  Fintech – Beware of geeks bearing gifts FIC Discussion Paper Summary

The full paper can be found here:   Fintech – Beware of geeks bearing gifts FIC Discussion Paper Full

[1] When we refer to ‘fintech’ we include the full range of digital finance technologies, big data analytics, artificial intelligence/ machine learning, algorithmic trading, distributed ledger technology and so on.

[2] Financial inclusion and financial capability apps

[3] It is important to note that these conduct of business risks will be an issue in wholesale and institutional markets, not just retail financial services

[4] In that it will significantly improve the financial and social welfare of households and the efficiency with which financial markets serve the real economy – although we are at pains to emphasise there will be some benefits

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Work and Pensions Select Committee Inquiry – Pensions Freedom and Choice

The Centre has submitted written evidence to the Work and Pensions Committee Inquiry into the Pensions Freedom and Choice reforms.

We are concerned that the risks associated with freedom and choice have not been fully appreciated. At the time of the launch we warned that the reforms were a regressive policy, rushed and very poorly planned, and badly implemented.

Consumers might welcome the reforms – after all who can be against ‘freedom and choice’. But there is cognitive dissonance evident here. Consumers also want their pensions to be safe and reliable. However, consumers will be exposed to greater uncertainty and risks in the form of market, product, misselling and fraud, and longevity risks. In addition, the reforms are likely to push up the costs of providing financial advice, push up costs of saving for retirement and/ or reduce the value of pensions in retirement.

Savers now have a good value, collective option for accumulating retirement savings in the form of NEST. But, this will now be undermined by the additional costs introduced at the decumulation phase as a result of freedom and choice. Costs are particularly important for the groups of pension savers we focus on – underserved, lower-medium income households.

Sadly, some of our fears have already been borne out particularly with regard to scams. But the real damage will be done in the medium-longer term as the costs of saving for retirement are pushed up and consumers are exposed to greater market uncertainty and longevity risk. It is simple logic that when more costs are extracted from the pensions system this reduces the value of retirement savings meaning households have to save more to compensate.

There were, of course, problems with the old system and annuities rightly came in for some criticism. But, the old system did allow consumers to manage longevity risks. It is not progress to replace a system with some faults with a new system which exposes consumers to greater market, misselling/ scam, and longevity risks and ultimately pushes up the costs of saving for retirement.

Lower-medium income households who can afford to save comparatively low amounts are particularly affected by high costs. They are also disproportionately affected by poor advice and decision making – they cannot absorb the financial losses associated with market and misselling risks in the same way as better off households.

Freedom and choice threatens to reverse the very real progress made through automatic enrolment and NEST. If we think of AE/ NEST filling the pool of retirement savings[1], freedom and choice drains away those savings in the form of consumers drawing down savings and/ or the pensions and investment industry extracting value in the form of high costs.

But, there are interventions we can adopt now to mitigate the risks in the short-medium term. The priority is to ensure consumers have access to objective, impartial financial advice and pension decumulation ‘defaults’ to allow them to identify safer, better value options.

Our submission can be found here: Work and Pensions Commitee Pensions Freedom and Choice-FIC final submission

The Committee’s terms of reference can be found here:

[1] The filling of the retirement savings pool needs to be speeded up anyway





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Is it possible to make profits fairly in financial services from low income or vulnerable consumers?

Last week, Provident Financial, the subprime lender which sells expensive credit to higher risk borrowers was dumped from the FTSE100[1]. The previous week its share price fell by 65% after it issued a second profit warning in three months and scrapped its interim dividend payment to shareholders. The firm, whose main products are costly door-step loans and high cost credit cards, had been one of the stars of the stockmarket in the post financial crisis era. Its share price more than quadrupled from 704.5p in July 2008 to 3,600p in November 2015 – joining the FTSE100 at the end of 2015. But by the beginning of September this year its share price stood at 885p.

Clearly, Provident Financial faces its own specific organisational problems. But, soon after that, the news broke that Buy to View, one of the leading firms in the rent to own sector[2], had been placed in administration[3]. Moreover, the introduction of the price cap on payday loans and much tougher regulation of consumer credit slashed the number and value of payday loans sold to consumers and drove huge numbers of consumer credit firms out of the industry.

This series of events leads us to ask a very fundamental question. The market is ‘amoral’, it will supply products and services to anyone – at a price. This is not a criticism, just a fact of life about how markets operates.  But, the question we should be asking is: can market providers in financial services make decent, sustainable profits fairly from low income or vulnerable consumers?

History suggests that when government and regulators (following campaigns from consumer activists) impose reasonable conditions on the financial services industry with regards to prudential regulation, good governance, fair treatment of consumers and fair charges, the industry struggles to meet the financial needs of lower income or vulnerable consumers. Note that consumer credit isn’t the only market where this is happened. It’s a much wider problem – it just happens to be topical in consumer credit.

When markets shrink, we then hear some in the industry claim that regulation causes or contributes to financial exclusion. This is disingenuous. No wants to see unnecessary financial regulation but it is hard to identify significant pieces of regulation which are actually superfluous. The regulation we have now, in effect, just codifies what society has a right to expect of businesses that are well run and deserve to be trusted. Sadly, the market left to its own devices failed to produce enough of those well run businesses that deserve the confidence and trust of consumers. Regulation exposed the real nature of the commercial relationship between many firms and low income/ vulnerable consumers they were selling to. Indeed, if anything, while we have seen major improvements in the culture in financial services, there is a long way to go. In some areas, more not less regulation is needed.

There is no point ducking this problem. Is it actually possible to promote markets in which commercial providers are able to provide decent financial products and services to low income or vulnerable consumers on terms which also make sense to shareholders/ investors? Changes in labour markets (rise of zero hours contracts jobs etc) and much tougher economic conditions are likely to exacerbate the problem. We see little evidence that mainstream financial services business models (predicated on the lifecycle model of progressive household earnings growth, the debt repayment and asset accumulation) have adapted to this new economic reality.

So, how do we respond to the challenge? Reducing regulation to try to promote financial inclusion is a false economy – it simply transfers the risks and costs back to consumers.

Some are evangelical about the potential of fintech to change the economics of distribution and bring more unserved/ underserved consumers into the market. There may well be some merit in this. But, fintech is just as likely to exacerbate financial exclusion and market discrimination. Fintech costs, it needs to be monetised. For lower income consumers, the cost of paying for new fintech apps may outweigh the benefits created in the form of switching to better value products and so on. The essence of fintech is greater market segmentation and granularity, more individualised or personalised products and services. It becomes even easier to identify profitable/ lower risk consumers and sell to them. Firms can much more efficiently identify and exclude less profitable/ higher risk/ more vulnerable consumers.

If reducing regulation or relying on fintech is not the answer, what is? Clearly, the state and regulators can help by: making markets more efficient and competitive; deploying social policy regulation to protect vulnerable consumers or mandating provision of products and services; supporting the growth of alternative providers and products; or indeed the state meeting financial needs.

Responsible providers who recognise that their firm does not exist just to create profits – and there are many out there – can do more to continue the improvements in culture in financial services and support the development of alternative provision.

Finally, civil society groups and consumers organisations can do more to reform the financial system and develop innovative, alternative financial products. We can do much more to help shape fintech so that it delivers benefits for excluded or vulnerable consumers. We have a duty to do this – we must stop just complaining about what’s wrong and broken or exposing scandals, and do more to make markets work better or develop alternative solutions where markets clearly cannot deliver.

But, if this is to happen, we first of all need an honest, frank debate about the limits of markets and the role of the state and regulators – what might be called a new social contract. Unless and until we do, it is difficult to see that much progress being made.

[1] the index of the leading 100 shares by market value listed on the London Stock Exchange

[2] See Better and Brighter: Responsible Rent to Own Alternatives an FIC report on the detriment caused to consumers in the rent to own sector,


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Economic and Social Audit of the City

As its many champions constantly tell us, the City provides huge benefits to our economy in the form of contribution to GDP, tax take, balance of payments, employment and usage of financial services by UK households. This is undoubtedly true. But, as our latest report, commissioned by the TUC, shows, set against that are the major economic, financial and social costs caused by the City’s activities. (Note we use the ‘City’ as shorthand for the wider financial services sector and financial system.)

To our knowledge, this is the most comprehensive attempt by a civil society organisation to bring together the available evidence on the benefits and costs of the City. It’s not perfect. There is much more work to be done. But we hope the report stimulates new, deeper thinking about the impact of the City on the economy and on the lives of UK citizens. We also hope the report helps policymakers recognise that the City needs reforming if it is to work better for the UK economy and society.

The need for serious financial market reform seems self-evident to us. Brexit provides an additional impetus for that reform. But, reform needs well thought out, robust policies. The dilemma we face is: can we identify policies that tackle the risks and market failures identified in the report without losing the very real benefits the City produces. We don’t have the answer to that dilemma yet. The report sets out a series of questions to guide the development of those policies. We look forward to working with interested stakeholders on developing those policies and campaigning for reform over the coming years.

Report summary

In the report we examined: conduct of business and culture costs; economic and social utility costs; externality costs; and threats to financial stability and economic resilience.

Conduct of business and culture costs:  Our tally for ‘retail’ misselling in the UK is £45bn. UK banks also account for a significant share of the estimated £200bn global conduct costs arising from Libor and foreign exchange market manipulation, money laundering and so on. The litany of misselling has left a legacy of mistrust which undermines consumers’ willingness to use financial markets to save for retirement. This also partly contributed to the buy-to-let boom which has helped pump up property prices beyond the reach of younger generations.

Economic and social utility: We found compelling evidence that a primary function of markets – to allocate resources effectively to productive real economy activities – is not working well. Only a very small share of bank and building society lending still goes to non-financial businesses. The scale of the value extraction (in the form of high costs and underperformance) in the £6trn asset management industry dwarfs the more high profile misselling scandals. Investor short-termism hinders the ability of real economy firms to plan for the future. Much ‘innovation’ in financial services was either about extracting value from clients or designed to deal with risks created by a previous set of ‘innovations’. There has been an illusion of innovation, some might say alchemy, as investors were sold the promise of higher returns at lower risk. Even now, markets are distorted as institutional investors invest huge sums in low yielding, safe bonds (the so-called ‘flight to quality’) and ‘search for yield’ by investing more in property and alchemical financial products. Investment in long term, productive economic activities falls between the gaps.

Externality costs: the sudden shock of the financial crisis resulted in huge costs for the economy and society. But, over-financialisation imposes ongoing costs by contributing to regional and household inequality and harming long term economic productivity. City institutions are not doing enough to mitigate climate change risk. Tax avoidance is a huge drain on public finances.

Financial stability and economic resilience: The financial crisis did so much damage for two reasons – the sheer scale of the UK financial sector and because we didn’t have the right firebreaks to protect the rest of the economic system. We cannot tell how big a risk the City still represents to the economy until it is tested by a new crisis. But, there are growing concerns that risk has been shifted from more visible parts to the ‘shadow’ financial system and major dislocations are evident in financial markets. The UK financial system still does not appear to be diversified enough to guarantee resilience.

The UK’s system of financial regulation is now well set up for financial stability, conduct of business/ consumer protection and competition regulation (even if it is not used well, it is at least there). But, we lack the institutional policy framework to tackle those structural failures highlighted above. No one in authority seems to be charged with improving the economic and social utility of the City.

Large parts of the financial system are working well and the City does contribute a huge amount to the economy and society. But, set against that, the City may still represent a serious risk to wider economic resilience. Perhaps more importantly for the economy in the long term, the City is just not very good at some of its primary resource allocation and asset management functions.

Reform of the City should be a priority. But this begs the questions: what shape should those reforms take; and can we persuade policymakers that it is possible to reform the financial sector without ‘killing the golden goose’?

To say Brexit complicates matters is an understatement. Brexit will create new risks for the financial sector and for households if regulatory arbitrage occurs. But Brexit also provides the opportunity and possibly the impetus for positive reform of the City.

Overall, the questions raised by this audit can be summed up by asking: what should the City of London look like in a post-Brexit world; what role do we want it play in our economy; and while reform is clearly needed, do we have the credible policies, policy structures and political will to make the necessary reforms happen?

The full report can be found here: Economic and Social audit of the City FINAL

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