Financial Exclusion (Liaison Committee Report)

Baroness Kramer Excerpts

Wednesday 25th May 2022 Grand Committee

[Baroness Kramer (LD)]

My Lords, I start with a couple of thanks, echoing the noble Lord, Lord Shinkwin, both to the Liaison Committee task force that worked on the original report and drove the follow-up report and to my noble friend Lady Tyler of Enfield for her leadership. I also think that we need to give an award today to the noble Lord, Lord Balfe, for the most radical solution that has been brought before us. It is one of those “the emperor has no clothes” moments: if you want people not to be financially excluded, make sure that they have enough money to be able to manage.

However, we all know that that is not the reality of the world that we live in today. Financial exclusion, as so many people have said, has become even more of a disadvantage with the cost of living soaring. Excluded people have even fewer tools for managing costs. The noble Lord, Lord Bilimoria, talked about the low financial resilience that so many people experience, but I was also very focused on the discussion by the noble Lord, Lord Shinkwin, of people with disability. They carry an absolutely undue burden that becomes far more acute in times like this, particularly people who are dependent on electricity, but even beyond that.

Others, including my noble friend Lady Tyler, have referred to the poverty premium, with examples of people on prepayment meters paying more for energy than those on direct debits, and by far. Finally, there is the process of claiming the Government’s £150 council tax reduction, which I think we will hear today is far more difficult for those on prepayment meters. We are in a very difficult and critical time.

I want to focus, though, on the issue of banking. Some 1.5 million people have no bank account and many more lack access to short-term affordable credit, with something like 2 million to 7 million people a year using high-cost credit—and within that group, as many as 66% could be classified as vulnerable. I have thought for many years that these people could be helped by better education and capability, by keeping bank branches open or by replacing them with community banking hubs—a project on which I will say a little more in a few minutes. But looking at a report from Barclays, I was stunned to see that it said that most people who do not have a bank account today have had one in the past. For many of these people the experience of a perilous fall into an overdraft, with its costs and fees, proved such a negative experience that they left banking altogether. Frankly, I do not know whether most people at the bottom end of the scale who find themselves in overdraft realise that, as bank customers, they are really paying for the costs of free in-credit banking for far better-off people. We have a real inequity in the banking system as it functions today.

It is also true that many people find it much easier to control their money when they rely exclusively on cash. It may not be the most effective or efficient way of managing payments but it allows them control. With cash disappearing, I am very glad that we now have an access-to-cash provision that will be engaged through the financial services and markets Bill. However, I share the concern of the noble Lord, Lord Holmes. It is not just the supply of cash that matters; it is whether or not entities will accept cash. Like him, when I went through my community I found so many places that now want only contactless payment, even for the smallest of purchases, and will no longer take cash. We have a far more complex problem here, unfortunately, than that which I suspect the financial services and markets Bill will tackle.

The answer I often hear is that fintech has a great deal to offer. I fully accept that fintechs have been springing up, providing mechanisms such as “jam-jars” to help people budget or using a broader set of factors in their credit judgments. But as so many have said—the noble Lords, Lord Sikka and Lord Holmes of Richmond, and others—this requires access to the internet, probably a smartphone and a confidence with technology, as described by the noble Lord, Lord Balfe, that does not exist in many of the excluded segments of the population. Even open banking offers a path only for those who have an existing financial product. The use of the internet as the key to financial access also carries the disadvantage that it makes impulse spending very easy and opens people up to pressure from irresponsible marketing. I hope that the Government have taken note of that from many of the civil society groups which have been tracking those kinds of behaviours.

Over and again, we have tried to find an answer by using the Post Office. Of course post offices are important, but I am frankly becoming completely disillusioned with their potential to provide more than very basic banking services. Community hubs are the latest idea: a shared banking services arrangement, with the Post Office actually providing the front counter. But as proposed, they will exist only where the banks have no branches and if those banks themselves actually agree. The banks should not be the decision-makers on whether a community hub should exist or not. As they are conceived now, community hubs continue the notion that financial inclusion is defined by access to a high street bank and the facilities it offers.

I find myself turning to routes that have worked well in other countries but never seem to have gathered sufficient momentum in the UK. The noble Lord, Lord Sikka, touched on this in a sense when he referred to the Community Reinvestment Act in the United States, which started out as a civil rights Act but evolved into a mechanism to create banking organisations dedicated to and set in their local community and which targeted services to it. Sometimes you find them in the form of credit unions and sometimes in the form of community banks, which are quite blended in the United States. Their great advantage is that they do not “put up with” disadvantaged or low-income people or see them as a way to perhaps offset fees from their better-off customers; they welcome these people as the core of their customer base and design services to meet their needs. The issue is achieving this at the scale and with the coverage required. That in turn means very significant investment.

Giving the FCA some powers—at the very least to have regard to financial inclusion—might help us drive towards a network of something like community banks and credit unions, which would meet some of this need. I would hope that it would make the FCA more proactive. However, frankly, after so many years of discussion I am pretty much out of patience and wonder whether the only way to achieve this is basically through legislation. I ask the Government to consider making it a condition for a banking licence for a bank above a certain size—in effect, the high street banks—to either provide effective services to the unbanked and underbanked sectors of the population or invest in an organisation that can, which is usually the preferred option in the United States.

When I was in the US, I saw really successful partnerships between the equivalents of the major high street banks and local community banks and credit unions. Ironically, they were really popular with the executives of the significant major banks. They would almost fight each other for the opportunity of having a day or two working at the community bank because it was a chance to interact with normal people. Big banks were able to provide very low-cost technical services, regulatory advice, human resources and all kinds of back-up for the relatively small local banks. The costs of running a community bank are much lower than those of trying to provide the same services out of the equivalent of a high street bank because they do not have the burden of trying to carry the high costs of the investment banking portion of an organisation or the very high exceptional salaries of so many senior bankers in the major banks.

Would-be entrepreneurs get to start businesses and go on to become significant clients of sponsoring major banks, and it becomes a route to opportunity. Even more importantly, in the United States you find that charities and civil society groups join the partnerships, providing a huge range of support and advice for individuals and helping the community bank target what it does so that it directly meets the needs of the clients that come in through its doors.

I feel that this has always been rejected in the UK because it does not have a “Made in Britain” stamp on it. In some ways, you could say it is picking up some of the roles of the old savings and loans, and perhaps of the branch banks we used to have long before the days of mergers and acquisitions. I ask the Government to get serious and look at this. We have talked and talked—I have been in webinar after webinar—and we are really making very little progress. Today’s economic crisis ought to underscore to us that this problem, above all, must be treated with urgency.