Financial Inclusion: New Technology

Lord Holmes of Richmond Excerpts

Thursday 6th July 2017 Lords Chamber

Asked by

[Lord Holmes of Richmond]

To ask Her Majesty’s Government what steps they are taking to promote financial inclusion through the use of innovative financial solutions and new technology, including open access to payment infrastructure, smart phone applications and distributed ledger technology.

[Lord Holmes of Richmond (Con)]

My Lords, it is a pleasure and a privilege to have secured this short debate on financial inclusion and the role that fintech can play in delivering that for citizens right across our communities. I welcome my noble friend Lord Bates to the Front Bench. We have, as we heard even this morning, a productivity crisis in our nation. With my noble friend covering not only DfID but Treasury matters in this House, it is fair to say that he is doing more than his bit to address this issue.

I was lucky enough to be a member of the Select Committee on Financial Exclusion. Our report had 22 recommendations. I ask the Minister to give us a hint of when the Government will respond to those incredibly important recommendations. On one of them we do not have to wait any longer for a government response because I am delighted that we already have our first Minister for Financial Inclusion in the form of Mr Guy Opperman, who stood at the Bar for pretty much the whole Second Reading of the Financial Guidance and Claims Bill yesterday evening. This is a tremendously positive step for the Government to take, and it will be critical that the Minister has cross-governmental reach as the issues around financial inclusion—or exclusion, depending on which perspective you take—are certainly not limited to one particular government department.

I am delighted to be co-chair of the All-Party Parliamentary Group on FinTech. I believe the Financial Guidance and Claims Bill currently going through your Lordships’ House will have a number of opportunities to raise issues around financial inclusion, some of which may also be raised today.

Why am I interested in fintech? I am interested because it is innovative and disruptive and has the potential to address some of the issues that have dogged our society for decades, not least the inability for SMEs to have consistent and timely lines of credit. Perhaps even more significant is the fact that so many hundreds of thousands, nay, millions, of our fellow citizens have been effectively locked out by being underbanked or unbanked. There has been no real sense that pressure has been put on, or desire felt by, the major financial institutions to lend to SMEs or address questions around the underbanked and unbanked of our society.

Why am I interested in inclusion? This goes right back to the beginning for me. It seems extraordinary that everybody would not be interested in how we enable and empower every single member of our society to play their part and to be fulfilled in whatever field they want. Financial inclusion is critical to this. When we set it alongside digital inclusion, we have two of the most significant building blocks that have to be so well set if we are going to address some of the most significant issues facing citizens in Britain right now.

If noble Lords need any more justification for that statement, they should just look at the close connection between financial exclusion and digital exclusion. It is not entirely like for like, but the connection is all too clear. If we are truly to build a nation which works for everybody, as good a starting point as any would be financial inclusion and digital inclusion.

What is financial exclusion? It is the inability of citizens to get their hands on mainstream financial products and services. What is fintech? It is the wave of technology linked to financial products which has the potential to transform and revolutionise how we do finance not only in this country but globally. The G20 recognises this and the connection between fintech and financial inclusion. Its 2016 report put together eight principles to suggest how fintech can play a positive role in the enablement of financial inclusion. Will the Minister tell the House the Government’s view on those eight principles and where he believes the UK is in relation to them?

The role of regulators is critical in this space. From a fintech perspective, we have an excellent regulator in the FCA. Its role in driving competition has been critical in enabling fintech not just to boom in the UK but to be a global leader. That is seen not least in the regulatory sandbox, which has delivered such great results for the founders, the companies involved and, through that, for the nation. In the light of this, does the Minister believe that it would make sense to increase the responsibilities of the FCA and enable it to have responsibility for financial inclusion?

It is also important to note the great work done on this by Innovate Finance, which connects everybody involved in fintech and has actually established a working group specifically on financial inclusion. This demonstrates just what a prescient issue it is. Indeed, if I return to the All-Party Parliamentary Group on FinTech, the most important principle that we set when we established the group was around financial inclusion. It is clear that the impact and the potential can be great, but if we do not get that regulatory framework in place, we will potentially not only let another generation of financially excluded people down but we will lose a massive opportunity in terms of economic growth and potential exports for this country.

Sir Mark Wolport did an excellent report on some of the technology that underpins fintech. Can I ask my noble friend the Minister for the Government’s response to, and thoughts on, that report? It was particularly wise and thoughtful about the potential uses and impacts of distributed ledger technology and how that can be deployed.

Moving to the European perspective, the European Investment Bank has been an excellent funder of fintech, not least in the role that fintech has played in securing financial inclusion. This will obviously disappear on Brexit. Will the Government commit to at least equalling the support that the EIB has given for fintech once we leave the European Union?

Moving slightly beyond the scope of this debate, but worth mentioning, can I ask the Minister for his view on a duty of care on financial institutions? I have done a deal of consultation on this and it has been extraordinary how many times, when I have mentioned this, respondents have believed that financial institutions already have a duty of care towards their most vulnerable customers. Not a bit of it. So when the Financial Guidance and Claims Bill comes to Committee, I will be looking to bring an amendment to probe the Government on this point—I ask the Minister for his response.

Moving to some of the opportunities where fintech is already delivering in the area of financial inclusion, access to bank accounts is of course a critical point. If we look at the Lloyds data, if you bank online you are likely to save between £500 and £700 per year—not insubstantial—through the control that you are able to gain by having that online service, to set up text alerts, to be far more closely connected to your funds, to not end up, potentially, in those financial crises which can push people back into financial exclusion.

Identity is incredibly important; there is much work being done on online verification, not least by GOV.UK Verify. This is incredibly significant and can be so enabling for people who currently find themselves without a bank account. This is not hundreds of thousands of people but, in Britain today, 1.7 million people without a bank account.

Looking at some of the services being offered by some of the fintechs, MiCard connects physical identity with digital identity. If we look at the Pockit example, it creates a clear online platform to get around some of the issues that have pushed people into an unbanked situation. Another is dopay, which is a system whereby employees can receive their pay directly from their employer even if they do not have a bank account. Such systems are innovative, insightful, enabling and including.

The question of physical location is incredibly significant when it comes to financial services. With the open banking initiative there is a real potential to look at how there can be an aggregation of fintech services put through a potential physical location. It drives down costs through that aggregation, yet still enables a potential physical location on the high street for people who want to engage with financial services in that manner.

Affordable credit is a critical issue and always has been. We have some particularly pernicious examples at the extreme end of so-called credit services in Britain today. Fintech enables a revolutionary approach to the assessment and consideration of credit, enabling people, responsibly, in a risk-based matter, to find themselves with lines of credit. This is a far more significant consideration of the elements that make up a credit score, rather than just the all-too traditional means of simply saying no.

Financial literacy is significant. Again, this goes to the Second Reading of the Bill yesterday, but a lot of what we need to address is around financial capability. Financial literacy is obviously critical to that, and fintech can play an important role by connecting with individuals, not least young people, in a very different, innovative and natural way.

Perhaps the most important part of society where fintech can play its part is around the delivery of benefits to recipients. We have seen a number of really interesting proofs of concept delivered via the DWP, not least through GovCoin and a similar project through RBS. What we see is the use of blockchain, distributed ledger technology, tied with a smartphone to enable recipients to have a far greater and more immediate connection to their finances—to feel enabled and empowered through this. It is innovative not just in terms of the tech but in terms of how this is then being delivered and in the proof of concept. Recipients find themselves enabled and far more connected, and within a short space of time they are actually coming up with suggestions and improvements for the programme—they are not just passive recipients but active, co-producing members of a proof of concept. Will the Minister consult with colleagues, not least in the DWP, to discover when we might see these proofs of concept taken to scale? They have incredible potential, but they need to be taken to scale, and we are not even at pilot stage yet. We have had some great proofs of concept, but we need this to get to scale and then we will truly see the impact and the difference that fintech can make in terms of financial inclusion.

From inclusion to my conclusion: I call on everybody involved in fintech to do all they can to consider how they, their tech and their businesses can interact, collaborate and relate to make a positive impact to enable financial inclusion. Similarly, I call on the Government to do everything to support the fintech sector in this country. It is a great, booming and world-leading sector, not least in what it does for financial inclusion. Let us ensure that it continues to thrive, continues to deliver and continues to be a great British enabler and a great British export, through and long beyond Brexit.

--- Later in debate ---

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, I join other noble Lords in paying tribute not only to the address of my noble friend Lord Holmes and to his securing this timely debate but to the productivity and passion that he brings to the topic.

Normally, we have a set speech and then we come to some of the questions raised in the debate, and invariably we run out of time. Therefore, perhaps I may go straight to some of the questions and then come to some of the set remarks that I have before me.

I will start with the Financial Exclusion Select Committee. Its report was widely acknowledged as a very thorough, detailed and comprehensive look at this area. It is a classic example of the use of the ad hoc tool within your Lordships’ House to produce a really worthwhile and stimulating report. Its timing was not necessarily perfect in the sense that it was published on 25 March, just ahead of the announcement of the general election, and therefore there was a slight hiatus during the period of purdah that followed. However, as the noble Lord, Lord Stevenson, mentioned, it contained 22 substantial recommendations, which are being taken very seriously. They are the subject of discussion across Whitehall and we will respond to them very shortly. Perhaps we might have a debate on them when the response has been published, but it seems to me that the report will be an essential piece of work.

This debate also comes immediately after the Financial Guidance and Claims Bill had its Second Reading in your Lordships’ House. The noble Lord, Lord Kirkwood, served on the Financial Exclusion Committee, along with my noble friend Lord Holmes, and he also spoke in yesterday’s Second Reading debate, which I read. A number of points have been raised in this debate which I will feed back to my noble friend Lady Buscombe, who is the lead Minister on the Bill, to see whether we can move forward.

We were blessed with two brief interventions, from my noble friends Lady Stedman-Scott and Lady Stowell. They focused on young people and the financial inclusion initiatives. One of the great advantages of responding to the debate is that I was able to look up on my smartphone the Government’s digital strategy to see whether it mentions young people. I was relieved to find that, even in the executive summary, there are a number of mentions of young people, with digital skills being placed alongside numeracy and literacy as key skills that people need for the future.

On my noble friend Lady Stowell’s point, the Government introduced financial education to the secondary school curriculum in England in 2014. It is for the devolved Administrations to talk about what is happening there. However, we can follow through on some additional elements of the efforts to include young people, because I share my noble friend Lady Stedman-Scott’s view that this has the potential to be a real leveller, as young people have great aptitude already in this technology. The E in PHSE stands for economics, and when it is well taught it increasingly involves fintech. We hope that that will be a key element, and we welcome that the issue was raised.

The noble Lord, Lord Kirkwood, asked about Verify being developed with the Cabinet Office. We are working with the Cabinet Office on this, but identity in financial services can be tough to crack. However, we look forward to following up on that.

The noble Lord, Lord Stevenson, referred to the G20 high-level principles. It is worth noting for my noble friends Lady Stowell and Lady Stedman-Scott that principle 6 refers to the strengthening of digital and financial literacy. The noble Lord, Lord Kirkwood, referred to my two hats, one of which is from DfID. One area in the G20 that we are following very closely is that of remittances. Remittances are a major part of economic development, amounting to around $420 billion per year—twice as much as overseas development assistance. Yet the cost of remitting money back to countries can vary between 3% and 17%. There is a great deal that we can help with there. The Government’s position on the G20 high-level priorities is that they are working closely with the Global Partnership for Financial Inclusion, or GPFI, which supports the implementation of the high-level principles on financial inclusion.

I go back now to some of the points raised by the noble Lord, Lord Holmes. He asked about the FCA’s role, and I was pleased that he recognised it as an excellent and innovative regulator in this area. Its role in financial inclusion was raised by the Select Committee report and the Government will respond to that. As for the single financial guidance body, it will provide information and guidance, and help people manage their finances.

The noble Lord, Lord Kirkwood, asked whether the Government should amend the Financial Services and Markets Act 2000 to create a requirement on the FCA to set out a reasonable duty of care for financial services providers to exercise towards their customers. Issues of duty of care are for financial services providers, as a requirement of the FCA. The Government will respond to this recommendation as soon as possible. In the FCA’s mission document, published in April, and in its response to the Lords’ Select Committee on Financial Exclusion report, sent to the noble Baroness, Lady Tyler of Enfield, in June, it committed to publishing a discussion paper to explore the duty of care further.

The noble Lord, Lord Holmes, asked about the DWP proof of concept, and he is right to say that this received positive feedback. It is examining this issue and will conduct further work before taking a decision on pushing these ideas forward.

I turn now to some of the key messages that we are seeking to get across in this debate about our position at the moment. As I have said, the Government will publish their response to the Select Committee’s report shortly. The pace of change—which was referred to I think as “innovative and disruptive” by the noble Lord, Lord Holmes—in this sector is frenetic. We are witnessing the emergence of a new wave of general purpose technology: big data, analytics, machine learning, peer-to-peer lending—that term probably needs to be qualified in your Lordships’ House—networks and distributed ledger technology, each of which can bring potentially far-reaching changes for people traditionally excluded from financial services.

We should think, for example, how much online budgeting tools can help to give people unprecedented control over their finances—empowerment, as the noble Lord, Lord Holmes, said. Indeed, the Department for Work and Pensions is exploring ways to give tenants more control over their spending via smartphones. This could include not actually paying rent monthly. If it is digital, why not pay it daily or weekly, which is sometimes easier to manage? The Government believe strongly that a flourishing fintech sector will lead to further innovations that will help reduce financial exclusion across the UK. It is worth noting that the development of fintech is not limited to London. There are strong fintech centres in Leeds, Manchester and Edinburgh, and across the UK.

In terms of how we will approach this, we suggest three pillars. First, we will create the most welcoming regulatory environment in the world for fintech, without compromising financial stability or consumer protection. The Financial Conduct Authority’s Project Innovate, which has been referred to in the debate, is recognised around the world as a gold standard in this field. Secondly, we will ensure that the legislative and regulatory framework is fit for purpose as new fintech products and services emerge. The Government are taking action. We have overhauled the regulatory and tax regimes to accommodate new peer-to-peer lending models and we are taking steps to ensure that customers have the option to share their financial data with fintechs safely and efficiently. Finally, we are promoting UK fintech at home and abroad. We have created fintech bridges with Singapore, China and Hong Kong. In April the Chancellor and the Governor of the Bank of England hosted the inaugural international fintech conference.

Several studies have ranked the UK as a leading global hub for fintech development and the Government are committed to building on this to make sure that UK fintech goes from strength to strength. However, this debate is specifically about how to use the UK’s success in fintech as a lever towards financial inclusion and capability. I can point to some early successes. The FCA has led the way globally. It has provided direct support and access to its sandbox to a number of firms focusing on social inclusion, such as Oval, an app that helps users build up savings by putting aside small amounts of money every week.

Beyond the regulatory sphere, the Government are also acting directly to stimulate exploration of potential fintech support for financial inclusion and capability. In March of this year, the Government’s digital strategy announced that we would launch a competition, to be run by Tech City UK, to encourage digital approaches to support financial inclusion. There is a clear need to ensure that we reduce the number of those who do not have any kind of account—the so-called “unbanked”. A financially inclusive society is one that allows its citizens to manage their money more effectively, securely and confidently. For their part, the Government aim to boost inclusion and ensure the widest possible free access to basic bank accounts.

I have some additional data which noble Lords may be interested to receive. In the first half of 2016 alone, nearly 500,000 basic accounts were opened in the UK. There are just under 8 million basic bank accounts open now in the UK, and 4.1 million basic accounts were completely fee-free at the end of 2016.

I move to my conclusion. The Government have two separate objectives. We are creating the conditions for fintech to flourish in the UK in general, but we are also taking specific action to ensure that these technologies are harnessed to tackle the problem of financial exclusion. These twin strategies will help us in the mission we all share of equipping everyone in our society, young and old, with the financial tools they need to live the lives they want. I finish by thanking once again the noble Lord, Lord Holmes, for introducing this debate and all those who have contributed so well to it.

[Lord Holmes of Richmond]

My Lords, I thank all noble Lords who contributed to the debate, not least my noble friend the Minister. It seems harsh to pull him up on one tiny detail, but I feel I must. He said that the timing of the publication date of the report from the ad hoc Financial Exclusion Select Committee was not perfect. The timing was perfect; perhaps the timing of the general election was less so. For different reasons, everybody around the House might share that sentiment.

We have a phenomenal opportunity in this country if we get fintech and financial inclusion right. We will not just have a world-leading, world-beating fintech sector, but through the financial inclusion that that will deliver we will address perhaps one of the most pernicious, iniquitous elements of our society: that all too often those on benefits and those who have the least find themselves having to pay the most, not least for the most essential utilities. If we can address that, it would be a profoundly positive element—one of many that can come from the excellent connection between fintech and financial inclusion. I thank again all noble Lords who participated.

House adjourned at 5.12 pm.