Financial Inclusion

Nick Hurd Excerpts

Tuesday 17th March 2015 Westminster Hall

[Mr Nick Hurd (Ruislip, Northwood and Pinner) (Con)]

It is a huge pleasure to serve under your chairmanship, Sir Edward, I think for the first time. It is also a great pleasure to have secured this debate. My motive for doing so was simple: I have spent six months representing my party on a non-partisan commission that was set up to look at the issue of financial inclusion, by which I mean the ability of our constituents to access the financial products and services that help them to function effectively in society. Those are products and services that many of us take for granted—after all, we live in a country with one of the most sophisticated financial systems in the world—yet the commission’s work raised a real concern that the issue of financial inclusion needs to be given higher priority. I therefore welcome the opportunity to make the case and hear the Government’s response.

The commission took written evidence and held oral evidence sessions around the country, in Liverpool, London, Cardiff and Glasgow, including with people who are or have been financially excluded. In all, representatives of 84 organisations came forward to share their views with us, including big banks, small charities, academics, entrepreneurs, insurance companies and local authorities. There was a wide range of people, but a consistent view that we could and should be doing better as a country to make the financial system work better for everyone, to improve the financial health of the millions of people who are, quite frankly, living on the edge.

The picture that came out of all the evidence is not reassuring. Nearly 2 million adults in the UK do not have a bank account; an estimated 2 million people took out a high-cost loan in 2012 because they were unable to access any other form of credit; and 50% of households in the bottom half of income distribution do not have home contents insurance. There is a price attached to that exclusion. Financially excluded people pay a poverty premium that has been estimated by Save the Children at £1,300 a year. Even more powerful is the picture of financial vulnerability and lack of resilience that came through so strongly from the evidence. Up to almost 9 million people are over-indebted, depending on the definition used; 13 million people do not have enough savings to support them for a month if they experience a 25% cut in income; and 15 million people—31% of the population—report one or more signs of financial distress. That is not the picture of financial health in the UK that I am sure we all want, irrespective of our politics.

At a time when the public are hearing a lot from their politicians about the public finances, the commission argues that the vulnerability of private finances should also be a major political concern, and that the issue of financial inclusion needs to be given higher priority.

[Duncan Hames (Chippenham) (LD)]

I commend the hon. Gentleman on securing this debate on an important subject. Does he share my concern that because most of the means tests in the welfare system do not consider debt repayments, private indebtedness hits very hard at times when people need additional help?

--- Later in debate ---

[Mr Hurd]

The hon. Gentleman has made a valid point well. The concerning picture I have outlined should not be interpreted as a criticism of the current Government. Much of the vulnerability I have discussed is clearly the consequence of a brutal recession, and the commission’s report recognises the clear evidence of economic recovery and the boost that many people will get from vigorous job creation, the improving quality of jobs, increasing wages and falling prices. Although this Government disbanded the financial inclusion taskforce in 2011, they can point—I am sure the Minister will—to plenty of activity on tackling specific barriers to financial inclusion. The report recognises, for example, the £38 million credit union expansion project, the inclusion of financial education in the national curriculum in England for secondary school students, the regulation of high-cost, short-term credit, auto-enrolment for workplace pensions and, last but not least, the Treasury’s welcome agreement with high street banks to provide fee-free basic bank accounts—the Minister has earned a great deal of praise for her work in knocking heads together to achieve that important step.

It is not just the coalition Government who have been busy. The devolved Administrations have arguably been leading the way in developing financial inclusion strategies and promoting financial inclusion, and several major local authorities have adopted their own financial inclusion strategies. Nor should brownie points go only to the public sector; the private sector has invested in and developed new products such as credit building credit cards, and prepaid cards. The not-for-profit sector has also been busy, not least the Archbishop of Canterbury’s task group on credit unions, which has challenged high-cost lenders and is piloting savings club programmes in Church primary schools, in partnership with credit unions.

That is all good, but it may not be sufficient. Indeed, the commission’s central message is a warning against complacency or any feeling that we have “done” financial inclusion, not just because the existing numbers tell us something different but because of fresh challenges that are emerging. Those challenges offer both opportunity and risk, and need to be managed properly if we are not to make the problem of exclusion even worse.

The first challenge is universal credit. There appears to be cross-party support at least for the principles of universal credit, so there will be change whoever wins the election. The big change will be in the way in which people receive their benefits, with six benefits combined into a single lump-sum payment that will be paid monthly in arrears. I believe that that change will benefit many people, as it will make payments more like income from work and so ease the transition into the labour market. However, it will profoundly change the way some people on low incomes have to manage their money.

A lot of concern was expressed to us about the need for effective support. I believe that the Government recognise that, and the report acknowledges that support will include alternative payment arrangements for those who need them, budgeting loans to help bridge the gap to the first payment, and universal support delivered locally—USDL, to use the jargon—which is the support system, led by local authorities and jobcentres working with local partners, to help people improve their digital skills and financial capability. The effectiveness of that support needs to be monitored very closely. We argue that minds in Government should be open to promoting inclusive alternatives to the Post Office card account that meet the new basic bank account industry standards agreed by Her Majesty’s Treasury, including electronic payment facilities.

The second challenge the commission highlights is linked to technology. Technology is changing the way we live and work, yet as Tristan Wilkinson of Go ON UK argued to us,

“We are only just starting to see what the potential of technology and its disruptive influence in society could become.”

Given the number of adults who have a mobile phone and access to broadband, it is clear that digital innovation has the capacity to drive some groundbreaking and disruptive product development. It can transform our ability to access valuable information on how to get the best deal, as well as our ability to keep control of our finances. That is exciting, not least as it creates space for entrepreneurs to come in and tackle market failure with new platforms that do not carry the overheads that the old players are lumbered with.

I know from my work as a Minister in the Cabinet Office, however, that we must never lose sight of the fact that some 16% of the population—over 8.5 million adults—are non-users of the internet, and that the digitally excluded are more likely to come from groups at risk of financial exclusion. I know that the Government have an ambitious digital inclusion strategy and I was proud to play a part in driving it forward. However, we must not lose sight of the fact that other services must remain available for those who cannot or choose not to manage their money in the way that new technology permits.

The other major challenge that I wish to highlight is the impact of higher interest rates. Interest rates have remained at 0.5% for the past six years, which is testimony to the credibility of the Government’s long-term economic plan. It has been good for the economy, if not for fixed-interest savers, but it is not sustainable, and at some point interest rates are likely to rise. The evidence we took was clear in expressing concern about the potential adverse effects of that rise on many households struggling to pay off their debts. According to the Resolution Foundation, around 600,000 households spend more than half their income on debt repayments; other research indicates that 60% of borrowers say they would cut down on spending if interest rates rose by two percentage points.

There is therefore no shortage of challenges, and there are no grounds for complacency if we are to secure the broader financial health that we want this country to achieve. What should be done? The report has 22 recommendations to provoke thought and debate, which the Minister will be delighted to hear I will not go through in detail. However, I will highlight some important strands of our argument, and I would be grateful for a response to them.

The first strand is about the need for clearer leadership and co-ordination. A clear feeling out there came through in the evidence that some momentum and energy has been lost. The Minister may well sigh at the recommendation that she or her successor should take the title of Minister for financial health and take a lead across Government on that, but there is an opportunity to pull together something that does not exist, but could exist given the good will out there: a national strategy, and more effective and visible co-ordination of the activity going on across sectors. There is some merit in the idea of an independent body to help Government accumulate evidence on what is going on, as well as providing accountability along the lines of the social mobility commission.

There is an urgent—in fact, it is imperative—need to stimulate more innovation. The way I see it, we cannot expect too much of the mainstream financial services players. They are not trusted and, frankly, they lack incentives to target the kind of customers we are talking about. However, with FinTech, this country leads the world in financial innovation, so we should be creating the space to encourage innovation and look at how technology and other means of disruptive innovation can come in to help tackle market failure.

We were impressed by the entrepreneurial instincts and drive of organisations such as Change Account and Ffrees, which are helping to tackle market failure, but they need support. One recommendation was not for Government, but for the industry to consider setting up a centre for financial services innovation—the United States has had one for 20 years—with a network of industry-led innovation and learning, trying to move the needle to stimulate the development of products and services that work for people on all incomes.

The second strand is on the need for a more concerted effort to identify, understand and tackle market failures. There are too many people for whom existing products and services do not work. They are disadvantaged and turned off from doing the right thing, which would make their lives easier. On personal current accounts, we were struck by the financial inclusion taskforce’s evidence that perhaps six out of 10 of the millions of people who do not have accounts had one previously, but were turned off by bad experiences with their banks.

There is an issue with identity requirements. Dr Paul Jones from Liverpool John Moores university told us,

“I have been to many groups around here and they will say that, ‘We cannot save and we cannot get a bank account’. They tell me things like, ‘You need a letter from God to get a bank account round here.’”

It is too hard. Payment mechanisms are critical to helping people to manage their finances, but new entrants and alternative providers tell a consistent story of the difficulty in being able to offer mainstream direct debits and fast payments. Direct debits themselves are problematic for many people on low or volatile incomes. All the evidence suggests that we need to encourage payment mechanisms that have more flexibility and better meet people’s needs.

There is a low income credit gap. The Government have borne down on extortionate lending rates through regulation, but the demand is still there. We were clear about the need to do more to support the scaling up and sustainability of the alternative community finance and credit union movements. A lot has been done, but that issue has not been sorted out. That matters, as does taking the opportunity to make wider data disclosures to help us to understand credit risk better in such income brackets, and to identify financial inclusion black spots.

Last but not least is the need for saving products and incentives that work for people on low incomes. We were struck by the evidence from one of the money mentor graduates at Toynbee hall, who said:

“I went to the bank to ask about saving. They told me that I could save £5,000 in an ISA. I was thinking of saving £1 or £2 a week, so I immediately thought that this wasn’t for people like me.”

Case after case bears witness to the statement that, for too many people, existing products and services do not work. We need to bear down on that market failure.

The third strand underpinning our recommendations is about a need for a longer-term commitment to building numeracy, financial skills and capability. There is a specific recommendation that the existing commitment to secondary schools should be brought forward into primary schools. Over the years, the Minister has been a passionate advocate of early intervention, and she understands the importance of shaping habits and skills at an early age.

Financial education needs to start earlier. There must be a robust, outcomes-based evaluation of how to improve financial capability, and a role for a reformed Money Advice Service to co-ordinate that. The evidence was compelling. Catherine McGrath of Barclays said:

“In New Zealand”—

where she comes from—

“financial inclusion is not a debate that is in the sector really at all. The only thing that I can point to...is that financial education is at the heart of the education curriculum and has been for quite a considerable period of time.”

In conclusion, we take great pride in having one of the most sophisticated financial services systems in the world, but it does not work for everyone. The consequence is that too many people’s lives are harder than they need to be. We have a major challenge in building the financial resilience of the millions of households who are living on the edge.

A recovering economy is clearly a necessary condition. Arguably, a reassertion of the value of thrift and saving is the long-term cultural requirement we need to see, but in the short term, the next Government can do a great deal to harness the energy and creativity of many organisations across the public, private and voluntary sectors to reduce financial exclusion and give more people the opportunity to create a future of greater possibility, both for themselves and for their families. I hope that that idea has cross-party support.