This week I went to the formal launch of the CSFI report on “Reaching the poor:  the intractable nature of financial exclusion in the UK”.  This highlights shocking figures on financial exclusion:

• more than a million adults in the UK still do not have a bank account:
• about 2.5 million people use expensive and largely unregulated home credit
  (doorstep loans);
• at its peak in 2012, an estimated two million people took out short-term, small value
  payday loans; and
• more than 400,000 households use the extremely expensive “rent-to-own” sector
  to purchase essential household goods.

And yet, the financial sector makes billions out of providing financial products which are either beyond the reach of the poor or hugely more expensive than for the rich.  Progress is painfully slow.  How can this be speeded up?

Learning from the past

If we look at the history of savings and lending institutions, the role of the mutual, not for profit, local community organisation stands out.  Yet the building society has almost completely disappeared, credit unions need less crippling regulation aswell as restructuring, and friendly societies are a tiny portion of the market. Many of these institutions, such as the Trustee Savings Bank and most building societies, were swallowed up in the boom years after deregulation. They need help to grow again.

Understanding modern day needs

The banking system is based on the premise that we get a job, earn a regular wage, start saving, borrow to buy a house, climb the promotion ladder, and then live out our retirement on a generous pension. It ignores the fact that most young people, by their early twenties, are heavily in debt.  There is no longer a natural career progression – income can go down as well as up.  And with zero hours contracts, it is almost impossible not to go overdrawn or max the credit card and incur huge penalties. A broken-down boiler can take you over the edge.  What’s needed is a rainy day bank account which allows occasional overdrafts at fair, and not penal, rates.

Recognising the importance of regulation

Pay day loans are less of a problem now their rates have been capped.  Banks have been forced, by the EU, to provide a free-of-charge bank account. Regulation works. It needs to go further, helping not-for-profit institutions and regulating those profit-making institutions which exploit the disadvantaged.

 Turning the problem upside down

At the moment the poor pay more than the rich for less attractive products.  Why should they? There are many ways to save which offer tax advantages, such as pensions.  What if you don’t pay tax?  Why should the rich get better savings deals than the poor?  It is far cheaper to buy insurance if you can pay in a lump sum.  What if you can only pay in instalments?  Why should the poor subsidise the rich? That’s also happening with the state pension age going up.  Life expectancy is linked to income.  Why should the poor subsidise the rich?  We’re a far cry from the 1970s and 80s when the rich paid income tax rates of up to 83% and a further 15% if the income was from savings or investment.  Now, it’s the other way round.

Government should take the lead. It should ensure the provision of savings products which offer cash bonuses instead of tax relief to those who don’t pay tax.  It should help those on low incomes to buy goods on fair terms.  And it should encourage mutual and low-cost savings and credit institutions.  The banks should be shamed into providing accessible and affordable financial products, not just for the rich but also for the poor.  People have a right to financial inclusion.  It’s time they were enfranchised.