Financial Inclusion Commission: Call for Evidence

Financial Inclusion Commission: Call for Evidence Toynbee Hall is delighted to be invited to submit a response to the Financial Inclusion Commission s call for evidence on how to make the UK more financially inclusive. Toynbee Hall works on the frontline in the struggle against poverty. Based in Tower Hamlets, we give some of the UK s most deprived communities a voice, working with them to tackle social injustice and providing access to free advice and support to those who most need it. In Tower Hamlets, 48% of children and 50% of pensioners live under the official poverty line - the highest ranking London borough on both counts and there are 9,300 households living in severely overcrowded accommodation. Toynbee Hall is in a unique place to help. Every year we help 12,000 people in desperate need and who have nowhere else to go. Toynbee Hall is recognised as a thought and practice leader in the field of financial inclusion and money advice, taking a needs-led approach to designing and delivering services which enable service users to take control of their finances and manage their money effectively. General Q1: What policy change would most support increased financial inclusion for the client group you represent? Policy reform of default charges on bank accounts could make a big difference to many of the people we see at Toynbee Hall. We have found that the reason some of our clients opt out of banking is because they get penalised, but they often aren t penalised because of bad money management but rather because of irregular income. There is currently no structure to the level of fees and charges and no standardisation in the way these fees and charges are communicated. For those who are on low-income, bank fees are highly disproportionate to people s incomes, leading to a situation where they are paying a poverty premium on their bank account. An underlying issue remains, regarding the way in which free-in-credit banking has led banks to make fees and charges less visible to consumers. While consumers believe that their banking is free, fees and charges are often hidden, making it difficult for customers to be able to evaluate the real costs of banking and evaluate the a product s value for money. Sustainability of free-in-credit banking hinges on fees collected from unauthorised overdrafts and other transaction fees, which hit low-income customers the hardest. Essentially, free-in-credit banking is subsidised by customers who are the least well of or the least informed. The true cost of free-in-credit banking is a financial services environment which is unfair and exclusive for a segment of its customers. The Financial Inclusion Commission should also be concerned with the role of payment methods in tackling exclusion. People can be financially excluded because of lack of access to payment methods for example they can t get a basic or current account, can t get cheque books or debit cards, or access to free cash at ATMS. A financially inclusive society would be one in which however you choose to pay for goods and services, it would cost you the same. It is usually the 1

industry that chooses to put extra charges on certain payment methods, such as additional charges on gas and electric prepayment meters, but many consumers don t have any choice over which payment methods they use. For example, by 2020 it is estimated that 10 million people will be living in private rented accommodation. Many landlords use gas and electric meters in their properties to reduce the risk of running up utility bills in abandoned properties. This means that the premium paid on certain payment systems i.e. gas and electric meters, will not just affect people on low-incomes but will also affect people living in privately rented housing. Better payment methods will impact the whole population, not just the excluded. Finally, we feel that financial exclusion is often the result of discrimination against people because they are poor and therefore to tackle this financial inclusion should be part of the government s equality policy. In the same way that the Equality Impact Assessment is a tool that helps public authorities make sure their policies and the ways they carry out their functions won t discriminate against people who are categorised as being disadvantaged or vulnerable, we believe there is scope for a poverty impact assessment which aims to prevent discrimination against people on low-incomes. Q2: What do you see as the role of the regulator, government, and financial services in promoting inclusion? The government and the financial services regulator can promote inclusion by setting a standard for a universal banking right and monitor firms to ensure they maintain this standard. The government and regulator should encourage and invest in the creation of a wider range of banking products that suit a wider range of people. They should also conduct real research into the reasons why people self exclude from financial services and whether or not products are actually reaching people in the way they are intended to. This research would also look into the levels of awareness of products among the excluded and on the practicality of products reaching people. There is no reason why mainstream products can t be open to everyone regardless of income and there is no reason why financial services can t offer a wider range of products to more people. However, because the priority of banks is to generate profit, they are unlikely to create the types of products that are useful for low-income people without being mandated to do so. The regulator should also look at ways in which data about basic bank accounts can be shared in a meaningful way. Banks are often cagey on numbers of basic bank accounts they hold, what they are used for and how they are used. Such information would help the sector to have a better understanding of the practicalities and limitations of basic bank accounts in order to improve these products. Financial services can promote financial inclusion by setting a standard of knowledge and understanding of exclusion and the poverty premium among their staff, and that banks have a strategy for dealing with and supporting vulnerable customers that is aligned with this knowledge. Digitisation, squeezed budgets and welfare reform Q4: What impact, positive or negative, does the increasingly digital delivery of financial services (e.g. prepaid cards, online banking) have on financial inclusion? Digitisation is a doubled edged sword there are definitely benefits to it, but people are excluded from it at the same time, usually because access to technology is unaffordable. Technology helps you compare products, manage your money and check finances easily and provides easy access. 2

Access to products and services increases if you re able to access them remotely, especially access to niche products. It also mitigates the effect of the poverty premium as better tariffs are offered to customers who can buy online. When things are accessible only online, financial inclusion becomes complicated. Digitisation assumes a certain level of knowledge and skill around using technology. Many people appear to be digitally included because they have access to phones and the internet, but their activities online do not mitigate the poverty premium or financial exclusion. Many people are not using the internet to pay bills or shop around, to apply for jobs or benefits, for example. In fact we don t really have much knowledge about what people are using technology for and this could be something that the Commission investigates further. Also, digitisation of services is not a choice that people make; it is something that is forced upon them, especially in the case of welfare reform. Universal Jobs Match for example, which is how those on job seeker s allowance apply for jobs, is a complex online system that is difficult for people with even average competency to use, but many people are being sanctioned for not complying to Job Centre rules because they do not know how to use the system. Where it is the government s choice to move services online, it should be as simple, easy and accessible as possible. With increased digitalisation we are seeing an increase in fraud and scams. The Commission should look into where industry standards can be set which ensure that banks are doing everything they can to safeguard customers. For example, the transition from off-line to on-line services has caused confusion for many customers about what official and authorised communication looks like, which creates an opportunity for scams to prey on vulnerable people. There is even more concern regarding appropriateness of digitalisation for people with disabilities. Not all websites are fully accessible and enabled for the range of disabilities so doesn t meet needs of disabled people. Q5: What opportunities are there to use technology to facilitate financial inclusion? Q6: How has the financial downturn changed the nature of financial exclusion? The Financial downturn has exacerbated the poverty premium, meaning that low-income households are even worse off than they were before. Cuts to legal aid and free advice means that people no longer have access to information and help or they are paying people to do this for them instead. Unscrupulous businesses tend to swoop in to fill the void, which puts vulnerable people at risk. Q7: What is the impact of welfare reform on financial inclusion and what support should be available to people as a result? One of the biggest impacts of welfare reform on financial inclusion is that more focus is now on the individual to look after themselves and take more responsibility. The Commission should look into those things that force people into destitution and into high cost credit. In particular, for many of our clients, changes to the benefit system and the sanctions process leaves them without any income for several months at a time. When someone s benefits are stopped, (for example housing benefit is stopped when someone is sanctioned by the Job Centre) clients are not being told what to do and who to contact to resolve the problem with their housing payment. People are going without housing benefit and falling into arrears as a result. Funds do exist to help these people but they are limited, hard to get and very rarely are people even aware of them. People are expected to manage their benefits on their own, 3

but don t know what to do when things go wrong and there is no one to help them. They only get help once they are at the stage of debt advice and by then it is too late. Transactional banking services Q8: What transactional services do households on low or unpredictable incomes, or who have experienced a life shock, need and want? Q9: What improvements are needed to make basic banking fit for purpose? Q10: Can technology help deliver better transactional banking services for people on low or unpredictable incomes? First and foremost it should be standard practice for banks to avoid financial harm to their customers. This should be banks primary duty over and above making profits. Changes need to be made to the way that Direct Debits work. We would like to see a limit on the charge for a bounced direct debit or the introduction of a grace period. Other considerations could include an automatic cancellation of a direct debit if it bounces a certain number of times. There also needs to be a commitment from government, the regulator and banks that people won t be harmed by using Direct Debits to make priority payments and not penalise people on their priority direct debits. JamJar (also known as budgeting) accounts are an example of a product that the sector thought was going to meet the needs of the financially excluded but there isn t much demand for them among the public. They are poorly advertised and promoted, and people are unaware of them and how they can access them, and in fact can be very expensive (between 5-15). This suggests that in order to make any new product or service fit for purpose they need to be backed up by resources to market and communicate these products in a way that is simple and easy for people to understand. Accessing special products from banks that can help you manage your money often come at a cost which low income consumers can t afford, such as JamJar accounts which was highlighted above. Banks should make such products available for all customers and ensure their affordability. There is concern that with more and more branch services being closed down or moved towards a more digital service, banks are removing services and people from those in the community who need it the most. Additionally, roll out of Universal Credit is forcing people into banking at a time when branches are closing down. There is real concern that there will be no one to help those who are new to banking or who would otherwise rely on the branch network for support. These customers won t know what to do as things change and there won t be any one to help them. The experiences of many of our debt clients suggest that banks are not doing enough to look after customers who are moving into banking. Clients have little understanding of the products and services they sign up to and are unaware of their responsibilities and the potential financial harm that can be caused. Much of this is due to the way in which many products and services are actively pushed on people without any effort to ensure customers appropriately understand the products. There needs to be a shift from thinking about accounts to thinking about features. Essentially, bank accounts are made of features (i.e. overdraft, buffer zone, online banking, direct debit, standing order, transfer services, mobile banking, etc.) it is these features, not the accounts themselves that are the products customers sign up to. Customers could then be encouraged and provided with appropriate guidance within the bank to help them consider the features that they need and want to help them manage their money. In this way customers can exert choice 4

over which features will work for them and banks would be able to offer more choice and flexibility. Credit unions do this well as they often have themed accounts based on the account s features, such as Christmas Account, prepaid account, etc. Affordable and fair credit Q11: Is there scope to bring people into mainstream credit who are currently excluded, while also ensuring that this does not risk financial difficulty? Q12: For people who are unlikely to qualify for mainstream credit, what might affordable alternatives be? Should banks, building societies and others play a role in provision? Credit unions are already providing affordable alternatives to mainstream credit, but the sector needs much more investment in order to promote themselves and raise awareness of the general public. The Commission should look into ways that the government and the financial services sector can support credit unions to expand and attract a broader customer base. New regulatory requirements mean that credit unions will be expected to hold higher cash reserves, but many of them don t have a broad enough customer base to meet those expectations. A broader customer base is necessary for the sustainability of the sector and for ensuring a viable alternative to mainstream credit persists. The Commission should also consider whether there are opportunities to provide affordable short term credit through channels that already exist and have established outreach activities with excluded people such as housing associations, the Church of England, and community micro finance initiatives. Q13. How does credit scoring contribute to financial exclusion, and are there viable alternatives to traditional credit scoring? Credit scoring is often a major barrier to people accessing affordable credit or appropriate banking products, especially if they have made arrangements to take on a debt management plan. If someone is on a Debt Management Plan this will have a negative impact on their credit score and might exclude them from access to essential services such as mobile phone contracts and utility bill payment through direct debit, leaving them with no choice but to take on more costly payment features such as prepayment meters or pay-as-you-go mobiles. The effect that a debt management plan can have on one s credit score can actually delay someone from seeking debt advice in the first place. Research from the Money Advice Service 1 found that 83% of people with debt wanted to pay their debts but delayed doing so because it damages their credit score and eligibility for credit later in the future. People in debt often want to take steps to pay back debts but because the environment penalizes them when they try to access credit and use certain payment systems, it becomes a difficult decision to make. Housing officers have told us that many of their tenants will often prioritise debts over rent because of their concern over their credit score, which ends up leaving them in arrears and at risk of losing their homes. What this tells us is that some people in debt are highly aware of the impact their credit score has on their ability to access products in the future and are therefore often weighing up decisions that are almost impossible to make. Therefore there needs to be recognition by government, regulators and the financial services sector of how debt and credit scoring can adversely affect someone and how difficult it can be to weigh-up the options. This problem can be tackled through a universal agreement that if someone 1 Money Advice Service. Indebted Lives: the complexities of life in debt. Nov 2013. www.moneyadviceservice.org.uk. 5

has a debt management plan, then they won t be penalised further when trying to access products and payment systems for priority payments. There could also be provision within the credit scoring process to allow people on debt management plans to access payment systems for the essential services and this could be an action for the regulator. The Commission could also look into the viability of considering credit scoring options that take into account other things that show responsibility and good money management, such as regular gas/electric bill payment, regular rent and council tax payment, for example. Assessing someone s behaviour and capabilities around bill payments would be a reasonable way to assess affordability because payment on these expenses would demonstrate responsible behaviour. At the moment it doesn t feel like decisions are made on this basis, but instead it s just a blanket judgement on people. Q14: What reforms could be considered to ensure consumers getting into financial difficulty are protected including those who become insolvent? Insurance Q15: What role should the state and the insurance sector play in providing a financial safety net in the event of an unexpected life event? e.g. bereavement, family breakdown, unemployment and illness Q16: Is the insurance market functioning appropriately and competitively? Q17: How can we ensure that people on low incomes, especially private tenants, have access to appropriate and attractive insurance products for their possessions and property? Q18: Will pension reforms enable inclusion, and what further improvements could be made? Low take up of insurance among the financial excluded is often down to clarity and costs of cover. With so many competing priorities for families on low-incomes and strict budgets, insurance (as well as savings) is perceived as a luxury they cannot afford. Many consumers are put off engaging with insurance products because of a lack of transparency. Insurance products are enveloped in complex language and terminology, are difficult to compare, and there is a perceived lack of transparency on what is actually covered. Insurance products need to be much clearer for consumers and also need to foster confidence in the consumer that they will be treated fairly. There is a real need for standardisation of the insurance market regarding what someone can and cannot claim for. The Commission could play a role in leading on the development of such a standard which would aim to create clear and simple messages on what consumers can and cannot claim for, and work with insurance firms to accept the standard as best practice and adopt it as a sector wide tool. This would help to make the insurance sector more transparent and fair, but it would also promote competition by making it easier to compare insurance providers. There could also be a role for the government to mandate a set of minimum standards should the insurance firms not comply with best practice. The Commission could also look into working with consumer groups to develop industry wide guidance on insurance which outlines the advantages and disadvantages of insurance and supports people to identify what is worth insuring. Savings products 6

Q19: Should policymakers enable and encourage people on low incomes to save, particularly in the economic downturn? Q20: To what extent can savings act as a preventative measure, helping people to avoid debt? Q21: What incentives to save work best for people on low incomes and how might the costs of these incentives be met? Q22: What practical steps could be taken to foster a savings culture in the UK? Take up and rate of pensions is low among our clients. No one is really planning for the long term future, but rather people are planning for their immediate needs and for security now i.e. a secure home. People are mostly thinking about the next step rather than thinking further ahead. People who can save should and this should be encouraged. People need their own safety net more and more and therefore the need for long terms savings is important now more than ever. However, encouraging savings among specific people may not be appropriate. If someone is in debt for example, it is doubtful that creditors would agree to savings being prioritised over paying off debt. If the case went to court and it was seen that there was income set aside for savings, it is very likely that the client would be ordered to pay this amount towards their debt and a Third Party Debt Order made if the monthly amount was high. Saving may only be of benefit to people in debt if all Interest and charges on debts are frozen, as it would be unreasonable to expect someone to save if the interest and charges on their debts continue to accrue. The Commission could look into ways increase savings rates through use of incentives. This could be matched savings schemes or non monetary incentives such as prizes bonds, or freebies. Reward based incentives could help to develop positive habits and engender a culture of saving. Savings products are promoted based on their interest rates and tax-free allowances but these benefits are so low that customers can t see the benefit. Recent research from the Social Market Foundation has also found that savings products that offer higher returns, such as fixed term savings account are perceived as medium or high risk by over a third of people. Most savers prioritise access to cash over returns which means that locking money away is seen as too risky for many consumers, even if returns are guaranteed. Promoting savings through the use of similar tactics as products that give freebies and rewards, similar to the mobile phone industry, should be considered as alternatives. Many consumer groups, such as students and young people, often choose other kinds of products in this way as the benefits gained are tangible and relevant to the customer. Another strategy for generating a savings culture, particularly among those who are non-savers, includes making savings goal focused and themed around the consumer s aspirations. Assigning a goal or a theme to a savings product (i.e. holiday fund, Christmas fund, etc) could make people aware of the benefits of saving in a salient and engaging way and persuade more people to save. Financial services providers should consider how they can advertise and promote savings products more widely, using messages and language which makes savings salient and the benefits tangible. Other There is a much wider issue regarding the way in which welfare policies have created an environment which is almost impossible for those who are vulnerable and excluded to navigate. The spirit of welfare reform means that we as a society are expecting everyone, including some of the most vulnerable people in society, to take more individual responsibility. If this is the case then the government is responsible for making sure that people have all the information and support 7

they need to help themselves and fix situations when things go wrong. There also needs to be an agreement and a commitment to a universal standard income. This would be a standard amount that is agreed that people need to live off of and that no one, including government agencies can take away because of debt, fees, or sanctions. For example, if a benefit claimant were to take out a crisis loan, the DWP will make the decision on how much to take from someone s benefits to pay it back, but the amount they decide on doesn t take into account the amount that people need to live off of which means the DWP s decisions often cause severe financial hardship and pushes people into destitution. We know that low income leads to exclusion and forces people to fill the gap with high cost credit. The DWP shouldn t be able to cause such destitution and contribute to exclusion. This situation, we feel, is one of the biggest challenges we face to tackling financial exclusion. The government is asking people to be fully responsible for themselves while at the same time are making people s lives more difficult. Agencies that have been tasked with providing people with the support they need are failing to do so, which results in individuals having to navigate the system on their own. The benefits system needs to be less complex and agencies need to be held to account for any unfairness that is brought upon individuals. Therefore, we ask that the Financial Inclusion Commission to not just look at how they can influence the financial services sector, but how can they help to make the whole environment in which people operate simpler and help individuals navigate the environment. Toynbee Hall 28 Commercial Street London E1 6LS Tel: +44 (0) 20 7247 6943 Email: info@financialhealthexchange.org.uk website: financialhealthexchange.org.uk Registered Charity No. 211850. A company limited by guarantee. Registered office as shown. Registered number. 20080 England Copyright Toynbee Hall. All rights reserved. 8