Sunday, 26 March 2017

The Financial Exclusion Committee: A Necessary Endeavour in a New World

This post is concerned with the recent publication from the ‘Financial Exclusion Committee’, a committee that was set up by the House of Lords to ‘consider financial exclusion and access to mainstream services’. The report has created headlines that allude to the poorest in Britain being excluding from banking services, and ultimately being turned towards ‘high-cost credit’ and ‘rent-to-own’ products, However, there are a number of aspects, some of which are particularly vital for society, which emanate from this report and are worth considering. Ultimately, the report suggests a number of reforms and, although advisory in nature, strikes the right tone in terms of what is required to protect the vulnerable in society as we rocket towards a new phase.

The report tackles a number of issues in terms of what is being labelled ‘financial exclusion’. The first aspects that we will look at revolve around the role of the banks within society. The first recommendation that may have a major effect upon how financial institutions operate is the recommendation that the Financial Conduct Authority (FCA) should create rules which clearly set out the duty of care that financial organisations should exercise towards their customers. The committee discussed how, currently, the Financial Services and Markets Act 2000 which, as the date suggests, was established in the era that brought about one of the largest financial crashes on record, established the principle that the FCA must have regard to ‘the general principle that consumers should take responsibility for their decisions’. However, the Financial Services Consumer Panel rightly noted that consumers can only be expected to take responsibility if their actions were based on sound and impartial advice which was based upon the very essence of exercising a distinct duty of care – the panel concluded that forcing this issue should lead to a change in culture that would see these institutions ‘take their customers’ best interests into account at every stage of their engagement’. This is the correct sentiment to have, but there is a qualifying understanding that needs to be advanced before we get carried away with such endeavours, and this will be advanced at the end of this post.

The next element of the Committee’s recommendations that concern the banks’ behaviour is the issue of promoting the right financial products to the right people. The Committee recommends that banks should be compelled to promote their ‘basic’ bank accounts – i.e. accounts that allow for a direct debit card and access to cash machines, that allow for direct debits and standing orders, but crucially do not allow for the provision of credit in the form of an overdraft – because not doing so directly leads to an increase in exclusion from the marketplace for those who lack an understanding of the banking system, and for those who have little need for more sophisticated products. It was discussed in the Press how the Committee found that even branch employees were sometimes unfamiliar with their own bank’s basic account offerings, with the Guardian suggesting that the main reason for this is that banks make no money from providing these accounts – because they cannot recoup funds via overdraft charges – and in some cases are making a loss on their provision. However, it must be noted that since a government-led initiative to increase access to ‘fee-free’ bank accounts in 2014, there has been an increase in their provision, which is a good start and one that is should be expected. It is to be expected because it was very much ‘expected’ that the British taxpayer would be there to provide security for the incredible losses suffered by these very same institutions. However, there is still work to be done, with an estimated 1.7 million people in the U.K. not having a bank account, which in turn leads them towards ‘payday loan’ companies – the committee found, most harrowingly, that 77% of those who used these firms in 2013 did so to pay for food.

The social effect of this exclusion makes for appalling reading for an advanced society, and the recent development of the incredibly misguided notion of the need to develop a ‘shared society’ – which is based upon the notion of moving away from the ‘social justice agenda of prioritising helping the poorest people in Britain, and to instead focus on those who live just above the welfare threshold’, presumably because they may vote, should not inspire confidence. It was found that more than a million people (40% of the working age population) in Britain have less than £100 in savings, that 2.6 million are struggling with severe problem debt, that 8.8 million are showing signs of financial difficulty, and that usage of rent-to-own as a means of purchasing has more than doubled in the last five years to 400,000 households in Britain. There was also detailed research included in the report concerning the specifics of those affected by financial exclusion, like the fact that one-third of those aged over 80 avoid using cash machines, which is an increasing problem as it corresponds to the increased rate of branch closures in the U.K. There was also an insightful and carefully considered investigation into the links between financial exclusion and mental health, with the report finding that there is a two-way relationship between the use of financial services and mental health – either by way of having a negative impact upon one’s mental health because they are financial excluded, or by way of a person’s mental health affecting detrimentally affecting their usage of financial services – neither of which are adequately considered by those offering financial services. Martin Lewis OBE discussed the idea of enforcing the option of providing ‘control options’ for those that may need assistance in managing their affairs, and this was rightly recommended by the Committee. The report also looked at the issue of disability, and found that, rather incredibly in 2017, banks were still not making reasonable adjustments for their customers, with stories of customers who are registered as blind being sent documents that were not in braille form, and contacting those who suffer from hearing loss via telephone; the Committee rightly concluded that banks need to do much more in this area.

However, before we look at the qualifying conditions that must be applied to understanding the effect of the Committee’s findings, it is worth looking at one very important, and often overlooked issue – financial education. The Committee discussed the issue of secondary schools not being monitored on their provision of Financial Education classes, despite it being mandated in England (only) since 2014. Whilst the devolved nations have incorporated the teaching of Financial Education into their curriculum, often via Mathematics, England still lags well behind in the enforcement of this push. Also, the Committee makes it clear that it wants to see Financial Education taught earlier in the development of children, with the teaching of financial education in Primary schools aiming to give children ‘life-long skills’ that would be accentuated as they developed. This was discussed further, with the Committee maintaining that it was important to have this type of education represented at all levels, including further and higher education. The Committee ultimately suggested that OFSTED should make monitoring the provision of this element of education specific, rather than classing it in general terms i.e. under the banner of ‘skills’. They then suggested that providers of education should incorporate the teaching of financial education into their programmes of study, as the 16-24 age group is particularly susceptible to making financial mistakes in a period of their life where an vast array of financial products are offered to them.

This cohesive and universal approach to resetting the attitude towards financial exclusion is precisely what is required. There is nothing to be said in opposition to the recommendations made by the Committee – it is simply appalling that people turn to unscrupulous lenders because of a lack of education in a supposedly advanced society. For these recommendations the Committee should be praised, and it is genuinely hoped that the movement they hope to inspire begins in earnest. However, as with any discussion of the financial sector, it is important to take a pragmatic approach to understanding the capability and potential for initiating such changes. There have been a number of posts in Financial Regulation Matters which show that banks and other large financial institutions are continuing to transgress, despite being indicted in one of the largest financial crashes on record. So, why would we believe that these same institutions would proactively, which is what the Committee calls for, engage with the need to exercise a duty of care to their customers – these are customers that are extremely unlikely to garner any profit for the banks. It is therefore important to recognise two interrelated aspects. Firstly, what we desire from these institutions and what they actually are is a completely different thing. We require them to be conscious, proactive, restrained, and forthcoming in their citizenship i.e. offering fee-free services to those who need it; yet, in reality they are organisations that only serve to create profits for their owners and to do so irrespective of the consequences, whether that be through dismantling the pensions of thousands of their employees – Philip Green and British Home Stores - or by way of the banks and their conscious mis-selling of insurance to the tune of billions upon billions of pounds; this is the reality of the situation. The solution to these problems is to use the power of the state to compel such actors, or initiate real punishment for not doing so, but there is another element currently developing which directly affects this potential solution. The post-2016 world is rapidly altering the power balances between the state and private entities. It is arguably unthinkable for the British Government to compel large financial institutions to act in the best interests of its citizens at a time when it is doing everything possible to stop those organisations leaving its jurisdiction, and it is this understanding that needs to be attached to the positive work undertaken by the Committee, regrettably. These organisations, or even schools that are themselves under intense pressure, will only initiate such forward-thinking and humanist programmes if they are compelled, because the negative effects of doing so in a world which is being defined by the acute pressures and the need to succeed at all costs can cause irrevocable damage to their position; unfortunately, the leaders of our society have deemed it more important to court the favour of these entities rather than compel them to do anything – any forward-thinking change can only be realised when that sentiment is reversed.

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