SUMMARY - Promoting Financial Inclusion

By HM Treasury (December, 2004)

www.hm-treasury.gov.uk/media/8F9/37/pbr04_profininc_complete_394.pdf

Abstract

The HM Treasury details two strategies the UK government uses to tackle financial exclusion: the "Financial Inclusion Fund" and the "Financial Inclusion Taskforce". The Fund is devoted to funding the strategies to eradicate financial exclusion in the UK, while the Taskforce will concentrate on monitoring and evaluating the Fund. These two government strategies were developed to address:

• The fact that there is a significant minority (estimated 8% of British households) without access to the most basic banking services, even in the sophisticated UK financial market.
  
  
• The aim to increase availability of affordable credit and provide access to financial advice to the unbanked (defined as those without an account of any kind) to build the financial capability fo the most vulnerable.
  
  
• The lack of access to bank accounts which limits the availability of credit options to alternative sources, which are expensive for the most vulnerable.
  
  
• The fact that the credit practices of alternative sources of credit, tend to engage the unbanked in over-indebtedness cycles that reinforce their vulnerability.

Summary

The UK's government acknowledges that there is a significant number of people living under financial exclusion (65% have an average annual income of 14,500 GBP, 50% are single, 20% are single parents, 30% are retired, most receive government benefits and live on concentrated areas), is aware of the costs of this condition and has developed a strategy based on two objectives.

Costs include individual and social costs. Individual costs of financial exclusion include: high charges for basic financial transactions and credit, lack of access to certain products or services, lack of security in holding and storing money, barriers to employment and entrenching exclusion.

Among the social costs are considered: child poverty, higher costs to the benefit system and financial exclusion is considered a link to social exclusion (i.e. financial institutions refuse to provide a product or service in certain areas).

The two objectives of the government's strategies are:

1. Increase access to credit.
   The unbanked are often forced to use alternative credit markets (doorstep lenders, pawnbrokers, buyback shops, etc.), and end up paying much more for credit (between 110% and 309% APR), perpetuating cycles of borrowing and over-indebtedness.
   
   In order to tackle this problem the government aims to:
   1. Increase the availability of low-cost credit. The government will introduce a reform to social funds, explore new models of low-cost credit and provide support to not-for-profit lenders. Also, it is still reviewing interest rates ceilings, although it recognizes that these are not recommended.
      
      
   2. Regulate in order to make lending practices more transparent and to address specific practices in consumer credit. Changes to the regulatory framework include increasing customer access to redress mechanisms when lenders do not meet the standards, which should increase customer's capacity to make informed decisions. Also, there will be no more tolerance for illegal money lenders.
      
      
2. Access to Money Advice
   Building financial capability means education, information and advice to make financial decisions with confidence, as well as having access to opportunities to take greater control of financial decisions.
   
   More availability of free money advice can contribute to the reduction of costs related to over-indebtedness.
   
   According to recent studies, face-to-face money advice is estimated to be the most efficient way to reach the target group, who are probably not aware of or take advantage of the availability of phone/internet services.