Opinion: Lord McNicol on the importance of financial inclusion

Lord McNicol of West Kilbride writes exclusively for NewStart on the importance of financial inclusion amid the cost of living crisis.

It may be rare for a Labour politician to agree with a Conservative Minister’s words. But I agreed with John Glen, Economic Secretary to the Treasury, when he described the importance of financial inclusion and access to affordable credit at last week’s Financial Inclusion Commission Summit. Glen’s words are little without action though, and he must heed calls for the independent regulator, the Financial Conduct Authority (FCA), to boost financial inclusion now. 

The UK poverty rate has soared. 14 million people and almost one in three children live in poverty. The cost of living is surging and for many households will mean stark choices: eating or heating. Part-time, insecure and gig-economy work, with many people securing insufficient hours to make ends meet, mean in-work poverty is rising too. 

Most people are already aware that those on pre-payment tariffs for gas and electricity – typically lower income households – pay more than those on direct debit, and that poorer households often pay more for insurance too. What’s less often understood is how the poverty premium extends to credit. 

By 2020, nine million people were borrowing just to pay for essentials because they had run out of money. While nobody believes credit is the answer to low wages, slashed benefits and rising costs of living, credit is a day-to-day reality for many. Those with least typically pay the most, often while being castigated for making “poor” choices when in reality they have little choice. 

Mary is a good example. A single parent, she earns around £15,000 working part-time for a charity in Scotland. Like millions, she has little in the way of savings. When Mary’s car needed a £600 repair she had to get it fixed or couldn’t work, but her credit score and part-time employment meant the bank refused an overdraft and the credit cards which many higher-paid households take for granted were impossible for her. So what was she to do? Turn to a predatory loan shark or high-interest lender? 

Sadly there are millions of Marys in the UK. They aren’t foolish, or bad with money, but sometimes emergencies happen and can only be covered with a small, short-term loan. So if and when they do need credit they ought to be able to trust that a lender will deliver on its obligations only to advance loans which people can afford to pay back, or face consequences. Every “Mary” should have access to affordable credit and fair choices. But they don’t. More than 30% of the working population are over-indebted and many are struggling to repay loans which were unaffordable at the point they were advanced by FCA-licensed firms. 

Evidence now published by the cross-party All Party Parliamentary Group (APPG) on Personal Banking and Fairer Financial Services, led me to seek clarity from the FCA and Treasury about how the FCA polices its own rulebook for regulated lenders. I was astounded to find it does not – that the FCA’s “general supervisory approach” is to make no independent periodic checks that FCA-licensed firms are following the rules. So, when someone like Mary applies to a lender on the basis of its published APR, can she really be confident that it is accurate, or that the lender is providing a loan that is affordable? 

If John Glen is serious about financial inclusion then Treasury and Parliament will insist that authorised credit providers are subject to independent periodic checks by the FCA of their regulations, and the FCA must revise its “general regulatory approach” so that firms only advance loans which are truly affordable to repay and are no longer left to be the final arbiter as to the fair treatment of customers. 

Positive steps are being taken. Fair4All Finance is working with community development finance institutions (CDFIs) and some credit unions to grow access to affordable credit. I was happy to hear that a CDFI was able to help Mary, and advanced a small loan to her which she could afford to repay, at a lower rate than a high-cost lender would have charged. But campaigners and journalists have pointed to immediate demand. Unless the ethical players in the market can scale-up, hundreds of thousands of people may turn to unaffordable, exploitative lenders which have a competitive advantage: they can out-spend ethical lenders’ marketing with the profits they make from making people’s lives worse. Or even turn to loan sharks. 

I have an interest in this through my role as Chair of the Public Responsibility Oversight Body (PROB) for Salad Money, a social enterprise which offers affordable loans to NHS and public sector workers. And I was staggered by the findings of last year’s independent, University of Edinburgh analysis of the financial lives of 10,000 NHS workers using anonymised Open Banking data collected by Salad Money. More than 9 out of 10 were using credit and loan products, with a significant number extremely high cost, charging people up to 1333% APR. With banks and credit card providers unwilling or unable to lend to many workers in the public sector, their daily existence is a hand-to-mouth struggle, burdened with high-cost and unaffordable debt. 

Financial exclusion destroys opportunity, health and wellbeing. It traps people in cycles of repaying extraordinarily high fees and interest when they need credit, money which would be better in their pockets, paying for household essentials or going into savings. The solutions are staring us in the face. 

Treasury must insist the FCA supervise its own regulations. It should use the coming dormant assets windfall to stimulate growth of the ethical lending sector. It must create a level playing field for ethical lenders by burdening unaffordable lenders with regulatory fines for breaking the rules. Everyone has the right to expect the Government protect consumers from the harms that arise from bad practice from FCA licensed lenders. 

Photo supplied by the UK Parliament on behalf of Lord McNicol

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