Cicero Policy Briefer

Issue 7, December 2006

Banking the Unbanked:
the Treasury Select Committee and financial inclusion

By Laura Chisholm

The Treasury Select Committee’s financial inclusion inquiry finally ended in November with the publication of three reports and few organisations involved came away unscathed.

Retail banks are criticised for treating basic banking customers as second class citizens. The DWP is criticised for failing to plan for the end of the Post Office Card Account in 2010. The FSA’s strategy for financial capability is attacked for failing to reach the financially excluded.

It’s fairly damning stuff; consequently, there is plenty in the reports to keep the industry and Government busy, and clearly much to do if the Committee and consumer groups are to continue to advocate a voluntary approach.

Despite recent progress, financial inclusion work still tends to be characterised by uncoordinated short-term projects. The contribution of industry players varies enormously. These shortcomings are reflected in the committee’s two overarching recommendations: first, that the Government publish a long-term financial inclusion strategy alongside the Comprehensive Spending Review; and second, for the development of a framework to measure the contribution to financial inclusion from individual banks, the FSA and the Government.

Financial advice for all

The Committee would like to see the creation of a generic financial advice network to provide for those on low incomes. The Treasury are given the task of looking into funding for such a service and they will be looking to the financial services industry to provide.

There’s good news for third sector lenders: the Committee suggests a Social Investment Bank and want to see support to CDFIs and credit unions by individual banks measured and reported. Interestingly, the funding for this will be looked at during a future inquiry into unclaimed assets.

Banking the unbanked

To its frustration, the Committee was unable to accurately measure banks’ individual contributions to the target of halving the number of ‘unbanked’. In order to rectify this, by mid-2007 it would like to see ‘measures of engagement’ published so that each organisations’ work with the socially excluded is transparent.

One of the main challenges for banks is to ensure that corporate policies on financial inclusion filter down to the branch level. This is not just a numbers game. In the eyes of MPs and consumer groups, the provision of a basic bank account is just the beginning. Banks must also ensure that these customers manage their accounts effectively, and ideally progress to more sophisticated financial products.

The suspicion is that not only do the poor pay more when it comes to credit products, but that their limited financial capability means that they are frequently hit by fees and charges. Unsurprisingly, the OFT is reminded to look specifically at the charges on basic bank accounts as part of their investigation into default fees.

The Committee was surprised that the DWP has not consulted banks on the fate of the 1.2 million customers who will be left without a Post Office Card Account at the end of 2010, and has urged the Department to rectify this situation before the end of the year. Whether the banks will thank the Committee for this remains to be seen.

The roles of the Government and the FSA

Successfully tackling financial inclusion and improving financial capability will take a generation, and the Committee has rightly homed in on the lack of long-term funding. Without it, the debt advisers paid for out of the Government’s £45 million will be made redundant in 2008.

The Committee also recommends that the remit of the Financial Inclusion Taskforce be extended to cover insurance and savings. This is in recognition of the fact that those on low incomes need access to products beyond basic bank accounts; a potential obstacle may be looming, though, in that the £120 million financial inclusion fund is already stretched.

The Committee has produced a comprehensive and expensive blueprint for proceeding with the financial inclusion agenda. It is keen for contributions to the agenda from both the industry and Government to be clearly measured so accountability is improved. Though it may come as a surprise that it falls short of recommending legislation to tackle financial exclusion in the form of, for example, a universal service obligation, the Committee is very much aware that it will be judged on how many of its recommendations will be implemented: this will certainly not be its last word on the subject.

Laura Chisholm can be contacted on +44 (0)20 7665 9536 or click here to email.

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