Transcript Financial markets, regulation, and products seminar

The Financial
Inclusion
Centre
Financial services that work
for society, not the few
DEVELOPING FINANCIAL RESILIENCE
`
Financial Inclusion Conference, Developing Financial Resilience in Preston, 6th October 2014
Mick McAteer, The Financial Inclusion Centre, www.inclusioncentre.org.uk,
CONTENTS
• FINANCIAL INCLUSION OBJECTIVES
• BARRIERS TO DEVELOPING FINANCIAL RESILIENCE WITH
VULNERABLE GROUPS
• WHAT CAN WE DO ABOUT IT – PRACTICAL IDEAS AND
POLICY
FINANCIAL INCLUSION OBJECTIVES
ABOUT THE FINANCIAL INCLUSION CENTRE
• Work focuses on the millions of consumers who are financially
excluded and poorly served by the financial services industry
• Main activities fall into number of main categories:
– undertaking research and analysis to understand the
extent to which, and why, consumers’ core financial needs
are not being met (root cause analysis)
– developing viable alternative products and services
– formulating new policy and campaigning to protect and
promote the interests of this very under-represented
group of consumers
– capacity building, strategic planning, partnership working
with organisations working in financial/ social inclusion
Defining core financial needs
• To promote financial and social inclusion need
–
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–
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a functioning, transactional bank account
fair, affordable credit to smooth income peaks and troughs
sufficient insurance to protect against risks and shocks
sufficient provision for decent retirement income
income/ assets to maintain standard of living/ participate
in society
– fair, affordable mortgages, or access to affordable housing
– financial provision for social/ long term care where needed
– access to objective money advice/ financial capability to
support out of trouble, build financial resilience
THE ROAD TO FINANCIAL RESILIENCE AND FINANCIAL SECURITY
Stage
CONSUMER ‘JOURNEY’ TO FINANCIAL RESILIENCE AND FINANCIAL SECURITY
Financial vulnerability/ insecurity
‘Square one’
Financial resilience
Financial security/ self-reliance
Definition
Consumers in a ‘negative’
position,vulnerable and exposed to
shocks/ detriment
Consumers back to a ‘neutral’
position-still vulnerable but with
platform to build on
Ability to withstand financial
shocks/meet short term needs
Sufficient means to meet
medium-long term needs
Main factors
Restricted access to transactional
bank account
Overindebted/ vulnerable to
subprime lending/trapped in
vicious cycle
No savings
Exposed to risk, no/little insurance
cover
No pension/ underpensioned
Housing problems, mortgage/rent
arrears
Low/unstable incomes, basic
poverty
Cash flow shocks
Poverty ‘premium’
Effective budgeting/’making ends
meet’ (if possible- as may be outside
control)
In the financial system(functional
bank account)
Paid off unmanageable/
unproductive debt
Still underinsured/ underpensioned
Income surplus , able to
withstand cash flow shocks
Effective use of banking system
Emergency savings (3 mths
income)
Access to fair, affordable credit
Basic insurance cover
Some form of ‘safety net’
Beginnings of pension
provision/but still
underprovision
Proper insurance cover, not just
for contents but income
replacement
Paying off/paid mortgage
Significant pension provision
Long term savings/ asset
accumulation
Debt/assets lifecycle model
positive territory
FINANCIALLY VULNERABLE/ UNDERSERVED GROUPS
•
•
•
Different consumer groups and entire communities at different stages of the
journey
Society consists of following broad groups (ex. super rich):
– Mass-affluent
– Safe-comfortable
Financially vulnerable groups include:
– Squeezed middle: uncertain futures, underprovided, lifecycle model of debt/
assets breaking down
– The ‘invisibles’ or ‘working poor’, asset poor, low income, insecure
employment (rise in zero-hour contracts/temporary/contract jobs), selfemployed, living standards debt maintained/ legacy of debt, welfaresupported, no/ low future income mobility
– Lowest income, chronically excluded
– Specific groups facing ‘compound detriment’ include: disabled people, renters,
single parents, younger and older people, significant concentrations of
detriment in certain disadvantaged communities
BARRIERS TO FINANCIAL RESILIENCE: WHY ARE FINANCIAL
SERVICES NOT WORKING FOR SO MANY?
WHY DO WE HAVE SUCH CHRONIC LEVELS OF FINANCIAL
EXCLUSION AND UNDERPROVISION?
• Due to environmental, demand side and supply side root causes
• Environmental: socio-economic factors, low incomes, changing labour
markets leading to overconsumption of debt/ underconsumption of
savings etc not much regulators can do about but can be aware of impacts
and respond
• Role of state/ government – withdrawing from people’s lives, leaving gap
that hasn’t been filled
• Demand side: consumer trust, confidence, behavioural barriers, low levels
of financial capability etc
• Supply side/ market failure:
– conflicts of interest, acquisition strategies, sales/ marketing practices, product design,
aggressive/ reckless/ irresponsible behaviours, technological/ risk pricing developments
– mainstream financial services not efficient enough/ not interested in millions of
households who are not commercially viable/ attractive enough to meet shareholder/
stakeholder expectations
– UK has poor track record when it comes to socially useful financial innovation in terms
of suitable products, service delivery, new institutions
THE NEW ECONOMIC AND FINANCIAL REALITY
•
New economic and financial reality forged by a range of socio-economic, commercial, and
regulatory events including:
– financial repression, fiscal adjustments and austerity measures
– a transition from a liberal to a more restrictive lending regime, regulatory pressures
(prudential and conduct)
– a period of low economic growth, low benchmark interest rates (but breathing space
will come to an end)
– core product margin pressures and legacy business models
– a legacy of high debt (public and private), not disappearing
– sustained pressures on household finances with low real terms income growth,
widening disparities in income and wealth, recovery will leave many behind
– age of insecurity and uncertainty for many households, decline in predictable,
progressive career paths and growth in ‘underemployment’
– far reaching technological change (we haven’t come to terms with this)
– policy changes eg universal credit
– sustained pressures on civil society/ local authority budgets
– overall, many households will remain economically and financially vulnerable
– challenge is: how do we help households build financial resilience?
WHAT CAN WE DO ABOUT IT?
WHAT CAN WE DO ABOUT IT?
• Need to address the barriers identified-socioeconomic, demand side, supply side
interventions
• Combination of:
– bigger role for state
– better regulation
– corporate governance
– market efficiency
– innovation/ alternative products and services
ROLE OF STATE
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•
State/ government (national and local) still has major role to play
NEST great example of collective provision making markets work
State still best placed to provide safety net for most vulnerable
State still best placed to ensure ‘social justice’ - we won battle for
consumers to have legal right of access to basic bank a/c,
government must implement
• Disappointing lack of innovation on big issues such as funding home
building (lock into low gilt rates/ use NS&I to issue social housing
bonds)
• We still have no meaningful consumer protection regime for renters
(registration, standards, rights, redress)
• Need reinvigorated strategies – including ‘Fairness Commissions’ at
local authority level
BETTER REGULATION
• Major opportunity for civil society to ensure regulators contribute to
challenge
• FCA already making huge difference in payday lending and other
consumer credit issues
• Exit of high cost lenders not just protects consumers but clears space for
alternative community lenders
• But FCA has to regulate in interests of all consumers – not just Daily Mail/
Which? readers
• Much can be done to supervise firms to ensure not erecting barriers to
access etc
• Making markets more efficient would reduce unit costs, extend reach
CORPORATE GOVERNANCE
• NB one of main reasons for exclusion is that many households
just not commercially viable for mainstream FS
• That’s a brutal reality but no getting away from it, but what
should response be?
• Strong argument for USO style approach in banking (will have
legal right) and social justice regulation in areas such as
insurance
• But difficult in other areas due to cross subsidies – difficult to
get support for
• However, there is still much FS can do
• Most effective is providing support for civil society/
alternative providers building capacity etc
INNOVATION AND ALTERNATIVES
• Big fan of community lenders (credit unions, CDFIs)
• But need strategy and coordination to build capacity and scale
to meet unmet needs, need to be more innovative (see LMCU
‘payday’ product), shared treasury services etc
• Greater use of employers, housing associations, affinity
organisations to provide scale and reduce barriers to access
(see our Does Debt Advice Pay report)
• Strategic partnerships can work
• New financial infrastructure and funding innovations - social
lending bonds (coming soon), social housing bonds
• Fincap interventions – priority must be to support people who
repay debts to build up savings cushion against future shocks
QUESTIONS?