There has never been more awareness or – or need for – responsible finance. It’s time for new measures to help the sector thrive, says Jennifer Tankard.
This year there has been more media coverage than ever about rising levels of personal and household debt.
Every month we see stories, covering, for example, the Financial Conduct Authority’s Financial Lives Survey, demonstrating that 50% of UK consumers currently show one or more characteristics of potential vulnerability.
There is growing awareness of over-indebtedness in the UK. Unsecured consumer credit grew by 10% in the year to June 2017. Employment and inflation figures show a gap between real wage increases and inflation, and there is increasing recognition of issues that can contribute to or exacerbate financial exclusion, such as the cost of housing. Over 8 million individuals now rely on credit to pay for essential household bills, often in the form of credit card debt, overdrafts, and high-interest loans.
But while we need to understand that there are enormous problems with financial exclusion, and its causes, I’d prefer less talk from politicians about how we need to tackle this and more action.
We know that many high-cost lenders act irresponsibly, treat their customers unfairly and prey on their vulnerability. And that low income consumers often pay a poverty premium for goods and services.
The column inches devoted to poor behaviour by Brighthouse et al – and politicians’ responses – do sometimes miss the opportunity to present solutions.
And I can point to solutions provided by responsible finance providers to 61,163 customers in 2016-17 – a 34% increase on the previous year. Yet our members could do even more.
Responsible finance providers are ‘mission-driven’ social enterprises: they treat customers fairly, only lend to those who can afford to repay, are transparent about the costs of borrowing, and provide supportive services that help customers increase financial inclusion.
And access to affordable credit from responsible finance providers helped 55,348 people on low incomes, with no savings buffer, to avoid taking on high cost unmanageable debt in 2016-17. Providers’ average loan size to individuals was £400 for an average term of 9 months. Plus providers also helped their customers to deposit over £3 million into savings accounts in 2016-17.
Our members also lent £141.7m to 363 social enterprises in 2016-17; and £67m to over 5,000 UK businesses during the same period.
Impressive figures, and a thriving responsible finance industry can continue to play a crucial part in tackling inequality, and in business and job creation in the UK. A number of measures are needed to achieve this:
A Responsible Finance Fund: The primary growth constraint for the industry is the lack of a dedicated responsible finance fund, similar to that seen in the U.S. A £150m fund would unlock significant commercial and social investment into responsible finance providers to on-lend. This would scale up the industry’s impact on excluded and undeserved communities, ultimately extending access to affordable finance to more businesses, social enterprises and consumers.
Access to tax reliefs and guarantees that are fit for purpose: Tax reliefs and guarantee schemes are widely used by the responsible finance industry to lever in commercial investment. To ensure these tools remain competitive and fit-for-purpose, we propose:
- Launching a guarantee scheme or tax relief for the personal lending sector, incentivising greater investment into responsible finance providers;
- Expanding the wholesale Enterprise Finance Guarantee (EFG) option to incentivise larger scale private investment; and
- Ensuring tax-reliefs and guarantee schemes are appropriate and flexible, to allow responsible finance providers to effectively serve demand across industrial sectors.
To guarantee that access to EU funding and facilities is maintained or replaced: The responsible finance industry receives approximately 10% of its annual funding to on-lend from EU Structural funds, in addition to using EU instruments such as the EaSl and COSME guarantees. Access to these EU funds and instruments have been frozen since 2016. While the chancellor guaranteed that key projects dependent on European funding that support economic development across the country will continue to receive funding, it is important that those facilities which incentivise commercial investment into the responsible finance industry, namely EaSI, COSME and the European Regional Development Fund (ERDF), are replaced, or access is maintained.
Proportionate and appropriate regulation: The responsible finance industry is regulated by the Financial Conduct Authority (FCA), and is compliant with its rules. These rules are designed for larger financial institutions and so place a disproportionate burden and cost on small firms like responsible finance providers. Proportionate and fit-for-purpose regulation is needed to ensure that responsible finance providers can thrive.
Economic instability, squeezed household budgets, and living costs outstripping incomes have exacerbated the precarious position of many in the UK. Many creditworthy social enterprises, small businesses and micro-enterprises continue to struggle to access finance.
The responsible finance industry is well positioned to work with the government in creating strong and diverse industries and an inclusive and resilient economy.