Is this government really committed to transparent, accessible local finance?

Since the recession, triggered by the 2008 collapse of a range of financial service providers, much debate has focused on banking as a utility  – as critical to managing every day life as water and electricity.

Before the recession banks were already withdrawing services, with declines in small business lending and bank branch closures reducing accessibility. But the recession has accelerated this trend, especially in deprived communities. Payday lenders have seen these market gaps as market opportunities.  Their exponential growth and rapidly rising profits demonstrate that there is business to be had in poorer areas but at a price. Unscrupulous lenders target those most in need of short-term credit but least well equipped to manage the consequences.

Payday lenders are not the only organisations to step into the void.  Many local authorities and other local partnerships have also seen the need for alternative providers. Previous editions of New Start have highlighted some of this local activity.

It is clear that there are significant regional disparities in the provision of financial services. We know from anecdotal evidence about clustering of payday lenders in deprived areas, for example.  There is also some research that shows the geographic pattern of bank withdrawal.  For example a recent report by Nottingham University on bank branch closure.

But that doesn’t give us the sophisticated picture needed to understand market gaps, for local partnerships to work effectively to fill these gaps and for new and alternative providers, such as community development finance institutions (CDFIs) to identify market opportunities.

This is why the Community Investment Campaign (CIC) has campaigned for the need for a statutory framework of disclosure of lending data by all financial service providers at a geographical level.

We have had some success. The government has announced a voluntary framework for disclosure by the UK’s seven biggest lenders (RBS, Lloyds, HSBC, Barclays, Santander, Nationwide and Yorkshire and Clydesdale).  From January 2014, they will make quarterly releases showing the outstanding stock of lending committed to customers across loans and overdrafts to SMEs, mortgages and unsecured personal loans.  The British Bankers Associations (BBA) will release aggregated data for the seven participants. Each individual organisation will release its own disaggregated data.  According to Danny Alexander, chief financial secretary to the Treasury, this framework is ‘a major step forward in terms of transparency (which) should encourage competition by helping smaller lenders to identify gaps in the market.’

However the voluntary framework doesn’t go far enough.  It doesn’t cover Northern Ireland and its release through the BBA and individual lenders will lead some to query the integrity of the data. It also excludes a large number of financial service institutions, including payday lenders.

Nevertheless, we believe this data will provide additional market intelligence to those working on financial inclusion and growth issues.  We already know of one large city council which is looking to overlay the data with poverty data, debt statistics and credit union and CDFI lending data. We would encourage all authorities to start thinking about how they can use the data in shaping approaches to financial inclusion.

Inspiration for the campaign for disclosure of lending data has come from the USA, where the community reinvestment act (CRA), enacted in 1977, is seen as critical to fostering access to financial services for deprived communities.  Together with other anti-discriminatory, consumer protection and disclosure laws, the CRA remains a key element of the regulatory framework in the USA. It encourages the provision of mortgage, small business and other credit, investments and financial services in deprived communities.

Last month the CIC organized a USA – UK learning exchange on community finance.  Jeff Nugent, senior programme director at The Center for Leadership Innovation, Joy Hoffman, group vice president for district public information and community development for the Federal Reserve Bank of San Francisco and Mark Pinsky, president and chief executive officer of Opportunity Finance Network (the USA’s equivalent of CDFA) all came to share their views about the CRA.  They told us about its impact, leveraging trillions of dollars in loans, investments and bank services into low-income communities.  But also the challenges it faces as the financial services industry evolves at rapid pace.

A US-style CRA may not be directly replicable in the UK.  But the basic lessons of the need for transparency and the benefits of ensuring access to affordable financial services and community investment in deprived communities are valid.

The government’s recent announcement of a cap on payday loans and its commitment to a voluntary framework for disclosure of lending data are two pieces in a jigsaw of ensuring access to fair finance for all communities.  But the whole picture will only emerge once we get real commitment to a strategic approach to tackling under-served markets.