Catalysing productivity and growth: A change in mindset on financial inclusion

Speaker: Nikhil Rathi, Chief Executive
Event: StepChange Connected 2024, Leeds
Delivered: 19 September 2024
Note: This is a drafted speech and may differ from the delivered version

Highlights

• Financial inclusion and growth need not be mutually exclusive.
• There cannot be genuine financial inclusion without digital inclusion.
• This will require a change in mindset, a different conversation about risk and innovation, and a systemwide effort - not just for government and regulators, but also for employers and schools.

It’s great to be here for my second time at StepChange[3]. Thank you Vikki for inviting me and for all you and your team do to protect vulnerable consumers.

And I’m delighted that the FCA, like StepChange, has become a major employer in Leeds. With an office on Queen Street since 2022, we are now expanding by a further 100 colleagues - up from 225 today.

It has transformed how we engage with StepChange and the financial community here up North. And what better backdrop for today than the stunning Aspire building?

As you entered, you might have spotted the blue plaque commemorating this building as the Yorkshire Penny Bank Head Office. A bank founded by Colonel Edward Akroyd in the mid-1800s. His vision? Let anyone open an account – even with a penny.

When the Victorian working class faced crushing poverty and little hope, Akroyd offered something revolutionary - financial inclusion for all:

• He promoted financial literacy, opening the world’s first school bank to inspire healthy financial habits.
• He established a pension scheme, supporting workers’ financial resilience. 
• And above all, he listened to customers, introducing cheque books for tradesmen.

Akroyd grasped that financial inclusion isn’t just a moral issue, but also an economic one.

Today, I would like to explore the links between financial inclusion and growth. And the idea that financial inclusion, approached thoughtfully, can actually catalyse productivity and growth. 

The FCA’s work to support consumers

Before I do, let me talk about the FCA’s support for consumers over a tough few years.

In April, I visited Money Advice Trust[4] in Birmingham. I spoke with advisers, listened to calls, directly hearing the pressure some consumers face. And while regulation can’t insulate consumers from economic stress, we hope the FCA has helped mitigate the worst impacts.

During the pandemic we introduced temporary Guidance, making clear how lenders could support customers in difficulty. Guidance that is now incorporated into rules, permanently strengthening protections.

And in May, we fined HSBC £6.2m[5] for historic failures in treatment of customers in arrears or difficulty, and ensured that 1.5 million of their customers were compensated by around £185m.

Our price cap introduced in 2015 for high-cost short-term credit saved consumers around £150m per year, and we have simplified overdraft charges and tackled high unarranged overdraft fees, saving consumers nearly £1 billion.

In 2023, we banned debt advice providers from receiving referral fees[6] from debt solution providers. Thanks to StepChange for your valuable input.

This stopped egregious business models that incentivised debt packagers to recommend options that made them more money, rather than serving customer interests. The ban will save consumers thousands in unnecessary fees and ensure they receive better advice.

Let me also be clear. We want a credit market that serves a wide range of people; affordable credit helps consumers manage finances and short-term or unexpected cash flow issues.

So we continue to work with the Government and Fair4All Finance[7] on initiatives for consumers who struggle to access credit.

Our most recent Financial Lives Survey[8] showed that almost a third of adults had used Deferred Payment Credit – or ‘Buy Now Pay Later’ - in the year to January 2024.  

Despite not yet regulating BNPL firms, we have already secured changes to unfair contract terms and warned firms about misleading advertising, and stand ready to make new rules once the law allows us to.

As you can see, we are using all the tools at our disposal, but ultimately need to tackle the root causes which prompted this regulatory activity.  

Consumer Duty and Call for Input

That is where the Consumer Duty[9] comes in.

Unabashedly focused on good consumer outcomes. Putting the onus on firms to communicate well and be proactive, innovative and data-driven – responsive to vulnerable customers’ needs. Providing protections that enable consumers to take responsibility for their decisions. 

StepChange and other consumer organisations supported the Duty, and we will maintain ongoing dialogue about its impact on credit and debt advice markets.

The Consumer Duty entails a change in philosophy and fewer new rules.  

With it now fully in force, it is timely to consider whether there are rules we should review to reduce burdens and duplication, delivering good outcomes whilst maintaining appropriate protection. Acknowledging tensions between the prescription previously necessary, and what a fast-digitising financial services market now requires.

To explore this, we launched a Call for Input[10] in July and would welcome your feedback by the end of October. 

Financial inclusion and growth

Alongside that launch, we reported on our new secondary international competitiveness and growth objective.

So how do we reconcile this objective with consumer protection, market integrity, competition and goals like financial inclusion?   
We are proud of the FCA’s work over recent years to support consumers.

We must now go further and look at fixing the foundations of our economy and financial system that made these interventions necessary.

Take financial inclusion. Published research suggests a causal link - it appears both ways - between improving financial inclusion and economic growth. To date, this research has been limited and focussed on developing economies.

But improving financial inclusion and capability can help mitigate barriers to, and possibly catalyse, growth. Links between over-indebtedness and mental health can impair productivity at work or even leave people unable to work.

The Money and Mental Health Policy Institute[11] have argued these issues can be long-lasting, with not just devastating human costs, but avoidable taxpayer costs too.

A G20/ OECD-INFE[12] report argues that greater individual and household resilience can contribute to national economic resilience and economic development.

And some evidence suggests economic growth and wealth creation can in turn bolster financial inclusion. Singapore tops the Global Financial Inclusion Index - a successful global financial centre and financially inclusive economy can go hand-in-hand.

Noting the caveats inherent in such indices, the UK lags in 7th place, despite hosting the second largest global financial centre. So there appears to be a link between higher economic growth and increasing financial inclusion, with gaps in our understanding of how that link works and its direction.

There’s further interesting work to be done to inform the debate.

Change in mindset and a new conversation about risk

But a fundamental change in mindset will be needed.

Focusing not just on products, but on what customers actually need and putting systems in place that deliver those in the long term.

For example, through our recent work on the provision of banking services, we pressed firms to build greater awareness of Basic Bank Accounts, and make the application journey easier. To reduce the estimated 1.1 million people without a bank account.  

Yesterday our new rules[13] came into force requiring banks and building societies to assess and fill gaps in cash access – a concern for the 3 million people relying on cash for most, or all, purchases.

But what we cannot change is the rapid shift towards digital payments.

UK Finance[14] project cash will constitute just 6% of payments by 2033 and FCA research indicates it is likely that more than half of UK adults now use digital wallets, up from 14% in 2017. So while access to bank accounts and cash is important, what we’re hearing now and what the City Minister reinforced last week, is that it’s also about access to wider services, including savings and credit products.

It’s about access to what you need to live your life. And these needs are not static. As markets digitise, what is needed to be a full economic participant will keep changing.

So to sustain a growing economy, and if we want a step change in financial inclusion, we will need to adapt too. That will require:

• a willingness to take more risk and to experiment, accepting that not every idea will work
• and a determination from everyone with a part to play to improve outcomes

Financial literacy and education

This will involve tackling the root causes of financial exclusion, not just symptoms.

Without a sustained commitment to financial and digital literacy alongside numeracy, we face an uphill battle. As consistently highlighted by many, including the FT’s Financial Literacy and Inclusion Campaign[15], and in the last Parliament, the Education Select Committee issued a significant report on financial education.

It shone a light on how children use money at ever younger ages, and their vulnerability to online marketing.

Financial apps are now available for children as young as 6, whilst 8% of 13-16 year olds own high risk cryptocurrencies, sometimes confusing gambling, trading, investing and entertainment.

Submissions to the Committee unanimously argued that financial education in English schools is inadequate and must be improved urgently.  

A problem amplified by 40% of school leavers not passing GSCE Maths this year, and 1 in 7 16-24 year olds not in education or employment - the highest level of inactivity for a decade.  

In short - effective financial education needs to begin early. Potentially even at primary level, as the Select Committee called for, and should now be considered in the Government’s curriculum review.

With its financial literacy levels, it is no surprise that Singapore scores as highly as it does on financial inclusion, showing an economic dividend.  

So as one commentator said this week – we simply cannot afford a lost generation. But that’s not to say financial education begins and ends in the classroom.

The UK scores weakly in the Global Financial Inclusion Index on employer support with only 7% of firms having a mature approach to financial wellbeing.

Auto-enrolment has been impactful. 85% of eligible private sector employees participate in workplace pensions, up from 41% in 2012. Good progress, and the FCA is working with the Government on its pensions review.  

But should we go further? Take workplace saving.

NEST Insight[16] has been assessing workplace savings auto-enrolment trials. An opt-out approach – where employees automatically start saving unless they actively decline – led to numbers of savers increasing by around 50%.

Such schemes were also almost universally approved of, 93% respondents liked them. With an estimated 1 in 3 working age people not having access to £1000 of cash savings to help with unexpected life events, this could be a game changer.

Any reforms would need to be balanced with the risk of overburdening employers, but the data suggests a huge potential for appropriately-backed schemes to help promote a saving culture at scale.

Even opt-in schemes may bolster engagement, as a major supermarket has reportedly found with its new workplace savings app. And as financial education is something that continues throughout life, we know that the advice and guidance market in the UK does not work well.

Working with Government, it is our hope to reform the system so consumers get the help they want, when they need it, and at an affordable cost. This could improve support for making pension decisions or choices with long-term savings and investments.

The demonisation of digitisation

But financial literacy won’t be enough – digital literacy, and inclusion too, help secure financial inclusion.

Just as Colonel Akroyd adapted to tradesmen’s needs by introducing cheques centuries ago, we must recognise that to be included financially, requires inclusion digitally.

That means access to devices and data, and the confidence to use them. Yet Ofcom[17] statistics show that around 1.5 million households didn’t have broadband as of March 2023, with lower-income and financially vulnerable households being least likely to have internet access. 

And only around 5% of the 4 million households estimated to be eligible for broadband social tariffs had actually taken them up.

Could financial services providers be more active in nudging customers towards a social tariff? What about employers?  Or public service providers?

While those who can’t use digital services need to be supported, they need not remain digitally excluded.

India’s unique biometric ID system ‘Aadhaar’ has enabled over 85% of India's underserved communities access financial services through Aadhaar-enabled payment systems.

Including through AI-powered voice access, targeting those with limited literacy and internet access.

The Brazilian Central Bank’s instant payment service ‘Pix’, with free interbank transactions for millions of customers, has revolutionised financial inclusion.

And closer to home, the Liverpool City Region Combined Authority has a scheme with Lloyds, Vodafone and Assurant, which provides participants with a free Android tablet and six months of free mobile connectivity. This includes in-person training, helping people build the confidence to maximise their newfound digital freedom.

So digital inclusion can foster financial inclusion, if we take an innovative and proactive approach.

And we are well positioned to do so, with the UK ranked joint first globally with the US for the presence and quality of fintechs.  

The FCA has already supported around 200 firms developing solutions to encourage inclusion, including Finexos, who are working on increasing availability of affordable credit, and Noggin, who produce an alternative credit score that aims to more accurately describe consumers with limited credit history.

In Edinburgh, one fintech told me of the benefits they had seen of anonymous chatbots providing debt advice, helping to reduce the associated stigma. We want safe and responsible use of AI to drive beneficial innovation.

But also an open conversation about the risks and trade-offs. For example, AI-enabled hyper-personalisation of insurance could benefit many by providing more tailored premiums, but at the same time runs the risk of rendering some customers ‘uninsurable’, or even potential discrimination.  

Citizens Advice[18] have long argued for better data sharing between creditors but run into privacy concerns. The recent controversy surrounding dynamic pricing for Oasis concert tickets shows the need for vigilance. Just because something can be done, doesn’t necessarily mean the public will accept it. Not everyone will 'Roll With It'!

Do we accept that the risk of a few experiments failing or some people not benefiting from innovation, is outweighed by the potential benefit to the majority of consumers, and long-term growth and productivity improvements?

I freely admit that we don’t yet have full estimates of the benefits of inclusion to growth and productivity. But experience elsewhere suggests that resolving foundational issues could have big impacts.

For example, a recent calculation by NESTA suggested that simply fixing wi-fi on trains could deliver benefits equivalent to one third of the London-Birmingham leg of HS2.

So let’s open up this debate and be willing to experiment and learn. And that includes experimenting with our processes and rules.  

Some argue that our affordability rules might discourage lending to groups who can’t otherwise access finance - maybe even inhibiting entrepreneurs’ access to microfinance - while others suggest that more prescriptive rules would improve outcomes for consumers.

We will engage on these concerns, balancing rules on consumer protection and financial crime with access to basic services.

Conclusion

It's not surprising that when he died in 1887, 15,000 mourners paid their respects at Edward Akroyd’s funeral, to a man who cared deeply about his fellow citizens and the morality of financial inclusion, but understood the social and economic benefits too.

So here today in the Aspire building, let’s think about the kind of society and economy we aspire to. We often find ourselves dealing with the symptoms of financial exclusion. But we also need to confront the causes: 

• Improving financial literacy, and digital literacy and inclusion - from schools through to the workplace.
• Embracing digitalisation and technological innovation.
• And being more ready to experiment and take some measured risk to deliver better long-term economic outcomes.  

That includes the FCA being ready to rethink some of our rules and regulatory approaches, and we would ask for your support as we do.

Because this will require a broader coalition to work together – government, industry, regulators, schools, employers, organisations such as StepChange – with candour, determination and dynamism. Financial inclusion is not a target to be met but an evolving journey.

We must evolve too, working together, educating, enfranchising and empowering every single person. Because that is the way our society will thrive, our economy will grow, and how we will ultimately protect consumers in the long-term.