The current UK financial sector is not well suited for many low-income households. The case for supporting people to access affordable and responsible finance from organisations like credit unions and Community Development Finance Institutions (CDFIs) is clear.
- The current UK financial sector is not well suited for many low-income households. To address this problem at its root, we must focus on growing the purpose-driven banking ecosystem which includes credit unions, community development financial institutions, building societies, ethical banks and mutual banks – that are driven by a social mission. We think councils should be a key player in this shift. They can help to tackle the systemic barriers the responsible finance sector faces, including low public awareness, a regulatory system set up to suit the big banks, and access to capital.
- The case for supporting people to access affordable and responsible finance from organisations like credit unions and Community Development Finance Institutions (CDFIs) is clear. Indeed, some councils already have a long history of working with these organisations to support their residents access appropriate and affordable financial products.
- The deteriorating economic conditions and growing levels of financial hardship have generated higher problem-debt and an increased need to ensure that affordable and responsible credit is available. Credit isn’t an appropriate solution for everyone, but for those who need it to smooth income fluctuations or deal with short-term financial problems, it is vital that it is affordable and helps build financial stability and resilience as part of the longer-term social and economic recovery.
- The Money and Pensions Service (MaPS) and Fair4All Finance highlighted the scale of the challenge facing affordable finance provision across the UK, evidencing that high-cost credit providers, such as doorstep or payday lenders, were lending more than ten times as much as affordable credit providers - £3 billion of lending compared to £250 million.
- Given their role as local community leaders and place shapers, and ongoing work with credit unions and CDFI’s, councils are well placed to support, develop and promote the delivery of affordable and responsible finance within their areas as part of a wider financial inclusion strategy. The LGA continues to highlight to key stakeholders, the work of councils on this agenda, and the significant value they could add with additional strategic backing and support, as part of a comprehensive and integrated approach.
- Government should to continue to fund and expand initiatives that increase access to affordable credit, such as the No Interest Loan Scheme pilot that is being led by Fair4All Finance, empowering local communities to develop and deliver affordable and responsible finance.
Alongside the welfare system and other forms of financial and hardship support, credit is an essential tool that enables households to smooth fluctuations in income, pay for unexpected events and cover periods of increased expenditure such as school holidays. Unfortunately, many people are unable to access lower-cost credit like bank credit cards and loans as they are financially vulnerable, on low or unstable incomes, or have a bad credit history. Many of those in this position will therefore unfortunately turn to high-cost credit, such as payday lending, rent to own or home collected credit, to help meet their needs because they do not have, or perceive that they do not have, any other alternative. The scale of high-cost lending in the UK was already significant before the start of the coronavirus pandemic, with the Financial Conduct Authority (FCA) estimating that three million consumers were using high-cost credit (excluding overdrafts) on a regular basis.
The combined effects of a rising cost of living and the coronavirus pandemic has continued to strain people’s finances. The FCA report that 12 million people across the country now have low financial resilience, meaning they may be struggling to pay their bills and manage everyday living costs. Whilst StepChange, the debt charity, have estimated that 29 per cent (15 million) of adults have experienced at least one negative change of circumstances since the beginning of the outbreak, including redundancy, a reduction in the number of hours worked, furlough with a reduction in salary, or a fall in income from self-employment. They also evidence that one in three of those affected negatively by coronavirus (4.9 million) have borrowed to make ends meet due to their reduced income, with an estimated nine per cent having used one or more forms of high-cost credit and two per cent an illegal money lender. Those in the most vulnerable circumstances face a poor choice of options – go without, go into arrears or take out high-cost credit, which can drain their already limited income with high interest repayments, and push them further into significant hardship.
The case for supporting people to avoid high-cost credit by improving access to lower cost credit via community lenders such as credit unions and Community Development Finance Institutions (CDFI’s) is therefore clear. It not only helps people to deal with short-term financial problems and manage uneven income, but also builds financial stability and resilience that can prevent future financial problems and save costs in the longer term. This should not be seen in isolation, but alongside a holistic package of financial support (such as income maximisation and debt advice) and discretionary funds that ensures the most appropriate outcomes are delivered for the individual’s circumstances.
Given their role as local leaders and place shapers, councils are well placed to support, develop and promote the delivery of affordable and responsible finance, ensuring that it meets local needs and priorities.
Evidencing the need and demand
This can help to build the business case and secure support for investment in relevant service provision. An evidence-based approach will maximise the effectiveness and value of local delivery, ensuring scale meets local needs and can be targeted to those who need it the most. Data sets relating to a wide range of issues, including poverty, financial vulnerability, subprime credit use and the impacts of COVID-19, are highlighted to ensure that a holistic evidence base can be developed.
The importance of promoting affordable finance
The direct promotion and marketing of local affordable finance provision is critical to diverting residents away from high-cost lenders. Unfortunately, the services available via credit unions or CDFIs can often struggle to be heard against these high-cost lenders, backed by significant marketing budgets and a highly visible digital and media presence. Additionally, for many of those in vulnerable circumstances who are looking at credit options, it can be hard to see beyond the weekly cost that is often the focus of advertising, and to recognise the longer-term financial implications of high-cost credit. Research by the Centre for Responsible Credit on behalf of Fair For You, evidenced that before finding their way to Fair for You, 80 per cent of their customers had borrowed from other sources in the previous 12 months, including 36 per cent from doorstep lenders and 29 per cent from the rent-to-own sector.
Given their role as local community leaders and place shapers, and ongoing work with credit unions and CDFI’s, councils are best placed to support, develop and promote the delivery of affordable and responsible finance within their areas as part of a wider financial inclusion strategy. Successful strategies such as the below should be used as a framework for how a national financial inclusion strategy could be delivered locally.
Case study: Leeds Credit Union and Headrow Money Line
Leeds Credit Union (LCU) is the largest community-based credit union with over 35,000 members from Leeds, Wakefield, Craven and Harrogate. Currently, regulations governing credit unions caps the loan interest rate that can be charged at 3% per month (42.6 per cent APR). This means that it can be more difficult to lend to those that are higher risk because they cannot price the risk appropriately.
In response, with a high-cost credit market in Leeds worth an estimated £90 million, LCU, supported by Leeds City Council’s financial inclusion programme, helped to launch a partner CDFI called Headrow Money Line (HML) to provide an affordable alternative to this high-cost provision for those declined by the credit union.
This unique partnership enables LCU to refer those loan applicants it would normally be forced to decline to this alternative source of affordable credit (charging between 69 per cent - 99 per cent APR). Customers continue to save and access additional financial services with the credit union but do not resort to high-cost subprime credit.
Additionally, the HML loan enables customers to demonstrate their credit worthiness, and ability to repay and build their credit score, thus presenting a route towards potential borrowing from the credit union at lower interest rates in the future.
Case study – Derbyshire County Council
The council has a history of supporting credit unions and community banks in the county to expand their provision. In 2020, support was agreed from the council’s public health budget to further promote access to affordable lending through the provision of a dedicated Service Development Officer and funding dedicated to promoting affordable lending and removing barriers to access. The project launched in October 2021 and is funded for three years.
A successful promotional campaign was carried out in November 2021 to January 2022 promoting Credit Union loans, the Stop Loan Sharks campaign, money and debt advice and advice strategies for a “low cost, low waste Christmas”. Social media posts reached over 110,000 accounts including 37,000 by targeted advertising in high-deprivation areas leading to almost 4,000 visits to the council’s Community Banks and access to credit webpage, with 746 “click throughs” to lenders webpages.