Fair By Design’s latest lived experience film highlights this injustice through three stories looking at energy, car insurance and access to cash. These stories show that people in poverty are charged more for essentials because of the way they pay for them.  

The film builds on work on the poverty premium in payments, and how people in poverty can access fair and flexible methods of payment. You can read a full paper on the issue here. 

Ofgem also said it had not made a final decision on the extra costs for people who pay for energy when they receive their bill. It plans to continue to explore how to tackle this issue and will publish a consultation by the end of the year. If implemented, a reduction or end to this extra cost would happen from April 2025.

Maria Booker, Head of Policy, Fair By Design, said:

“This is a big win for people on low incomes. Today’s announcement introduces a lasting solution. We welcome recognition from the regulator that people on low incomes should not pay more for their energy.

“We also welcome Ofgem’s intention to bring down the premium for paying on receipt of bill, even if not as soon as we had hoped.

“But the extra cost for those who pay when they receive their bill still exists. We want to see this completely eliminated and will continue to push hard for this change to happen.”

Read the full release on Fair By Design’s website.

In our consultation response, we set out a wide range of policy solutions to create a fairer domestic energy market, emphasising the need for Ofgem and the Government to prioritise the interests of low-income consumers. This includes: 

• Introducing an energy social tariff as soon as possible. There is an ongoing affordability crisis in energy. Prices are forecast to remain significantly above their pre-crisis levels for many years to come. The Government needs to urgently honour its commitment to consult on introducing long-term bill support for those least able to afford their energy.
• Reforming standing charges as they are too high. Ofgem should look to recover the fixed costs of the energy system in a fairer way. 
• We would like to see an end to premiums for different methods of payment, particularly when those methods of payment are disproportionately used by those on a low income (“poverty premiums”). 
• We would also like to see regional differences in energy prices abolished. People on low incomes have told us that they want the energy system to be less complicated and fairer.  

Our full consultation response notes in further detail our policy asks.   

Background

In July 2023, the Government brought in temporary measures to end the premium that pre-payment meter (PPM) customers paid for their energy, whilst tasking Ofgem with finding a way of ending the PPM premium permanently when the Energy Price Guarantee comes to an end in April 2024. This consultation is part of that process.  

Ofgem has taken the opportunity to look at the premium paid by customers who pay on receipt of bill (known as standard credit) as well as the premium paid by PPM customers. 

Our response

We want to see the poverty premium in energy ended. In its consultation, Ofgem set out three options, and we support option three. Option three not only makes having a pre-payment meter the cheapest method of payment, but also significantly reduces the standard credit premium (option 3 would reduce the standard credit premium to £62).  

We still believe a standard credit premium of £62 is too high but recognise that it is significantly better than both other options included in the consultation. 

Our full consultation response notes in further detail our policy asks.  

The default tariff cap (‘the cap’) came into force on 1 January 2019. The cap ensures that default tariff customers pay a fair price for their energy that reflects the efficient underlying cost to supply that energy.

Given growing levels of energy debt Ofgem has been carefully monitoring the evolution of debt-related costs relative to price cap allowances.

Ofgem has seen evidence of a gap between costs and the existing cap allowance in cap period 8-10a (April 2022 – June 2023). Ofgem is therefore issuing a policy consultation on whether they should adjust the price cap to account for these deviations between costs and allowance. Ofgem considers that it is in the interest of customers to allow suppliers to recover efficiently incurred costs, as suppliers going out of business ultimately increases costs for all consumers.

Fair By Design’s response to this consultation is driven by the desire to get rid of premiums that those on low incomes pay due to how they pay for their energy.

You can read our full consultation response here. 

FBD is looking for a talented individual with an outstanding track record of successfully delivering impactful communications and public affairs strategies to join its team.  Using your skills and experience you will help Fair by Design to achieve its mission of eliminating the poverty premium by ensuring communications are persuasive and effective and that messages are heard by policymakers and those in power.

How to apply and more information 

Deadline for applications: 8am on Monday 19 September 2022.  

Interviews for shortlisted candidates will be held on Friday 23 September 2022 at BCT offices at The Foundry, 17 Oval Way, London SE11 5RR.

The research, which includes testimony from people in poverty, found that vulnerable and low income consumers are increasingly quoted higher premiums for insurance, or are refused cover altogether.  This can be due to a range of factors, many of which are often outside someone’s control, such as where they can afford to live, or their medical history. One of the main drivers of the ‘poverty premium’ in insurance is a shift away from a pooling of risk across many different people towards more granular pricing based on an individual’s specific risk factors. This has been made increasingly possible by advances in technology and increasing amounts of data that can be used by insurers.

Consumers and their advocates consulted for the report maintain that they are not in a position to assess whether a high or unaffordable premium, or an insurer’s decision not to offer cover at all, is reasonable or fair. This leaves them in a lose-lose situation – unable to demonstrate a market failure to the government and regulators, and unable to take any legal action.

Questions were also raised about the interaction between the Equality Act and insurance pricing. People with certain protected characteristics such as race, sex (for example, in the case of single mothers) and disability were less likely to hold any insurance, indicating a level of exclusion from the market.

A number of solutions were recommended by stakeholders, including the creation of reinsurance schemes similar to Flood Re and auto-enrolment through employers. Some also called for the end of the monthly payment premium that exists for certain types of insurance.

The IFoA and FBD recommend that:

• The Government should set out a minimum level of protection needed by all, including low income families, for them to remain financially resilient to risks and unexpected shocks – such as Covid-19.
• The Government should also look at how it can facilitate the delivery of a minimum level of protection, through policy interventions such as extending the Flood Re model of insurance, to cover consumers who are priced out or excluded from the market.
• The FCA should support government in this work by undertaking a study into the regulatory outcomes the market is currently delivering for low-income consumers. This study should also consider the interaction between insurance pricing and the Equality Act. This is in line with the recommendation of the Treasury Select Committee in its inquiry into consumers’ access to financial services.
• The Government should work with the FCA and industry to understand the policy changes needed to support and incentivise the sector to develop solutions to address the poverty premium.

Martin Coppack, Director at Fair By Design, said:

“We are all now encouraged to look to the market to protect ourselves and our families from the inevitable ups and downs of life. But what happens if you can’t move to a different postcode – one seen as less risky by insurers?  What happens if you have had cancer or another illness in the past? We know that a life or income shock is one of the biggest reasons people get into debt, yet those who can least afford a shock to their finances are being priced out or left out.

“As companies become more able to individually price risk and move away from more mutual forms of pricing we are being left with a two-tier market – one that works for the most healthy and wealthy in society.

“The poverty premium means that households often go without insurance, and they often have to resort to other more costly ways to protect themselves such as credit.

“To level up our communities, regulators, policymakers and industry need to work together to make sure people on low incomes can access the protection they need at a price they can afford.”

David Heath, Chair, IFoA Policy Advisory Group said:

“As the insurance industry has evolved, pricing for individual risk has had both positive and negative impacts. While lower risk customers have enjoyed lower premiums, vulnerable and low-income households are often considered high risk.  These customers are being offered higher premiums, which may be unaffordable. In some cases, they are being refused cover altogether.

“The Covid-19 pandemic has disproportionately affected low-income households and drawn attention to their limited financial resilience in the face of job losses and economic hardship. At a time when adequate protection is more important than ever, this group is facing the most difficulty in securing affordable insurance that would provide a much-needed safety net.

“As Government and industry consider how best to address the challenges highlighted by the pandemic, we would urge them to consider the creation of a more sustainable social and economic system which provides everyone with accessible and affordable insurance. Boosting the resilience of low-income households has the potential to reduce the costs of state welfare while allowing these households to pay bills and spend on goods and services, benefitting their wellbeing and the economy

The Fair By Design study of 1,000 low income households accessing the services of national poverty charity Turn2us, shows that less well off households are spending the equivalent of 14 weeks’ of food shopping just to access the same services as people who are better off.

• Car insurance was the biggest contributor to the poverty premium, with some people paying nearly £300 more a year because they live in a deprived area.  Paying monthly instead of annually could mean an extra £160, for a total poverty premium of nearly £500.
• Credit is expensive on a low income, whatever form it takes. A sub-prime credit card costs around £200 more a year (between £194-£207) and personal loans cost more than £500 extra.
• Being on the best energy prepayment tariff could still be £131 more expensive than the best online-only one. But being on a fixed tariff could still be costly: not paying by direct debit costs up to £143 more a year.

The experience of the poverty premium is diverse among different age groups. For example it affects under 35s, struggling with the costs of owning a car but it also affects over 65s because of digital exclusion and struggling to  switch energy providers online or find the best energy or insurance deal.  And for those families with young children switching rates tend to be higher. However, they were also more likely to use expensive forms of consumer credit for household goods like washing machines or fridge freezers.

Martin Coppack, Director at Fair By Design, said:

“It isn’t right that the people with the least, are paying more for essentials like heating their homes and insuring their car. The poverty premium pulls people under and makes it hard for them to stay afloat. But it doesn’t have to be this way.

“We’ve seen the positive impact that regulation, such as setting price caps, has had on reducing the poverty premium in energy and high cost credit. Regulators should now work together to find solutions for people struggling across all markets. And by eliminating the poverty premium, we can make our society fairer for us all.”

Jamie Grier, Director of External Affairs and Income Generation at Turn2us, said:

“The poverty premium is an inherently unfair penalty for people struggling with money, and it only exacerbates the difficulties of those of us who are managing on a low income. This vicious cycle locks people into high costs, debt and living without the essentials many of us take for granted.

“However, this is a solvable problem. Stronger regulation of financial products, an improved social security net with crisis grants and protective changes to the energy market would mean we can start eradicating the poverty premium.”

Read the executive summary and full report.

There is not, however, a well-developed, shared understanding of what inclusive design means in the context of financial services, energy and other essential services, how it relates to current regulation and UK law, or how it should be incorporated into the work of regulators and businesses. The Inclusive By Design project, a partnership between Fair By Design and Money Advice Trust, aims to fill this gap by providing research and practical resources for regulators and businesses operating in the credit, insurance and energy markets in particular.

Martin Coppack, Director of Fair By Design said:

“Essential products and services are almost all still designed for the ‘perfect consumer’ – who never becomes ill, always has a steady income, is able to understand complex terms and conditions and always has the time and technology to easily find the best deal for them. We all know this myth does not stack up in reality. We know that how products are currently designed also means that someone can pay more for an essential service simply because they are poorer than their neighbour – they, in effect, pay a poverty premium.

“Inclusive design is an emerging area for essential services, but there is a great deal of work in other contexts that we can draw on in developing a strong agenda in credit, insurance, energy and other markets. We look forward to engaging with a broad range of stakeholders over the coming months, and sharing the results of the programme throughout 2020.”

Joanna Elson OBE, Chief Executive of the Money Advice Trust, said:

“Good progress has been made on improving the way vulnerable customers are treated in sectors like financial services and energy. At the Money Advice Trust we have now trained more than 21,000 members of staff and worked with over 250 firms on supporting customers in vulnerable circumstances, and this agenda is continuing to grow.

“However, regulators and businesses also need to look ‘upstream’ at the way that products and services are designed in the first place – to ensure they work for all customers, including those who are vulnerable. We look forward to working with Fair By Design to explore this important issue further, including producing practical guidance for businesses next year.”

People in poverty pay more for products and services. This includes expensive energy tariffs, high cost loans, rent to own products such as household appliances, and insurance in deprived areas. This is known as the poverty premium. Fair By Design (FBD) is a movement dedicated to reshaping essential services, like energy, credit and insurance, so they don’t cost more if you’re poor. Fair By Design’s vision is for a UK where poor and low income people pay a fair price for essential services.

The Money Advice Trust is a charity which helps people across the UK tackle their debts and manage their money with confidence. The charity runs National Debtline and Business Debtline, which last year provided help to more than 204,000 people by phone and webchat. In addition to these frontline services, the charity provides training for the advice sector through Wiseradviser, works with commercial organisations to help them identify and support their customers in vulnerable circumstances, and works closely with government, creditors and partners to improve the UK’s money and debt environment.

As with the recent news about caps on the rent-to-own sector (e.g. BrightHouse), a lot of what we hear about financial exclusion reaches us only through two dimensional stats. It’s only when you see and hear what it looks like that it become real.

Today sees the publication of new research looking at the reality of being declined access to a payday loan. This research, which I carried out when I worked for Toynbee Hall along with my colleague Dr Lindsey Appleyard at Coventry Business School, supported by the Barrow Cadbury Trust and Carnegie UK Trust, used the existing statistics only as a point of departure. What we really wanted to know was: what did these numbers mean in real life?

We wanted to know what impact financial exclusion was having on people every day. What happens when you are denied access to traditional forms of financial services and, what’s more, what happens when the costlier alternative providers deny you access as well — primarily by virtue of tightened regulations?

For some of these answers we spoke to Courtney. She is married, lives in social housing, is educated to undergraduate degree level, has two children and used payday loans to pay for school uniforms and other items for her children. For her using these loans was totally normal.

She told us: “It was always for house stuff, it was never for just fun, it was always like, stuff for the kids, clothes, uniform. Anything really, even if it came to Christmas, I needed to get stuff for the children for Christmas, then I would just get a payday loan … get the money and not really think about it until afterwards.”

One part of her answer in particular is very revealing: “it was never for just fun.” A prevailing pernicious view in our society is that people in financial straits are there through their own inability and failing. It made me feel dreadful that she would even need to explain herself in this way. Here was someone doing her best to provide for her family in any way she could — the panic involved, so many of us couldn’t even begin to imagine — and what seemed to go through her mind, at that point, was an explanation: this wasn’t frivolity, but necessity.

In doing this research we were influenced and guided by the research that the financial regulator, the Financial Conduct Authority, had done to review their policies on high cost credit. They had pointed out, for example, that:

“Across users of less mainstream products we observe a consistent pattern of their financial situation worsening over time. However, that it not to say it is the credit product itself which causes this deterioration. It is possible for consumers to recover from these positions — we observe that former borrowers who are no longer using these products often have improved financial outcomes.”

We found this important because we might mistakenly get the impression payday loans were a helping hand for many of the people in financial straits. However rather than giving a helping hand they were very often dragging people into a much deeper, much more complex problem.

But the real value for this research came from the conversations. Speaking to people across the UK for this research allowed us to gain insight into what the solutions might be. We were well aware of many of the problems, and learned about a few we’d not previously realised. But actually talking to people in places that made them feel comfortable was invaluable.

What we suggest in our recommendations is more investment in low-cost affordable credit provision. For many of the people we spoke to, borrowing from friends and family is hardly an option at all. Some said if they get lucky maybe they get one bite of that cherry. After that, nothing more. We can’t rely on people’s ability to do that.

At the same time we want organisations to take a good look at themselves and work out what they can do to help their clients and employees avoid credit altogether. We want organisations including housing associations, local authorities, social and private landlords, employers, and other creditors like utilities companies, to recognise the different roles they can play in preventing individuals with short term cash flow issues from falling into hardship and seeking credit, when this is avoidable.

The people we spoke to were very responsive to this idea, but sadly cynical of it being a reality. We want to prove that cynicism wrong.

The people we spoke to are in a major bind: they know nothing gets done if you don’t try but they’ve had knock back after knock back. Hope is important but despair is forced too comfortably into their lives. We hope this research starts a different conversation: through the testimony, stories, and lessons that our participants wanted us to reveal we hope things start to change: access to affordable financial services, structural organisational change that help people avoid debt traps, and the eradication of the extra costs of being in poverty is something we’ve all got a part to play in.

Read ‘Payday Denied‘

Carl Packman, Head of Corporate Engagement, Fair By Design