Theresa May in 2016 made a very powerful speech demonstrating her willingness to fight against what she called “burning injustices”. She noted that “if you’re born poor, you will die on average nine years earlier than others […] If you’re one of those families, if you’re just managing, I want to address you directly.”

To her party’s conference that year she also said:

“Where companies are exploiting the failures of the market in which they operate, where consumer choice is inhibited by deliberately complex pricing structures, we must set the market right.”

Recognising the plight of poverty, and the extra costs associated with it, is something that unites the political spectrum. The Fair by Design initiative recognises it’s not easy to solve, but it is focusing on solutions not just words.

Poverty is increasing

The Centre on Household Assets and Savings Management (CHASM)’s 2018 Financial Inclusion Monitoring Briefing Paper, demonstrates the scale of the problem.  It starts by celebrating some positive recent developments including falling unemployment and increased wages for full time employees. However, poverty is increasing, both in and out of work, “with those out of work particularly affected by benefit cuts and delays”.

The report shows that poverty has increased since 2010. In 2016/17, 30 per cent of all children and 16 per cent of all pensioners were living in poverty, while 1.5 million people, including 365,000 children, were destitute at some point during 2017.

Poverty is expensive in the UK. As the concept of the poverty premium illustrates, there are extra costs of being in poverty. The cost of credit, for example, becomes higher if you are obliged to visit an alternative provider like a payday lender for borrowing money. The cost of energy is higher if you are stuck on a costlier tariff, and the costs of insurance increase if you live in a particular area.

Figures in CHASM’s report bear out some of those extra costs. For example in 2014–16, nearly half (47 per cent) of the population had some form of unsecured lending, which can include payday loans and other forms of high cost lending, but is most often credit cards.

In addition to high cost credit from the alternative credit sector (e.g. payday lenders, the rent-to-own sector like Brighthouse), the costs of unarranged overdrafts has been particularly hard for consumers:  whilst one million people took out payday loans in 2017 at least 10 million used an unarranged overdraft.

The report finds that those on the lowest incomes are much more likely to be in arrears on utility bills and credit commitments: 16 per cent of those on the lowest incomes (lowest 10 per cent of incomes) were in arrears in 2012/14 compared with only one per cent of those with the highest incomes (highest 10 per cent of incomes).

One issue for those experiencing the extra costs of being poor is not just how much they spend, but the costs of essential products and services becoming totally unaffordable. From the report we see that only six in ten working-age adults had home contents insurance in 2016–17, and we also know that 60% of those earning £15,000 or less per annum have no contents cover. Of those who did not have it, nearly a third said they could not afford it.

Fair by Design’s plans to eradicate the poverty premium             

In Fair by Design’s recent roadmap, charting how we will get rid of all the extra costs of poverty, we set out plans to get rid of the poverty premium. We call on businesses, including all consumer credit providers, to eradicate the poverty premium from all of their products and services to ensure low income customers aren’t paying more for essentials. Fair by Design want the Financial Conduct Authority (FCA) to broaden its regulation of all forms of high cost credit including caps on those not currently covered: overdrafts, rent-to-own, home-collected credit, catalogue credit, and store cards.

Fair by Design want landlords to ensure every new housing tenant is automatically placed on the cheapest energy tariff, to stop them from paying over the odds on their fuel bills, particularly those unaware of the fuel provider choices which exist, and we want employers to support employees on wage advances to help them to avoid turning to high cost credit lenders.

Find out more about the Fair by Design movement on our website and follow its activities on twitter.

Tackling Financial Exclusion Through Local Finance Partnerships sets out a blueprint for successful partnerships that could be replicated across the UK. It provides a step by step approach to achieving the changes needed and is based on successful approaches in the USA.

Two million people do not have a bank account and nine million people do not have access to mainstream credit options.[1] So at least 14% of the UK’s population faces financial exclusion. This impacts on their ability to participate in the economy and build financial resilience through savings, for example.

Tackling financial exclusion and strengthening the UK’s financial capability does not require new entrants to the market. Existing finance and advice organisations with a local focus could strategically engage with each other to achieve far greater scale.

Locally-based finance organisations, such as credit unions, responsible loan funds and debt and money advice charities, offer access to advice, savings and affordable credit. They collectively reach over 3 million consumers and businesses each year.[2]

Tackling Financial Exclusion Through Local Finance Partnerships is available here. The research was based on interviews and focus groups with 22 finance providers.

[1] Financial Inclusion Commission (2015), Improving the Financial Health of the Nation, http://www.financialinclusioncommission.org.uk/report

[2] Based on figures from the Association of British Credit Unions Ltd. (https://www.findyourcreditunion.co.uk/about-credit-unions/),

Responsible Finance (http://responsiblefinance.org.uk/policy-research/annual-industry-report/),

Citizens Advice (https://www.citizensadvice.org.uk/Global/Migrated_Documents/corporate/money-advice-services.pdf), and the Money Advice Service (https://www.moneyadviceservice.org.uk/en/corporate/record-number-of-people-benefit-from-money-and-debt-advice) (all figures as of March 2017)

A new report from CHASM, University of Birmingham’s research Centre on Household Assets and Savings Management, is calling on the government and employers to do more to help those on lower incomes to start saving. CHASM is a research centre based jointly in the School of Social Policy and Birmingham Business School at the University of Birmingham.

The report found that around 16 million people in the UK have less than £100 in savings, which researchers say creates too much financial risk, something which households should be looking to mitigate.  Low incomes are a key barrier to saving but policy change could nevertheless help people to save more.

The report’s key recommendations include:

• The government should enhance the Help to Save Scheme to make it more flexible and more generous. The money for this could come from rebalancing the amount spent on savings schemes that benefit the better off.  For example, the cost of tax breaks on Individual Savings Accounts amounted to £2.6 billion in 2015/16, while the Help to Save Scheme is only expected to cost £70 million per year by 2020/21.  A small reduction in the cost of ISA tax breaks could be directed to the Help to Save Scheme.

• For those in work, employers should provide and promote Save as You Earn schemes, working in conjunction with credit unions where appropriate. These schemes are free to set up with credit unions, who can handle the administration of the schemes.

• Joined-up working at local level is important, such as Birmingham’s Financial Inclusion Partnership, can lead to important initiatives, like Birmingham Money, to support those on lower incomes. This joint working involves local authorities, credit unions, community development finance initiatives, Citizens Advice, charities and housing associations among others.

The report makes ten key recommendations:

• A new government spending formula should be developed, linking the amount of support for lower income savers to the level of help given to ISA savers more generally.
• Policy makers and commercial providers should build on the principles of Help to Save and develop more flexible savings mechanisms and products that coincide with the needs of lower income savers. Matched savings schemes need to be lower, and more realistic targets for savers to reach before rewards from the ‘matched’ saving can be realised.
• Savings products need to be designed with realistic and positive savings goals as their focus.
• More needs to be done to meet the appetite for trusted ‘brands.’ Civil society has an important role in creating and sustaining locally branded, trusted savings institutions through effective sign-posting.
• Central and local government should support the creation of a number of national brand leaders in the Credit Union sector, working with civil society to encourage people to save and to build trust with Credit Unions.
• The rules governing information routinely provided to savers should include the obligation to inform them of alternative products or more recent offers. Higher standards of service will include this level of transparency, as well as helping lower-income savers navigate the process of switching/ opening an account.
• Commercial providers should be prevented from defaulting savers onto the lowest interest rate. Instead, lenders should default to a capped percentage of the account opening Offer rate.
• A Savings Commissioner should be established along the lines of the Children’s Commissioner, with responsibility to protect and promote the interests of savers, particularly those on lower incomes. The Commissioner should also have statutory powers to ensure acceptable standards of transparency in the savings market and to encourage a higher standard of service.
• Employers should be encouraged by government to provide savings services to their employees. The success of national pension auto-enrolment should be emulated for shorter-term savings, with employers automatically deducting a small proportion of a monthly income, unless employees choose to opt out.
• Local Authorities should be enabled to take the lead in bringing state, community and commercial providers together to deliver a savings strategy.

Have you ever tried to survive for a week without something you think is essential to life? Chocolate for lent, booze after Christmas, cakes before your summer holiday?  What if you had to live without access to basic financial tools for a week?  Without access to a transactional bank account, so that you could only pay bills in cash and in person?  Without any form of savings so that the simplest set back meant a trip to high cost credit providers? Without insurance so that something lost is lost for good not lost until a replacement arrives?

Access to basic banking facilities is an essential part of modern life, as employers and government agencies move away from cash and cheques towards electronic payments.  Small and micro businesses are also affected by difficulties in accessing basic affordable financial tools, often relying on easy access to bank branches to bank cash safely.

Effective tools for savings, payments, and accessing credit and insurance can help people to climb out of poverty or get through a crisis or emergency without falling into debt.  They can help businesses survive and grow and not slide into bankruptcy should a crisis occur.

The UK has made real progress in ensuring that most adults have, at least, some form of bank account. It is estimated that only 3% do not.  This is broadly in line with European neighbours such as Germany, France and Slovenia.  It also compares well with others such as Poland (30% without access to a bank account) and Italy (29%).  Still the 3% in the UK, some three million individuals, are effectively financially excluded by a lack of access.   And access to other types of financial tools remains patchy.  59% of UK households have savings of less than £5,000 and 56% of the poorest households do not have home content insurance. The reliance by many on pay day loans to get them to the end of every month is well documented.

A recent experiment in America organised by the Chicago based Center for Financial Services Innovation gave a group of white collar workers tasks to perform without using mainstream financial services.  These included buying a pre-paid card and cashing a cheque. Needless to say it wasn’t a happy experience.  The cost of transactions, the time spent in queues and the lack of security of personal data took participants by surprise.

This is why the Community Investment Coalition (CIC) is calling for a radical new approach to financial inclusion.  We believe that every adult, household and business should have access to a basic package of fair and affordable financial tools to help them participate in economic life.  These tools are: a basic transactional bank account; a savings scheme; access to affordable credit; physical access to branch banking facilities; insurance; and independent money management advice. We have launched a Community Banking Charter calling for the provision of these basic financial tools and setting out the steps required to achieve these.

Achieving this radical change does not require radical measures.  Political leadership, capital investment, better local partnership working and asking the main retail banks to step up to the plate are some of the steps needed.

The experience of the American white collar workers is shared by ordinary people every day in the UK.  CIC partner Local Trust commissioned a video detailing how a lack of access to basic financial services impacts on everyday life.

The UK’s emergence from recession will not result in a rush by the financial services sector to move into new markets in poorer communities.  Many people will benefit from economic growth.  But those without access to key financial tools are likely to get left even further behind.  We need radical change.  And it needs to happen now.

Jennifer Tankard leads the Community Investment Coalition (CIC) and is Director of Advocacy and Research at CDF.