The providers (also known as community development finance institutions) lend to financially excluded individuals whose only other options for credit are often exploitative and even illegal high-interest lenders and to viable but under-served businesses and social enterprises.

Transparency and affordability are key to these FCA-regulated providers, which will not lend to a customer if their loan will make the customer worse off, and do not lend to businesses or social enterprises unless it will increase the business’ chance of success. In 2019 they saved their personal customers, who often face a ‘poverty premium’ in higher charges for utilities and credit, £7.5 million in interest payments to high cost lenders. They created thousands of new businesses, and created and protected 13,800 good jobs in businesses and social enterprises.

Research published in Responsible Finance: The Industry in 2019 also demonstrates:

• Responsible finance providers lent a total of £200 million to 40,000 customers in 2019.
• The providers lent £78 million to over 4,200 businesses, creating 3,400 new businesses and creating or saving 8,300 jobs. The businesses they lent to reported an average £320,000 increase in turnover.
• £93 million was lent to almost 400 social enterprises – creating and saving 5,500 further jobs.
• £24 million was lent in 35,000 loans to individuals, saving low income households over £7.5 million in interest payments.
• £3.3 million was lent to over 200 homeowners, enabling people to bring their homes up to a decent standard and to stay in their own homes.

The research also demonstrates how responsible finance providers directly contribute towards reaching the UN Sustainable Development Goals – and includes four key recommendations to enable the sector to scale-up to meet un-served demand.

The Poverty Premium can sometimes come over as an ethereal concept, so it’s the concrete examples that really bring it alive. These are the ones where it’s clear that the people impacted are being driven into yet more poverty because of it.  The way the Poverty Premium impacts on them is clearly an injustice. These concerns hit me squarely when reading the February 2019 column by Michelle Edwards in independent local newspaper, the Waltham Forest Echo. Edwards is a campaigning journalist and a Marlowe Road Estate resident in the London Borough of Waltham Forest. Her piece on the newly completed affordable housing block on the estate as part of its regeneration programme raises a particular concern for those residents in relation to their energy provision.

Energy costs for people in poverty are the biggest driver of the Premium, so when we saw her piece we thought it was really important to highlight it as a part of our involvement in the APPG on Poverty Inquiry into the Poverty Premium.

Edwards told me “All the new and existing tenants moved into the block as part of the regeneration development were given an eleven-page Residential Heat Supply Agreement for their heating and hot water.” The dictated terms in the Agreement for their method of payment is a pay-as-you-go prepayment meter. In her words, “Having a prepayment meter almost always means paying more than you need to for energy bills. Not only is the unit price for energy more expensive with a prepayment meter, but the cheapest tariffs offered by energy suppliers are usually not made available for prepayment customers. The council may at its own discretion vary the energy tariff rates for the supply of energy at any time. As it stands, the meter is the only option available to residents”.

According to the piece, payments for the prepayment meter are managed by a third party called EEMonitor. Of the residents she spoke with each had reported problems with their meter. “Apparently the top-ups disappear at an astonishing rate.” One tenant told her he moved in on 12th December 2018 to find his meter was already showing a reading of minus £5. Apparently, the construction workers had left the heating on. Up to 20 January, the tenant had put £60 on the meter.  As a disabled occupant he can only afford to turn his heating on for one hour a day. In another of her examples for a similar period, a household had spent £70. The children of that household were told to cut down their showers and only turn the heating on when absolutely necessary. A third resident she met required consoling in the foyer. His mother has a medical condition that affects her bones. In order to keep warm, she has to stand up against the radiator.

This is the stark reality of how people are being locked into extra charges for their energy. There are many more across the UK. There must be a better way to support poor and vulnerable communities to enable them to make ends meet rather than locking them into yet more hardship. We hope the APPG on Poverty Inquiry into the Poverty Premium report makes a real difference to those on the ground who, like the Marlowe Road residents, are struggling to keep their heads above water. It’s time for action.

Lucie Russell

Fair by Design is a movement dedicated to reshaping essential services, like energy, finance and insurance, so they don’t cost more if you’re poor.  People in poverty pay more for energy, finance and insurance than those on higher incomes.  This is the Poverty Premium.

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.

In 2014, in the world of unsecured personal credit, there were few offering credit to those people on low incomes, and who have to take credit and pay it back each week or fortnight; people who can’t get credit from their banks or building society.

Most of those providers charged what most of us would consider to be high interest rates, high fees and inflated prices for the items, which would keep people from ever being able to escape their clutches.

There had to be a better way. So in August 2014, we got funding to get an independent company to run a series of consumer focus groups. They asked users of this type of credit when they used it, why they used it, what they used it for, and how they felt about it.

From what we heard, Fair for You was born. Two years later, we’ve capital and loan finance from four social funders, are fully authorised as a lender by the FCA, and have been trading since December 2015.

Our second Social Impact report has just being released and makes surprising reading.

For instance, we heard that an average loan of just £300 can directly improve customers’ ability to pay their rent (over half of people surveyed said this was the case, rising to two-thirds of lone parents). And that a loan of this size can directly improve the health and wellbeing of our customer’s children’s (one third felt this was the case – rising to 51% of lone parents).

Isn’t that amazing, given the comparatively small size of the loan?

However, a cursory view of Trustpilot will show you that among the 300 people who have so far posted reviews, pricing is only part of the reason that Fair for You has such an impact. It is the whole design of the solution that works for them.

Why? Because, without being too technical about it, we’ve combined structured credit with some of the key benefits of unstructured credit.

Our loans are for items for the home – we don’t do cash loans – and the customer chooses the item they want from our ‘digital high street’. The loan is then structured to purchase that item.

It’s also structured because the loan is clear to the customer, structured repayments on a schedule. They agree to pay an amount of their choosing, over a period they choose – weekly, monthly, fortnightly or four weekly, over any period from 12 weeks to 24 months.

So, if the customer wants to pay £10 a week over 37 weeks, then that’s the loan that we agree; and they are kept up-to-date on their repayments, via text, posted statements and monthly on-line updates.

The benefits of flexibility are that the customer can overpay at any time, and many customers choose to do so. For some it allows them to clear the credit earlier, and for others it allows themselves to miss a payment when facing a difficult week. All clearly get the fact that they don’t pay so much interest if they overpay.

However, the biggest difference is in the assessment of credit. We recognise that many households have low and fluctuating income, such as zero-hours contracts, so we set low repayments and allowing overpayment for when the money’s there. We’re also understanding of past credit problems, so we look instead at a customer’s management of credit over recent years.

It will be interesting to monitor the impact on the financial wellbeing of the households using Fair for You. Our Social Impact report estimates that within 3 years, the majority of customers having switched from using high cost credit regularly to using Fair for You, will no longer have a Poverty Premium in their household.

In the past few years considerable funding has been spent on financial education. For a fraction of this cost, the long term benefit to the households of having access to good financial products may far outweigh being continually taught how to avoid the most aggressive mutations of high cost credit providers.

Better product design, delivered in a more socially responsible manner, may well provide answers in a post-banking crisis world that has seen our society so polarised by their exposure to poverty.