1. Background

1.1 Select Committee on Financial Exclusion’s report (March 2017)

In May 2016, the House of Lords appointed a Select Committee on Financial Exclusion to consider financial exclusion and access to mainstream financial services.

In March 2017, the committee published its report, ‘Tackling financial exclusion: A country that works for everyone?’. Considering what is meant by financial exclusion, the committee did not set out a precise definition. Instead, it “referred to established research” and found that the term began to be used in the early 1990s to refer to concerns about bank closures. The committee reported that financial exclusion had subsequently come to describe “the ability, difficulty or reluctance to access mainstream financial services, which without intervention, can stimulate social exclusion, poverty and inequality”.

The committee reported that evidence had shown that a wide range of people at various stages in life can be affected by financial exclusion. However, it noted that those at particular risk included: those on low incomes or living in poverty; young people; older people; people with difficulty accessing banks; and those lacking digital access.

Focusing on the scale of financial exclusion, the committee found that despite the UK being at the “forefront of the global finance industry” and a leader in the fields of financial services, technology, and innovation, financial exclusion was a significant problem:

A sizeable number of UK citizens lack access to even the most basic financial services, while still more are forced to rely on high-cost and sub-optimal products which can prove damaging to their long-term financial health.

It also highlighted the role of ‘poverty premiums’—where the poor pay more—in exacerbating the effects of financial exclusion. It said that the closure of bank branches, along with the growing emphasis on digital services, “will intensify financial exclusion”.

The committee made a series of recommendations calling on the government, regulators, and industry to help those currently experiencing difficulties. The recommendations also focused on supporting the financial capabilities of future generations. For example, it said that financial education should be added to the primary school curriculum.

1.2 Government response

The government published its response to the committee’s report in November 2017. It said it was “committed to working with industry, regulators and charities to tackle financial exclusion” and thanked the committee for its work. It gave responses to the committee’s recommendations.

The government also focused on the difference between ‘financial inclusion’ and ‘financial capability’ in its response. It acknowledged that there is overlap between the terms, but also gave the following definitions:

  • ‘Financial inclusion’ means that individuals, regardless of their background or income, have access to useful and affordable financial products and services.
  • ‘Financial capability’ means that people have the ability to manage their money well, and therefore captures people’s ability to use, and maximise their use of, products made available by the financial services industry.

The House of Lords debated the committee’s report and the government’s response on 18 December 2017. The chair of the select committee, Baroness Tyler of Enfield (Liberal Democrat), led the debate. Commenting on the government’s response, she said she was disappointed by its tone and argued that it “lacked a sense of urgency and ambition”. Lady Tyler also said that the government had failed to engage directly with a significant number of the recommendations and issues raised. However, she did welcome some of the actions taken by the government such as the creation of a new financial inclusion policy forum.

2. House of Lords Liaison Committee’s follow-up report and government response

2.1 Follow-up report (April 2021) and government response

In April 2021, the House of Lords Liaison Committee published a follow-up report on tackling financial exclusion. The report examined the progress made by the government and key stakeholders on the implementation of some of the recommendations made in the 2017 report. The committee argued that the Covid-19 pandemic had made it “particularly important to not only understand but take action to tackle financial exclusion”.

The follow-up report found that “four years on [from the original report], financial exclusion is still highly prevalent in the UK”. It said that there was evidence that financial exclusion had been exacerbated by the pandemic, with millions experiencing low financial resilience (“the ability to cope financially when faced with a sudden fall in income or unavoidable rise in expenditure”). It called on the government to prioritise those experiencing and at risk of financial exclusion “as we move out of the crisis”. It made a number of recommendations under the headings ‘inclusive financial services’ and ‘leadership from government and proactive regulation’. A summary of these recommendations and the government’s response to them is provided below.

The government responded to the follow-up report in June 2021. It said that tackling financial exclusion “has been a priority and remains high up on our agenda, even more so with the impact of Covid-19 on people’s personal finances still unfolding”. As a result, it said it would continue to progress work on financial inclusion and work closely with the financial services sector, government departments, the regulators, consumer groups and charities as well as the Financial Inclusion Policy Forum. The government also said it would continue to publish an annual report outlining its actions to tackle financial exclusion.

In its response to the follow-up report, the government addressed the wide range of conclusions and recommendations made by the committee. These recommendations fell under various categories. These included:

  • Access to cash: The follow-up report recommended that the government bring forward “measures announced in the 2020 budget to protect access to cash without delay and set out a timetable within six months of the publication of this report”. In response the government said it agreed that cash has ongoing importance to the daily lives of millions of people and confirmed that it would “consult this summer on further legislative proposals to protect access to cash”. It also highlighted the role of cashback and that the Financial Services Act 2021 “will allow shops and other businesses to offer cashback without a purchase more easily from June 2021”. The government published a summary of responses to its consultation on access to cash in July 2021.
  • Digital inclusion: The follow-up report repeated the select committee’s recommendation that the government should ensure that non-digital access to financial services remains possible. It also recommended that the Financial Conduct Authority (FCA) monitor and make recommendations to banks about inclusive design. The government agreed that digital inclusion should be promoted alongside financial inclusion. It also recognised that “access to non-digital services continues to be important” and said that throughout the pandemic the government had worked closely with regulators to ensure banks, building societies, the Post Office and credit unions continued to maintain branch access for essential services. Regarding the recommendation about inclusive design, it said it was a matter for the FCA to respond to.
  • Basic bank accounts: A basic bank account is a transactional bank account which does not charge fees for standard operations. The committee’s report recommended that the government expand the analysis on the basic bank accounts annual report to include evidence of how banks are ensuring access to such accounts. Responding, the government agreed that access to a transactional bank account is “vital for financial inclusion” and said it is committed to improving access to bank accounts. It highlighted the FCA’s 2020 review of basic bank accounts, stating that it had found “good examples of customers being informed about basic bank accounts”. The government also said it encouraged firms to consider the areas for improvement identified by the FCA and agreed with its recommendation encouraging firms to create an inclusive customer journey.

Other areas which the committee made recommendations and conclusions in relation to, and the government commented on, included: bank branch and ATM closures; the role of the Post Office; affordable credit; the help to save scheme; debt advice; financial education; control options; the FCA’s objectives and a duty of care to customers; and the government’s financial inclusion strategy.

2.2 Other responses

The FCA responded to the committee’s follow-up report. It said that while many of the areas covered are matters for the government and Parliament, “there are themes that relate to areas we are actively working on”. It set out an overview of these areas, which included: a financial inclusion objective; duty of care; control options; affordable credit; bank branches and ATM closures; digital inclusion; and access to cash. The FCA set out ways in which it was working with the Treasury to address the issues raised by the committee, and how its existing guidance mitigated certain problems highlighted by the committee. On the duty of care, the FCA said it was currently consulting on introducing a consumer duty for financial services towards their customers.

The Financial Inclusion Commission, an independent body, commented on the responses provided by the government and the FCA. It welcomed aspects of the government’s response, including its statement that it would ensure that the annual financial inclusion report would include plans to reduce financial exclusion as well as the adoption of regulation for ‘buy now, pay later’ products. It also welcomed the launch of the government’s consultation on legislative proposals to protect access to cash.

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Cover image by Nick Pampoukidis on Unsplash.