‘Our banks often exclude the poorest. A Fair Banking Act could change that’

Today, the insidious and growing presence of illegal money lenders in towns and cities around the UK is uncovered in a new report from Fair4All Finance, entitled ‘As one door closes – Experiences of illegal moneylending during an emerging cost of living crisis’. The report recommends cross-party support for policy reform to ensure more low income households have access to fair credit from banks, as well as community finance providers, such as the one I helped set up in 2015.

As the party that represents the ordinary people of this country, Labour needs to build an economy that works for all. As part of that, we need to ensure that quality jobs and opportunities are within the grasp of everyone. But beyond this, we also need to make sure that everyone can access the services that enable them to participate fully in economic life. The Tory government has undoubtedly failed on this front – around a quarter of people in the UK are currently excluded from the basic financial services we all need to get by.

Many people on low incomes are penalised with relatively higher charges for essential financial services (we call this the “poverty premium”). Some are excluded because they are considered  too risky – “basic” bank account holders are denied overdrafts and other services that most banking customers take for granted. Some are excluded because of who they are – a disproportionate number of black people and disabled people live in poverty and thus find themselves underserved by the banking sector.

The cheapest commercial loans – still single percentage APR – come from high street banks or mainstream credit, but you can only access them if you pass the stringent credit checks. At the other extreme, it’s easy to find triple-digit interest rates offered to borrowers locked-out of the mainstream lending market. But most politicians and bankers have never had to pay an interest rate anything like that; most don’t know what it’s like to owe money at this price.

The net result of the financial exclusion of large swathes of our population is disastrous. People who are judged as not creditworthy are denied opportunities to become creditworthy. Loan sharks prosper, preying on a million vulnerable people. Meanwhile, there is currently no market incentive for mainstream institutions to comprehensively deliver services such as affordable credit. The outcomes are not merely economic: financial exclusion breeds social exclusion, and it holds back communities and wears down individuals’ resilience.

In the very deprived communities, Labour needs to work hardest to help. Would-be entrepreneurs seeking to help folk earn their way out of poverty are excluded from investment. Start-up businesses owned by black or female entrepreneurs (as well as social enterprises) report that it’s harder for them to obtain credit than other SME owners. The way to get a start-up loan, it appears, is to already have the funds.

The situation is dire, but we are not without solutions – indeed, we can look over the Atlantic for inspiration.

In 1977 US President Jimmy Carter introduced the Community Reinvestment Act (CRA). The CRA was implemented to oblige financial institutions to help meet the credit needs of underserved communities, with particular focus on those with “low and moderate incomes”. Since the CRA was introduced, it has become common practice for mainstream institutions to partner with mission-driven finance to address financial exclusion, lifting the prosperity of local communities and economies.

Community Development Finance Institutions (CDFIs) – bodies created by the CRA – have invested over $2 trillion in small businesses and community development initiatives that would otherwise have been excluded from funds. CDFIs do exist in the UK, but they are as-yet relatively immature.

Nevertheless, in 2022 British CDFIs lent £45 million, an average of £500 per person, to 90,000 individuals. But this represents just 7% of those looking for help. Some of their money is lent to small businesses previously declined for investment by mainstream institutions – £228 million in 2021, 38% more than 2020. And it’s a business model that works: over 90% of borrowers will repay their loans successfully.

One particular CDFI, social enterprise Fair for You, helps low-income customers by saving them – for instance – over £250 when buying a washing machine (when compared to the cost of buying on high-cost credit). Aimed at a band of people just below mainstream creditworthiness, this charity-owned company, renowned for excellent customer service, has generated £250 million-worth of social value since 2015. All the benefits are shared between its customers.

In 2022 Fair for You co-created the Iceland Food Club, allowing tens of thousands of struggling families to borrow up to £100 interest-free from Fair for You to buy food at their local Iceland supermarket. The scheme targets school holidays, when costs are highest for parents, whilst improving the credit scores of the families involved.

Values-led banks like Triodos, Unity Trust and the Co-operative support CDFIs in Britain, but we need dramatic change to encourage the necessary growth in community finance. To see impact at a similar scale as sparked by Carter’s CRA in the United States, we need a UK equivalent of that legislation.

This is where Labour must show real ambition and leadership – it is what a mission-driven government should do. Indeed, when previously in government Labour created CDFIs in Britain, and the Party talks fondly of the co-operative economy. But we need a more bold, transformative policy to truly address the scale of the financial exclusion problem and to lift this brake on individual and collective prosperity.

That’s why I am calling on Labour to commit to a Fair Banking Act, a UK answer to the US CRA.

The Fair Banking Act would oblige mainstream financial institutions to report publicly on tackling financial exclusion and be rated in relation to their performance in the provision of responsible lending; fair services to those who are underserved and excluded; and partnership agreements with CDFIs or other mission-driven banking institutions. This is a partnership-orientated approach that would encourage the banking incumbents to improve and empower alternative, responsible lenders to step-up where the mainstream institutions cannot.

Every school of thought within the Labour tradition will agree that if the Party stands for anything, it is for the interests of those excluded from society and the economy. Taking inspiration from the CRA, the Fair Banking Act would be a winner for consumers, communities, and the party.

The Fair Credit Charity (Fair for You’s owner) is part of the Fair Banking for All campaign. All campaign members are calling for a Fair Banking Act to form part of  Labour’s next manifesto.