6 April 2005
Speech by Anna Bradley at launch of Fair Finance, Docklands

1. I am delighted to have been invited to speak at the launch of Fair Finance. There are at least three reasons for this.

 

2. The first is that Fair Finance is the first Community Development Finance Institution (CDFI) to have introduced some basic consumer protection measures through its rules enabling us, the FSA, to register them under the Industrial & Provident Societies Act (the "I&P Act"). These measures include reasonable money laundering checks, adequate systems and controls and minimum business standards. This means that Fair Finance will, for example, take independent advice on their financial promotions and put measures in place to protect against financial crime.  

 

3. The second reason is the importance of the role of institutions such as Fair Finance in our community. I – like I hope all who work in Canary Wharf – am conscious of the discrepancies between, on the one hand, the wealth and opportunity which are so conspicuously on display in the financial services firms grouped at Canary Wharf and, on the other, the poverty and social deprivation which have, for too long, been a feature of this part of East London. As a member of the Tower Hamlets community, we at the FSA – like other employers in Canary Wharf – have responsibilities to discharge and contributions to make. We do this through our Community Affairs programme which focuses on Education and Regeneration projects in Tower Hamlets and other boroughs bordering Canary Wharf. For my part, I have - over the past year or so - given management support to the Eastwards Trust, a charity set up to address the long term care needs of elderly Asian people in the face of the breakdown of traditional Asian family support.  

 

4. The third reason is that the registration of organisations such as Fair Finance enables us – as regulator - to play our part in making a positive impact on those who are excluded from financial services: those two million without a bank account; those three million who rely on expensive alternative credit facilities; those – typically in receipt of benefit, in socially rented accommodation, on low incomes, often single parents – who are outside mainstream financial services. We are only one part of the picture and I would like to commend the support provided by Fair Finance's private sector partners in helping it get off the ground – NatWest, the Royal Bank of Scotland and Barclays. 

 

5. What, you might ask, is the FSA's role in relation to financial inclusion?  Let me take a moment to put our role into context and to give you an overview of what we have done to date and what is in the pipeline.

 

6. First, an observation about our duties: at no point in the statute which gives us our powers, duties and responsibilities is there a special mention of either social exclusion or the special problems of those on low incomes. We have no statutory duty comparable to that placed on other regulators, such as Ofgem, to have special regard for those on low incomes. But, given the importance of financial services in our society, you will - I hope - be relieved to know that, despite the absence of any specific duty, we have consistently tried to be thoughtful about and sensitive to the special requirements of those who find it difficult to access financial services. Special concern for those who are financially excluded has been a common theme across all our work on financial capability. And indeed we expect that as we carry out our statutory responsibilities we will have a positive impact on financial inclusion. Let me give you examples of where we have been able to make a difference.

 

7. A problem for the financially excluded is having few or none of the normal tokens of identity required for account opening: a passport, driving licence or utility bill. At a time when anti-terrorist concerns have led to an emphasis on documents for account opening as a means of combating money laundering, this has become a particularly acute obstacle. The specific rules are drawn up by the financial services industry, not by the FSA, but we have encouraged the industry to show greater flexibility: to accept just one document for identification purposes, and to use identity checks already carried out by others. The single document which should in future be accepted would include an official letter of offer of benefit from a benefit agency such as the Child Benefit Agency, or from a government department such as the Home Office for an asylum seeker. We hope this will lift one obstacle to financial inclusion.

 

8. A major channel for providing financial services to those who are not well served by traditional providers are the credit unions. We have been acutely aware that we at the FSA needed to strike a correct balance between on the one hand the necessary supervision of new institutions, often run by people without extensive experience of financial services, who would benefit from our guidance and help, and on the other the recognition of the special contribution that credit unions can make to combating social exclusion. I think we have struck that balance. The assets and membership of credit unions are rising: credit union assets now total over £427 million, nearly double on 2000, and membership stands at 473,000, nearly 50% up on 2000. Meanwhile, the consolidation among credit unions to produce fewer but better resourced and I would hope better run credit unions is a helpful development.

 

9. We have also been concerned about the financial exclusion of those who wish to practice their religion and who find themselves, for that reason, without access to the financial products and services which would meet their needs. One of the successes of the FSA in 2004 was our authorisation of the first purely Islamic bank in Europe, the Islamic Bank of Britain which will, for the first time, offer Shariah-compliant financial products to the UK's 1.8 million Muslims. The Chief Executive of the Bank said the FSA had made a helpful contribution to setting up the Bank. His words (not mine) were: "an incredibly constructive approach was taken by the regulator ….. the FSA clearly desired finding a way to make it work". We wish the new bank and its customers well. Going forward we are continuing to work actively with providers of Islamic products such as 'murabaha' which are economically equivalent to a permanent fixed rate mortgage. We are working with the firms involved to ensure that our rules about these products, including the key facts illustration which helps consumers compare products, are consistent with Shariah law and provide the protections of FSA regulation.

 

10. Another recent development aimed at improving access to financial services for those who are excluded is the Community Banking Partnership.  This is a new venture, based on similar operations in the US, that brings together credit unions, the community finance sector, banks, building socieites and money advice agencies to provide a range of services to the financially excluded through a "one stop shop" format.  The intention is to provide a range of services covering money advice and support, help with bills and debt repayments, savings facilities, affordable loans and access to basic banking services. We have been advising the Community Banking Partnership on the regulatory implications of how they are planning to set themselves up and to operate. And we are currently considering how we might build on this initial engagement to further support the work they doing.

 

11. Finally, I want to come back to the work that we are doing on financial capability.  The ability to understand one's personal and family finances, is central to anyone's well being – in any society. But it is particularly the case in a society, like ours, which is characterised by the extensive availability of credit, a wide range of financial products, the opportunity for sophisticated consumers to take advantage of the convenience and flexibility which these offer – and a general level of awareness and understanding among those who do or could use these financial products which in no way matches the complexity and sophistication of what is on offer.

 

12. Let me set out the problem. Research for the Financial Services Consumer Panel showed that two out of three consumers think that financial matters are far too complicated for them. A study by the Institute of Financial Services showed that eight in ten people did not correctly identify the term APR as the interest rate and other costs of a loan and four in ten people admit to not really understanding financial products such as mortgages and ISAs. Yet at the same time, individuals are being required to take increasing responsibility for their financial decisions: for decisions on pensions which used to be taken by employers, but are now more and more the responsibility of the individual; for decisions on student education, where the student will in future incur debts rather than simply receive grants; and for decisions on health provision. This growing move to require the individual consumer to take responsibility for his or her financial decisions places greater strain on the need for basic financial capability – the ability of individuals, as customers of financial services firms, to make informed decisions between the many choices available to them.

 

13. We at the FSA have been much concerned to address this strain – insofar as we are able to do so. I make that caveat clear. The principal responsibility for a society with literate and numerate citizens clearly lies with government, and with the education system, not with the financial services regulator. The government's spend on primary and secondary education runs at some £22 billion annually. The FSA's total expenditure is some £260 million. But within that figure we are taking our responsibilities for financial capability seriously. Our annual Business Plan shows that our spend on financial capability this financial year will be approximately double that which we spent last year – which was in turn twice that which we spent in the previous year. For all that increase, this year's spend of £8 million is insignificant in comparison with the government's spend on education at £22 billion, or in comparison with the financial services industry's spend on marketing at £1.4 billion. The challenge for the FSA is to identify where our efforts can have most effect, and where our expenditure has most leverage.

 

14. We have been tackling these questions as a priority for the FSA for more than a year, in a group chaired by the FSA's Chief Executive John Tiner which brings together representatives of government, employers, providers of financial services, those who use financial services and those who comment in the media about them. Our aim is to co ordinate the resources that exist on a much greater scale than in the FSA to tackle the problem of financial capability; to act as a catalyst for action by those who have substantial resources; and to identify and finance seed corn activities where others will perform the harvest. We have tackled the issues in an entirely practical way: to see how we can use the work place more to encourage understanding of financial needs and opportunities; to encourage better integration of financial issues in the curriculum for schools; to identify what is needed by way of generic advice, and what is the best way of achieving this. It is an essential but necessarily long-term task if we are to obtain an effective and fair market for retail financial products.

 

15. Specific and practical initiatives which we are supporting through this include the work of Fairbridge West in Bristol to embed financial capability into training for excluded young adults. In the Financial Capability's work on borrowing, an online tool is being developed to help consumers assess their levels of indebtedness: this tool is being provided in a variety of media to ensure it reaches those that do not have everyday access to the internet.  Later in the year, we will be establishing an Innovation Fund to support and encourage the development of new approaches to financial capability, particularly amongst small voluntary organisations on the frontline. The idea is that successful projects will be rolled out elsewhere. We expect that some of the projects that we award funding to are likely to be of benefit to people who have difficulty accessing financial services. Finally, we have already met with Brian in his new capacity as Chairman of the Financial Inclusion Task Force and look forward to working together with them.  

 

16. Looking ahead, I expect that we will have more opportunities to make a positive impact on financial inclusion.

 

17. On CDFIs, we are currently considering the case for introducing a proportionate regulatory regime for CDFIs inviting retail investment. We will be putting our views to the Treasury in due course. If HMT decides to bring this group of  CDFIs within the scope of FSA regulation, it will provide investors with additional protection. For example, investors would have access to the Financial Ombudsman Service and in certain circumstances to the Financial Services Compensation Scheme, if something went wrong. It would also give us, the FSA, powers to enforce the measures that we have put in place. 

 

18. A relatively new responsibility for us is the regulation of general insurance. All of us have the need for access to insurance products and services. This is therefore an important area where we will be particularly mindful of the impact of our regulation on financial inclusion. One of the areas that we are particularly concerned about is the sale of payment protection insurance off the back of another transaction,  across various markets including mortgages, loans and card sales. Our new regime will raise standards in this area so that consumers get a fairer deal on PPI. We will be starting a programme of work in May to check whether firms have raised their game and are aiming to publish the results of this work in the autumn.

 

19. On credit unions, we are now working to facilitate innovation in the credit union sector by not imposing regulatory barriers. We are discussing whether at least some – larger, well run – credit unions might offer basic bank accounts through partnership with existing banks. Again, this would be a way of bringing real benefits to the "unbanked". We also welcome the Government's announcement in the Budget that they are going to change the rules for Child Trust Funds to make it possible for credit unions to offer them.

 

20. On credit unions, we are now working to facilitate innovation in the credit union sector by not imposing regulatory barriers. We are discussing whether at least some – larger, well run – credit unions might offer basic bank accounts through partnership with existing banks. Again, this would be a way of bringing real benefits to the "unbanked". We also welcome the Government's announcement in the Budget that they are going to change the rules for Child Trust Funds to make it possible for credit unions to offer them.

 

21. I hope this gives you a flavour of some of the areas in which we would hope, in the course of carrying out our regulatory responsibilities, to make a positive impact on financial inclusion. If you think there are other areas where we could do this, then we would like to know; we will of course listen, but may not always agree. But if we do disagree, we will try to explain why.

 

22. Finally, I'd like to wish Fair Finance every success in offering its services to those who most need it.