The UK needs a  Community Re-investment Act now.   home

Aug  2001

  How to reduce Financial Exclusion in deprived neighbourhoods                                                             
Over two million adults on low incomes in this country do not use any kind of financial services.  A recent report from the Social Exclusion Unit showed that these are mostly the unwaged, those living on benefits and social housing tenants. According to the British Banking Association less than 2% of applicants are turned away by the Banks when they apply to open an account: -it’s a case of voluntary exclusion.  A common services like banks, building society and insurance offices are being withdrawn.  According to the British Bankers Association, the number of UK bank and building society branches fell by a quarter between 1988 and 1998.  Now the demutualised Building Societies are closing their branches wholesale. The recent New Economics Foundation report called Financial Exclusion in London’ showed that the greatest withdrawals had been in the wards with the greatest degree of social exclusion.  This pattern is repeated all over the country. The plight of people living in these areas is often exacerbated by the practice of ‘red-lining by postcode’ whereby credit or other financial services are systematically refused to people living in certain post code areas regardless of their personal circumstances.
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This rules out telephone banking, direct line insurance or any on-line transactions.  Credit cards are often refused by the small traders in these areas because of the charges.  Despite their public expressions of concern for the disadvantaged, the Banks prefer to concentrate concentrate on high value added services for their affluent middle class customers. This is sometimes called the ‘flight to quality’. 
So where do people on low incomes go for credit?  They go to cash converters, pawn shops or money-lenders. According to the Public Studies Institute’s report, ”Money Lenders and their Customers” about three million people people in this country are in hoc to licensed money-lenders.  Many others are so poor that even the money  lenders won’t touch them. Some then fall into the clutches of loan sharks who are prepared to use violence to ensure repayments.  The interest rates charged are often astronomical.  What is being done to combat financial exclusion?  
       Here the Co-operative Bank has lead the way. Savers can bank at !5,000 Post Offices through out the country.  Some private sector banks now do the same. The  government is currently computerising the Post Office network.  The use of Automatic Credit Transfer will then enable it to cut the costs of paying benefits substantially.  When the project is completed in 2003, the Post Office will then have a branch network ten times the size of the biggest of the High Street banks?  However rural post offices are still being closed. The recent mass closures of its rural branches by Barclays Bank highlighted the crisis in the countryside.  The Labour government has recognised these concerns and is  looking to broaden the role of Post Offices to become ‘universal banks’ not only in rural areas but also in suburban and in the inner cities centres. Where there are no banks, cash machines can be a help.. However these machines can cost as much as £100K.  The installation costs coupled with maintaining the telecomm link means that a high foot-fall is necessary if they are to be viable. For this reason, many Banks would like to cut down on the number of cash machines.  



in 15,000

Post Offices

But recently some of the large petrol chains have applied to put ATMs in their forecourt  convenience stores.  These would be loss-leaders but could provide a very serious threat to the clearing banks’ customer base.  Using satellite technology can cut costs.  The Co-operative Bank is experimenting with extending its  network of cash machines into small Co-op convenience stores using roof-top dishes.  However all these measures  are at best palliatives and a poor substitute for personal financial services.  So how are we to combat financial social exclusion in deprived areas?
The Community Re-investment Act 1977 in the US could be a model here.  The Act seeks to encourage financial institutions to “fulfil their obligations to meet the credit needs of their communities". It requires the regular evaluation of their community lending performance.  Government regulators must take this into account when mergers, acquisitions or branch closures are being proposed. Interested parties such as community groups and other financial bodies can challenge any proposal.  This does work.  When the Chase Manhattan and the Chemical Bank wanted to merge in March 1996, a $18 billion community development and lending programme was announced to ensure public support. To date, the US Treasury estimate  that over $300 billion of credit has been provided to low or moderate income neighbourhoods.  Equally importantly, the lending has been found to be profitable
The banking regime in the States is different from the UK.  Some critics say that the CRA would not work here.  However  there have been several attempts to introduce a Community Re-investment Act into the UK starting with  Tony Colman MP’s Community Re-investment Disclosure Bill in July 1998. This Bill required banks and others to  divulge details of their lending and financial services by post code and to ensure that red-lining does not take  place.  In July this year, David Kidney Labour MP for Stafford tried again with his Community Re-investment Bill.  Both these Private Members Bill fell.  
Last November, a Treasury report entitled Access to Financial Services was published.  This is part of the  National Strategy for Neighbourhood Renewal and the report was produced by Policy Action Team 14. Their task was to look at ways of developing credit unions and making it easier for people living in deprived  communities to get insurance cover.  The role of Banks, Post Offices and others in providing financial services in these areas was also examined.  The goal was to “develop a strategy to increase access to financial services for people living in poor neighbourhoods”,  The report’s authors reject the idea that the Banks have obligations to serve all sections of the community and adopts a mainly free market approach.  It makes about 40 recommendations.
Many of these are about improving product design and delivery methods so as to cater for the special needs people living in deprived areas.  Risk assessment methods are examined and reasons for market failure are touched upon.  The rest is about exhortation to good practice and modest changes to the regulation of Credit Unions.  The report does not deal with  disclosure of information and excludes any form of compulsion. It suggests a five year programme for monitoring outcomes.
It is hoped that the number of bank accounts will have increased so that there will be fewer households without accounts.  The FSA Credit Union framework and legislative changes should mean more Credit Unions. More Insurance with Rent schemes should be in place. By 2005, all benefits should be paid by automatic credit transfer.  Low income household usage of the banks and insurance companies should be at similar levels to other social groups.  In conclusion, it states that “if the recommendations are all taken up, it is possible to envisage a time when financial exclusion as we know it will have disappeared entirely”.  We shall see!  If that hasn’t happened Labour should legislate!
But why wait?  When Labour first got in, many people thought that it might bring in CRA type legislation.  There was a flurry of activity amongst the financial institutions looking into community finance initiatives.  When it  became clear legislation was not imminent, interest died away.  But it does show what the threat of compulsion can do !  What should be the attitude of the Co-operative Movement be towards Community Re-investment legislation?  The Co-op Bank and CIS both have an exemplary record when it comes to community re-investment and combating social exclusion.  Their ethical trading policies have led the field.  Consumer Co-ops with their community dividend grants have helped thousands of communities throughout the UK.  Last year over £6 million pounds of aid was distributed  in this way.  
But where the Co-op has lead others have not been so keen to follow.  Some private sector institutions  have given help but many more haven’t.  Too many City institutions greedily continue to chase profits at the expense  of deprived communities.  In my view, the Movement should support those like Gareth Thomas MP chair of the Co-op Party who have campaigned for a UK Community Re-investment Act.  A new Act would release funds and expertise  which could be used to promote Credit Unions, Employee Co-ops and other kinds of Community Finance Initiatives

This article was published in the Co-op News

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