Future finance: a new approach to financial capability

1. Context
2. The study
3. Recommendations
4. Points to consider

Context

The Centre for Social Justice (CSJ) has previously identified that nearly 9 million people in the UK struggle with problem debt. This has an enormous personal cost for these individuals and their families, and can damage their ability to help themselves. Over-indebtedness and low levels of financial capability also have consequences for the UK economy, together costing almost £12 billion per year. Previous research into these issues has often been too narrow in focus, especially as problem debt is multi-faceted. The resulting lack of evidence has made it difficult for funders to know where best to direct their limited resources, and to know how best to design products and services for low income households.

The study

This study explores how innovative financial technologies and targeted social investment in existing organisations could scale up a new generation of Alternative Finance Institutions (AFIs).

An advisory group of six experts was created. For three months, they attended numerous evidence sessions. Insight from these sessions helped CSJ researchers collect evidence from other organisations including from civil servants, FinTech firms and social investors. A literature review was also undertaken. There were also focus groups with clients of two Community Development Finance Institutions (CDFIs) to further explore issues facing low income households. The recommendations were built on these diverse strands, aiming to make a positive impact on the lives of those struggling with problem debt.

Recommendations

To focus primarily on the wants and needs of low income people, for example through:

• Developing a tool to allow people more control over their financial information, so that they are able to seamlessly transfer between service providers and support services.
• Offering more products with ‘social purpose’ to help people develop their own financial capability. The cost of delivering these products should be covered without being passed on to the consumer. A new independent body, The SoFiTech Foundation, should be created. This would oversee the innovation fund and accelerator programme required to develop viable new products.
• Protecting vulnerable customers by creating a registry of them.
• Providing a more holistic experience for low income households from when they interact with a range of stakeholders, including AFIs, debt advice services and financial capability training programmes.

Develop a robust evidence base so that the most innovative practices can be learnt from by other organisations and agencies, including policymakers. Other suggestions in the report include:

• The Money Advice Service (MAS) needs to continue to develop common evaluation frameworks and performance metrics. Organisations can then keep consistent records and be evaluated on the same criteria.
• Increased data sharing should be a focus of government, as it would provide the evidence to ensure resources are used effectively and help AFIs identify potential target markets more successfully.

Improve both policy and the regulatory system to help create a competitive market for AFIs, so they can serve the needs of low income people:

• A new independent body should be created to evaluate and develop AFIs. The Alternative Finance Foundation would create a new Code of Conduct, award ‘credit ratings’ to AFIs, stimulate the market by providing first loss protection for investors and certify AFIs using new common evaluation frameworks.
• Stakeholders, including MAS, need to work together to develop a range of ‘aspirational’ accreditation processes that drive up standards and help push organisations to develop more innovative services.

Support innovations in FinTech to help AFIs grow and reduce their current reliance on subsidies, for example:

• AFIs need to be able to licence and implement FinTech solutions as cost effectively as possible. The new Social Enterprise for AFI innovations (SEAFI) should support this by holding licences for white label FinTech products and making specialists available to AFIs to help them customise suitable products.
• Cloud-based technologies also could offer great potential for AFIs to reduce their costs in future, and their use should be encouraged e.g. by the Financial Conduct Authority (FCA).

Points to consider

Relevance: Problem debt impacts on wellbeing and financial capability and solutions to these issues are an important focus for UK policy.

Applicability: This paper is applicable to anyone with an interest in improving financial capability in the UK, as well as those concerned with how regulation, policy and/ or innovation in the market can help meet the needs of lower-income people.

Full report

Future finance - full report