Keeping pace with rising costs – improving financial inclusion for consumers

Speech by Sheldon Mills, Executive Director, Consumers and Competition, delivered at Financial Inclusion Virtual Summit 2022

Speaker: Sheldon Mills, Executive Director, Consumers and Competition
Event: Financial Inclusion Virtual Summit 2022
Delivered: 31 May 2022
Note: this is the speech as drafted and may differ from the delivered version


  • Rising costs are impacting consumers and business and could create new challenges for financial inclusion.
  • Regulation plays an important role in driving financial inclusion and improving outcomes for individuals and communities.
  • Financial inclusion is a complex issue that requires strong partnerships and collaboration across government, regulators, industry, and other organisations to address.

According to the Inclusion Foundation, one in four adults in the UK will experience financial exclusion at least once in their lives.

As of 2020, 13.4 million people in the UK are on relative low incomes, 10.7 million adults had low financial resilience and 24 million demonstrated one or more characteristics of vulnerability. These consumers are more likely to experience financial exclusion. 

The Covid-19 pandemic and the current cost-of-living crisis have thrown into stark relief the importance of basic financial services to households up and down the country.  

Imagine coping in the depths of lockdown with no access to a bank account. You can’t get essential groceries as the nearest shop is only accepting card payments. You can’t access the alternative options online. You keep your money in the house in the biscuit tin, with value being eroded by inflation. Someone breaks into your home when you are out for your daily walk and the money is gone – and you don’t have insurance.   

Financial regulation has an important role to play in driving financial inclusion. 

But financial regulation cannot tackle financial exclusion or the related ‘poverty premium’ alone. We must work together across government, regulators, industry and consumer groups.

Essential financial services for all  

The Government defines financial inclusion as individuals, regardless of their background or income, having access to useful and affordable financial products and services. 

While the UK’s financial services industry is vibrant and offers some great products and services, there remain some people in the country who do not have access to some of them. 

Increasingly, you need a current or checking account to be paid and to safekeep money, and to then use it to transact with others or pay bills including energy and water. And yet, as of 2020, 1.2 million UK adults had no current or e-money account of any sort. This is a global problem with one-third of the adult population worldwide – 1.7 billion people – still unbanked in 2017, according to the World Bank.

Affordable credit enables many families and individuals to buy goods and services, spreading repayments over time, and to manage cash-flow shortages. But we have seen through our work on high cost credit and affordable lending that households struggle to access credit, or can only access credit at very high prices. 

Insurance helps consumers to withstand financial shocks when things go wrong. But one in ten adults in the UK do not have an insurance product. And low-income households are less insured and, when they do have insurance, pay higher premiums or face more costly monthly payments.    

Savings, pensions and investments are important for saving for key life events – buying a house, retirement, later life care, and so on. Accessing good advice and fair value on these products is essential, but they are not always available to those who are less well off.

Understanding consumers' financial lives

Barriers to financial inclusion require multiple actors, initiatives and innovation to tackle. But first, we need to understand the lived experiences of different communities in accessing financial services. 

Our Financial Lives survey, a nationally representative survey of UK consumers, is a rich source of intelligence that helps us identify harms and improve consumer outcomes.  

It provides data on the characteristics of vulnerability including poor health, a life event, low resilience or low capability. It allows us to find correlation with income levels, social deprivation scores, and personal characteristics like gender or ethnicity.    

Qualitative and quantitative information are both necessary for understanding financial inclusion and enabling coherent policy choices.  

During the pandemic we added survey questions on young people and ethnic minorities as we could see that the way it was impacting them was qualitatively different to others. Some of the challenges people face were unknown or new to us.

Empathy – an under-used word for a regulator – is key.

Education and financial capability 

And the data shows just how important education and financial capability are to financial inclusion.  

In 2020, one in five UK adults reported having low financial capability, meaning that they have low confidence or knowledge in managing financial matters or have poor or non-existent digital skills.

9 million people in the UK cannot use the internet without help, and 11.7 million people lack the essential digital skills for everyday life. One in six adults (16%) with low capability say they have fallen into debt which might have been avoidable if they had understood their options better.

We want to see consumer journeys for new and existing customers that are clear, transparent, and accessible – including to consumers with characteristics of vulnerability. Firms have a role to play and our proposed new Consumer Duty will help shape this. 

We also work with others such as the Money and Pensions Service, which provides valuable advice and support to consumers that are otherwise not available.   

Making markets work well 

But education alone is not enough. Sometimes, markets do not work well to produce good outcomes for consumers. 

When this happens, there are choices for government policymakers and regulators to make to create the conditions for the supply of basic or essential services.  

Recent major legislative and policy initiatives have made some progress. 7.2 million basic bank accounts were open as of last year as a result of legal requirement on the largest personal current account providers; 30 million people have a pension in accumulation with auto-enrolment; 5.4 million people can still rely on cash to a great extent thanks to the efforts to protect access to cash.  

We tackled market failures to support inclusion, through for example, our work in general insurance to remove ‘loyalty penalty’, our price cap for high-cost short-term credit which is expected to save consumers with low financial resilience £150m per year, and our intervention in travel insurance which helps consumers with pre-existing medical conditions access affordable cover.  

We also seek to promote innovation that improves financial inclusion. We have seen innovative products aimed at lower income households or people who struggle with managing their money come through our Regulatory Sandbox and Innovation Pathways programmes. These include initiatives to provide free cash withdrawal over the counter in local shops, and basic bank accounts for the homeless to receive salaries and save.  

We have supported the development and growth of the payments and e-money sector. E-money accounts were used by 2 million people and are popular among younger people and people with characteristics of vulnerability.

Widening the distribution networks 

One of the challenges to financial inclusion is reaching the financially excluded. They are not served by financial services industry, so we need to reach beyond financial services to achieve financial inclusion.

In this context, frontline service providers in adjacent markets can play a key role. 

For example, social housing landlords can sometimes be well-placed to signpost tenants to affordable credit from a credit union or a relevant financial institution which can help them purchase essential household goods.

A couple of years ago, we published a guidance for social housing landlords to help them understand how they can help tenants find alternatives to high-cost credit.  

What we’ve aimed to do is to facilitate access to affordable credit, which in turn can help tackle some of the barriers caused by low financial resilience and capability.  

That is just one example of the importance of adjacent markets. We are open to doing more in this space.

Advancing inclusion through technology 

Unsurprisingly, technology also plays a key role in financial inclusion, economic growth and empowerment.  

If we look beyond the UK, the rise of smartphones and secure digital payments has helped support rural and urban communities worldwide where many people still don’t have bank accounts. 

Microinsurance, made possible by advances in data collection, has helped hundreds of millions of people on low incomes around the world insure their livelihoods, with products that cover health, livestock and crop, for example. 

In the UK, opportunities from Open Banking have enabled firms to develop innovative products and services that support widening access to financial services. 

Data sharing comes with risks of misuse, data loss, and algorithmic discrimination, but if appropriately managed, it can remove major barriers and frictions and enhance financial inclusion. 

For example, it can enable the development of budgeting and planning tools, pre-populated debt advice journeys and support for those who have ‘thin credit’ files. 

The FCA will jointly oversee with the Payment Systems Regulator the next phase of Open Banking, to unlock further benefits of data and technology while managing associated risks. We will also work with Department for Business, Energy and Industrial Strategy as it progresses the Smart Data initiative.  

There is no doubt that these initiatives will help tackle some of the financial inclusion challenges we see today. 

Our role in inclusion 

I recognise that there are calls for the FCA to have a specific objective or 'have regard' to financial inclusion.  

We welcome the discussion and we believe that regulation has, and will continue to have, an important role to play to further financial inclusion, although ultimately, our remit is a matter for Government and Parliament to decide.  

As I have set out, we are already doing a huge amount that would lead to improvements in financial inclusion. This includes our work to monitor access to cash coverage, supervise bank branch and ATM closures and conversions to help ensure fair treatment of customers, and support the Government as it develops legislation to protect access to cash.

And our new FCA Strategy published last month sets out four consumer topline outcomes which drive all our work: Access, Fair Value, Suitability and Treatment, and Confidence. These outcomes go to the heart of financial inclusion.  

We will continue to make financial services markets work well for all families, communities, individuals, and small businesses across the UK.  

Rising costs and borrowing

The rising cost of living is going to present some challenges to our collective efforts to improve financial inclusion. 

Prices of food and basic necessities going through the roof. Real wages falling. Savings being eroded in real terms. It is a perfect storm. 

The squeeze on household finances could push more people into vulnerability and the risks of financial exclusion are set to intensify. 

Like many organisations, we are preparing for the risks that may materialise in different economic scenarios, such as more persistent inflation and slower growth. 

The impacts of these risks will not be distributed evenly. Households on higher income will likely be cushioned from the impacts, whereas other households will experience a squeeze on their finances and a few of them will be struggling. 

While the headline average inflation rate is at 9% and rising, the Institute of Fiscal Studies estimates that the poorest households may face average inflation rates of as high as 14%, compared to 8% for the richest households.

In other words, the poorest is going to be the hardest hit.

Credit can be a useful tool for households and businesses to smoothen outgoings and weather temporary income shocks. But the availability and affordability of credit is likely to increasingly become a challenge for struggling consumers.

Borrowing has grown. Data from the Bank of England shows that in March, credit card borrowing grew by 10.6% over the past 12 months and other forms of consumer credit grew by 3%. Net consumer credit borrowing, at £1.3 billion, is higher than the 12-month pre-pandemic average. 

For those in financial difficulty, debt advice and in some cases, forbearance, can make a real difference.

Small businesses are also affected. Annual growth rate of lending to SMEs is at a record low, falling to -5.1% in March. 

A key element of our work is ensuring that firms we regulate treat customers fairly. We expect firms to identify customers in vulnerable circumstances and provide them with products and tools to help them manage their finances.

We’ve warned the consumer credit sector against misleading advertising and exploiting the cost-of-living crisis to promote their services.  

But we don’t want firms to be deterred from providing credit where it is affordable and where it is in the customer’s best interest, provided that the communications around the lending products are fair, clear and not misleading.  

We want to see lending practices and product features that help consumers and small businesses manage through difficult times. I believe the industry can rise to this challenge. 

Preparing for the future 

The cost-of-living crisis is also presenting challenges to consumers’ ability to prepare for the future.  

Consumers, especially those who have less savings, increasingly need to make painful trade-offs between managing immediate needs today and planning for tomorrow.  

Some may decide not to take out discretionary insurance, cancel existing policies or reduce their cover. Those of working age may need to cut back on their savings and retirees may draw down on funds more quickly.  

High inflation means that consumers are losing money in real terms when they save. And if this situation continues, there is a risk that more consumers would fall into problem debt.

We want firms to respond by helping their customers manage through the challenges they face in a range of ways.  

Some of the responses will be targeted support and guidance for customers who are on the lowest income or are struggling, focussing on specific products. Others may have broader applicability across a wider customer base.

Since the start of the year, the Bank of England has raised base rate from 0.25% to 1%. While some deposit takers have passed on the increases to consumers quickly others seem to be taking longer. 

We are seeing increasing disparity between the Bank’s base rate and the average variable cash ISAs rates offered by the largest high street banks and building societies, from around 0.2% at the beginning of the year to around 0.7% last week. 

We expect firms to be transparent about this and to be able to explain the decision they take on their savings rates, to us and to their customers.

With interest rates from cash savings still low, and inflation soaring, more people are being drawn towards the promise of high returns of risky investments.  

More consumers are investing in speculative crypto tokens, with some consumers borrowing to fund their investments. 

Our research shows that in 2021, 14% of crypto purchasers used some form of borrowing to fund their investments. This is a worrying trend.

To consumers who are using credit to invest, or considering doing so, my message to you is that you should never use credit cards to buy investments; you can end up facing high fees and if you lose money on the investments the debt still needs to be paid back. And your investment is unlikely to be protected by the Financial Services Compensation Scheme. 

This underlines the importance of ensuring those who are on lower incomes can save and invest safely for their future.

Working together to improve outcomes

When people go through tough times, it’s important that we find ways to support each other. The events of the past three years place a continued level of stress on the economy and this stress has reached right into the homes of many in the country. 

It is essential that we work together to support the challenges individuals and communities face in accessing financial services and we will continue to play our part, including through the Financial Inclusion Policy Forum.  

I am optimistic that our Strategy, together with our proposals for a New Consumer Duty and our work on innovation, can help to bridge the differences in our background and circumstances, and can encourage our vibrant financial services industry to help shape a fairer, more prosperous, and inclusive society.

Financial inclusion opens doors for families, allowing them to smoothen outgoings and secure a better future. And it enables small businesses to grow, creating jobs and fuelling investments. 

The recent response to the plight of the Ukrainian refugees from industry, charities, regulators, and the Government shows how together we can innovate and bring underserved consumers into the financial system quickly, enabling them to access bank accounts. 

From new banking services for people who are homeless, to loans provided for potential victims of illegal lenders, we’ve seen that we can make real progress in financial inclusion when we come together and innovate. 

The levers sit across a range of organisations and we need to work together to get to the right outcomes.

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