It's time for an Enlightenment on financial inclusion

Speech by Nikhil Rathi, our Chief Executive, delivered at PwC Glasgow for the Scottish Financial Enterprise: Extending Financial Inclusion event.

Speaker: Nikhil Rathi, Chief Executive
Event: Scottish Financial Enterprise: Extending Financial Inclusion, delivered at PwC Glasgow
Delivered: 29 September 2023
Note: This is a drafted speech and may differ from the delivered version


  • The FCA cares about financial inclusion and is seeking solutions to spread it, but it doesn't have all the levers at its disposal to have justified making it a statutory requirement.
  • Solutions will come from industry and especially through technology – where clearer and more targeted products can be rolled out at scale.
  • We stand ready to regulate new products such as Buy Now Pay Later (BNPL) and to scrutinise the outcomes that artificial intelligence (AI) will have on inclusion.

It is fitting that today’s event on financial inclusion is hosted in Scotland – the land that gave birth to the Enlightenment.

For 3 centuries, also home to a thriving financial sector and - right now – also home of squeezed households.

Some 43 per cent of – or 1.9 million Scots – told our researchers they could not cover bills for 3 months or more without their main income - 3 percentage points higher than in England and 2 more than the UK average.

One third of Glaswegians do not have any savings, according to Glasgow City Council’s research.

History, experience and challenge combined also gives Scotland an edge in finding solutions.

Harnessed by the cross-sector Financial Inclusion for Scotland group, working with others such as Cabinet Secretary for the Wellbeing Economy and Scottish Financial Enterprise, I am confident that Scotland will once again provide that spark that inspires others.

Today Scottish Financial Enterprise and Standard Life have published a hard-hitting report pointing out that at some stage we may all face financial vulnerability. But many are too reticent to share information about their circumstances. The report shares some of the ideas coming out of the recent Vulnerable Customers Summit – open banking for vulnerability particularly appealed to me.

I have also witnessed other examples of Scottish ingenuity to tackle financial inclusion: Earlier this year I met fintechs at Edinburgh University including one that used AI to guide customers through a debt management conversation. People felt less judged discussing their financial details with robots rather than humans. Talking about money is the last taboo – Brits are more open to discussing our health problems or even what happens between the bedsheets than balance sheets, according to a study by Lloyds.

We need to open up that conversation about managing money.

This morning I met with campaigners and spoke to firms who are making great strides in trying to foster inclusion.

One such organisation is Glasgow Credit Union, which has held its interest rates for mortgages steady since 2009 despite base rate increases.

Why we care about financial inclusion

The Government’s definition of financial inclusion is that individuals, regardless of their background or income, have access to useful and affordable financial products and services.

Campaigners argue that firms have resisted providing access to products and services to the less profitable customers.

Over time, with more personalised profiling and pricing, some groups may be left behind as the ‘computer says no’ to their non-standard fit.

Yet successive governments have decided not to make financial inclusion a statutory obligation for us. We agreed. Certain proposed amendments to the Financial Services Markets Bill around financial inclusion sought to place obligations on the FCA such as broad based reporting. We don’t have the remit or powers to tackle all financial inclusion issues, which is why Government did not accept those amendments.

There were good reasons for this – pragmatic rather than ideological – that regulators hold blunt tools, rather than the keys needed to unlock financial inclusion.

While we set expectations about how firms should behave and act when they fail to abide by these, it is outside our scope to tackle, alone, the widest socio-economic challenges.

But financial inclusion matters to the FCA, deeply.

If you are outside the financial system or cannot access credit or insurance, you’ll find it harder to get back on your feet when things go wrong. Those sudden expenses of a car or appliance failing, of a burglary or accident, can blow people off course and even out of work.

The Unbanked – the ultimate excluded

The ultimate example of financial exclusion is not having a bank account, the most unassuming but most essential financial service.

We estimate that some 1.1 million adults – or 2.1% in the UK - are unbanked – down from 1.3 m in 2017. In Scotland, the percentage is higher: 3%.

There are other variations, too: The proportion of 18-24 year olds unbanked is more than double that of those aged 25 and over.

10% of Muslims have no account; and 7.0% of those without work.

Those with poor financial numeracy were 3 times as likely to be unbanked – at 6%; 7% for those with no educational qualifications.

We will be doing more to understand what barriers remain in place for these people, including why over half of those without accounts say they don’t want or need them, and how to bridge what clearly points to a service and trust gap.

And we will look at whether the processes for accessing basic bank accounts are working as they should be.

Access to cash

We also know lack of access to bank branches and cash is a pressing issue, particularly in Scotland’s rural and island communities.

Between 2015 and 2022, Scotland lost 554 – or more than half – of all its bank branches.

We cannot compel banks to open branches, but we have pulled the levers we can to encourage 3 banking hubs in Scotland in Cambuslang, Troon and Carnoustie. Across the UK, there are 8 in total with plans for another 9 at least in Scotland.

Short term shocks, long term impacts

Looking beyond bank accounts, with cost-of-living pressures, 1 in 8 UK adults cancelled or downgraded at least one insurance policy in the 6 months to January 2023.

The proportion of adults in financial difficulty rose from 8% in May 2022 to 11% in January 2023. That’s 5.6 million people in difficulty.

The number of adults finding it a heavy burden to pay bills increased from 15% to 21% in that same time.

Citizen’s Advice tell us that 50% of the households coming to them for help have higher outgoings than income.

That squeeze can lead to consumers being ineligible for mainstream credit products and falling into debt.

The rise in the appeal of BNPL products and payday loans is unsurprising.

We’ve capped the cost of payday lending, and following recommendations we made 3 years ago, we stand ready to regulate the BNPL sector to make sure consumers can continue to benefit from innovation and maintain access to affordable credit, whilst being treated fairly.

In the meantime, we secured changes to potentially unfair and unclear terms in the contracts of Clearpay, Klarna, Laybuy and Openpay

Short term crises and actions can lead to long-term effects. Despite auto-enrolment, pension schemes participation will also be affected by a growing number of self-employed people. This has gone from 8% of the workforce in 1978 to 15% today.

And then there is the trend of over-55s taking out substantial lump sum payments from their pension pots to take advantage of tax breaks  – perhaps without full regard to the repercussions for their incomes down the line.

The proportion of the population aged over 65 is set to rise from 18.6% to 24% by 2043. More than 17 million people – or nearly 1 in 4 - will be at or near retirement age in the next 2 decades. In Scotland, that will rise from 21 per cent of the population over 65 to 25 per cent. More adults need also to save to fund social care.

Younger people, who are now more likely to have lower net incomes to pay for their student loans and are hit with an ever-bigger challenge to get on the housing ladder, will be possibly left to bear the brunt of this.

So having laid out the challenge, how do we tackle these issues?

The solutions are multifaceted and require a high degree of public-private cooperation.

Before turning to specific actions the FCA has taken and will take, let me highlight a few areas in particular:

  • financial education and numeracy
  • technology
  • commercial incentives
  • and diversity and inclusion

Numeracy, financial capability and education

Financial inclusion is affected by confidence and education.

UK adults lag behind peers in OECD countries on financial literacy, according to a 2016 study.

The UK ranked just above Turkey and below Indonesia, coming 9th out of 17 countries studied.

Our Financial Lives Survey showed that nearly a quarter of adults (24%) had low levels of confidence in managing their money.

Young people, those from ethnic minorities and the unemployed were affected most.  

Lack of financial capability can also mean those who have money to invest fail to do so or invest inappropriately.

Younger people in particular are more likely to invest in crypto – which is unregulated, high-risk – they must be prepared to lose the lot.

That is why the Prime Minister’s vision that every young person should be equipped with the maths skills that they need could also play an important part in giving young people the confidence both to run their finances and to obtain products that are right for them.

In Scotland, the National Response to Improving Mathematics Board is developing a plan to embed maths learning for everyone and help people in Scotland have numeracy skills for life.

I would go a step further and say as well as improving our maths literacy, we could all benefit from an intense focus on digital skills as increasingly access to financial services and digital capability go hand in hand.

Technology is key

Which brings me to the question of technology.

Digital public infrastructure, such as digital public identity, implemented effectively with due regard to privacy concerns, can play a powerful role in tackling financial inclusion.

But first, we must have the infrastructure in place: In the UK, there is a target for 85% of the population to have access to fast broadband and for 95% of the UK landmass to have mobile coverage by 2025.

In India, the so-called digital stack which connects private companies to government IDs, payment networks and data, has led to 450 million bank accounts being opened by last year.

This has particularly empowered women and the poorest as well as those with the lowest literacy levels. It has also connected micro businesses to finance and payments.

Digital identity could play a role in addressing the issue of the unbanked as well as access to other financial services. There is a significant opportunity for technology to drive the solutions to financial inclusion.

There has been a five-fold increase in the use of current accounts from e-money institutions since 2017 – from 700,000 to 3.5 million last year.

And more tech does not mean fewer older customers. In the Netherlands, some banks deliver iPads to pensioners to help them with their banking.

At home, initiatives like the Barclays Digital Eagles which started life here in Glasgow, teach customers how to use banking apps and learn tech skills.
There has been a surge in older adults using online banking, which more than doubled in the over 75s between 2017 and 2022, from 27% to 62%.

Most noticeable is the increased use of mobile apps: up from just 1% in 2017 to 23% in 2022 for adults aged 75+, and up from 9% to 40% for adults aged 65-74.

Overall, almost 9 in 10 (88%) adults banked online or used a mobile app in 2022.

AI has the potential to bring about a profound change on our way of life.

User-interfaces will become more customer-friendly, and customers will be offered hyper-personalised services.

But there are risks.

We need to bear down on any signs of discrimination or exclusion.

There is good news here too. AI, data analytics and machine learning could dramatically lower the cost of providing financial services and enable inclusion.

One firm I met on a recent trip to India uses AI and machine learning to assess client’s creditworthiness for loans and BNPL products. The firm specialises in servicing those who do not have a credit score, for example younger people.

Another was looking at micro-finance, making it possible for street sellers to access financial services and credit for the first time.

And we need to debate the impact of the analytics of huge data sets that AI allows. For example, are we happy to move to more accurate individualised insurance pricing? Cheaper for the majority, but more expensive, perhaps prohibitively so, for the higher risk as the pool gets smaller.

Commercial incentives to drive inclusion

Financial inclusion cannot be solved by state action alone, there need to be commercial incentives too. 

There are various schemes that encourage investment into deprived areas.  Flood Re – a joint initiative between Government and the private sector - makes otherwise uninsurable homes in severely flood affected areas insurable.

We should be more imaginative when it comes to incentives to provide services to under-served groups.

The FCA welcomes genuinely creative and evidence-based solutions that regulated firms put forward to support financial inclusion.

We will be running one of our tech sprints early next year, dedicated to supporting innovators coming up with solutions to financial inclusion challenges. Please do get involved.

And we stand ready to provide further dedicated support for the companies with the most promising ideas to help them grow and scale, building on schemes such as our Early and High Growth Oversight programme for up to 300 fast growing firms.

But ensuring commercial incentives also means we have to be ready to work together to tackle risks that raise the costs of serving some customer groups. 

Kathryn Townsend, the Government’s disability and access ambassador for financial services, has led several initiatives (PDF) to give greater access to customers who are deaf or hearing impaired.

She has reported success in encouraging firms to think of solutions beyond sending all information out in a written format to their hearing impaired customers. After all, British Sign Language, not English, is the first language for many hearing-impaired customers.

Emma Hardy, a member of the Treasury select committee, has highlighted how flat pin pads risk excluding blind and other visually impaired people from a vital payment service. Engaging people with disabilities and relevant experts earlier could help firms service them better. Thankfully many of our biggest banks, including NatWest, Barclays and Nationwide are already mindful of these challenges and issue accessible cards widely.

Diversity and inclusion

At the start of this week, we set out with the Prudential Regulation Authority at the Bank of England our plans to improve diversity and inclusion in the financial services industry.  We set out clearly how this work ties to our statutory objectives. For the FCA’s part, this includes making the case that a genuinely diverse and inclusive workforce will better understand the needs of a diverse customer base.

Regulatory actions

Now let me turn to regulatory actions we have taken and are taking.

Under the Consumer Duty, a sweeping reform we introduced in July, firms who reject customers have to explain alternatives and provide access to appropriate products.

We do not want to see a reduction in products or services that are in the interests of customers, or reduced access to them.

If firms are considering withdrawing a product or service, our guidance says that they should consider the impact on the customers affected, in particular those with characteristics of vulnerability.

We have acted on savings accounts. We want savers – particularly those on low incomes – to get into the habit of saving. To do that they need regular savings accounts with good value interest rates.

And with our colleagues at the Information Commissioner’s Office, we have made clear that banks and firms cannot hide behind GDPR to be proactive in approaching customers about the most appropriate products.

Our price cap for high-cost short-term credit is expected to save consumers with low financial resilience £150m per year and we have also told insurers to cancel the loyalty premium many customers were paying.

Through the UK Regulators Network, we have issued guidance (PDF) to financial services and utility companies on forbearance, how to offer help earlier when customers get into arrears and how to point customers to debt advice.

Thanks to our work on borrowers in financial difficulty, firms have agreed to pay an estimated £48 million in compensation to over 195,000 customers who were treated unfairly. 

At present, not enough customers are getting good and affordable financial advice due to caution on the part of firms.

We want to shake this up and are conducting a review on the boundary between guidance and advice.

Our cross-cutting interventions all aim to protect consumers from harm, boost competitiveness and provide solutions to financial inclusion.

We recognise we have a wide remit and a range of powers. But we do not have all the levers – some of them sit with governments – in Westminster and in the devolved nations. Others sit with industry and consumers themselves. But if we pull these levers in the same direction, together, we can make a significant impact.

Together, we need a new Enlightenment that can spark a solution to financial inclusion.