The Government's Financial Inclusion Strategy is a missed opportunity

The Government’s Financial Inclusion Strategy was finally published yesterday – and while there are some positives for us to celebrate, it mostly represents a missed opportunity.

From the very outset, it was clear that the process would be constrained by two key factors: there was no appetite to spend political capital on any new legislation, and the Treasury did not want to do anything that would upset the financial services industry.

As a result, two of the three sub-committees were chaired by industry representatives – and the third was chaired by the chief executive of the quango Fair4all Finance. And thank heavens for Fair4all finance – because much of this strategy has been handed over to them to deliver, using the resources that have been allocated to them from dormant assets.

Meek recommendations

But many of the recommendations are very meek. They include commitments to set up new working groups to explore problems in more detail. But in most cases, these are problems that are already well understood – and working groups simply kick the solutions further down the road. In most instances, the strategy looks for industry to work with consumer groups to find solutions – but many of the answers will require more than voluntary codes of conduct or standards.

Let’s be honest – when it comes to financial exclusion – the elephant in the room is that many of the solutions require firms to invest time and resources in customers who are unprofitable. There is no commercial incentive for firms to get behind this programme – which is why we tend to need regulatory and legislative solutions to move things forward.

So while it’s great to see five banks and Nationwide volunteering to offer bank accounts to homeless people, this will need coordination with the third sector and a real commitment from banks to the policy if it is to be successful. Banks will not want too many of these customers – so without a compulsion to take them on, there will be a natural incentive to try and be as unsuccessful as possible in this space.

But let me reserve my cynicism on access to banking and credit for the moment. There are some steps forward here – and let’s see what they amount to.

Insurance is the big disappointment

The real disappointment in this strategy is the work around insurance. The three main initiatives are:

-              a push to get more social tenants taking up contents insurance

-              an exploration of the reasons more people don’t take out income protection, and

-              a commitment to “total signposting”, which will mean anyone turned down for insurance will be signposted to another provider who might be able to help them.

I’m all in support of helping more social tenants get access to contents insurance. And there are already some very good low cost products on the market – so there is certainly an opportunity to do a better job at coordinating local authorities and social housing providers to improve access.

But like many financial inclusion challenges – the key reason for lack of take up is often that families just don’t have enough money to spare. If it’s a choice between an extra meal and contents insurance – everyone is going to opt for the food.

So for those who can’t afford cover – it will either need to be provided for free by their council or housing association (paid for by Government), or they will need to remain uninsured - and turn to the third sector when the worst happens.

The same goes for income protection. Industry already provides solutions for most of the insurable risks. Many people who fall through the gaps are the ones who are not commercially viable. At the Fair4all finance conference on Tuesday, one of the breakout sessions played a video of a man talking about how no one would offer him income protection because of his health. And then within a couple of years, he was unable to work and had to rely on benefits. While that is obviously a sad story, the insurers were presumably right to reject him. Even if someone in the market would have covered him, the cost would likely have been prohibitive because his poor health indicated he was likely to soon end up being unable to work. And that is exactly what happened.

This is what the benefits system is for. And if we want the private sector to step in to provide more income protection, it will only happen if the Government forces widespread take up and more pooling of risk. There’s little appetite for this – as it would be politically difficult to steer through.

But there are genuine issues of insurance exclusion that could have been addressed in this financial inclusion strategy and weren’t. The very poorest in society are unlikely to be able to afford insurance. But there are many more who might be able to – but are priced out because social factors push their risk rating up.

As I’ve written about at length before – and you can read about in our Insurance Pricing report published in July – today’s sophisticated insurance pricing models tend to penalise lower income customers because they have a higher propensity to make small claims – not because of their underlying risk. Many people are also often forced to pay more for factors that are outside of their control. They may well be higher risk – but people’s risk is not always correlated to their ability to pay.

To provide a more inclusive insurance market, we have to look at the way insurance is priced and draw some boundaries. This is a social debate that needs to be led by Government and the financial inclusion strategy is another missed opportunity to start that conversation.