12.1.2Financial market exclusion

In recent years, the UK government has become concerned about the extent of

‘nancial exclusion’ – the exclusion of signicant numbers of people from nancial

services: from particular sources of credit, insurance, bill-payment services and

accessible and appropriate deposit accounts. People may be excluded as a result of

the policies and behaviour of the nancial services industry or they may be ‘self-

excluded’ because of the type of nancial products available or their assumptions

about the likely behaviour of nancial institutions. That is, they might not apply

for nancial services because they assume they will be rejected. Poor members of

the community, in particular lone parents, people with disabilities, the unemployed

and those on low wages, are the most likely to be nancially excluded. For them,

nancial exclusion is one aspect of general deprivation – a major element within

‘social exclusion’, which implies a lack of economic, political or social citizenship.

However, nancial exclusion is not limited to the poor. There may be problems

also for ethnic minorities as well as for those who do not conform to the standard

picture of credit worthy people used by nancial institutions in risk assessment.

The Family Resources Survey (FRS) for 2002–03 indicates that 1.9 million house-

holds covering 2.8 million adults have no bank account of any kind. Approximately

3 million households (12 per cent of the total in the UK) lack a current account.

Research carried out by the FSA suggests that 27 per cent of employees do not have

an occupational or private pension. Up to a quarter of households have no home

contents insurance and 45 per cent have no life insurance cover.

Exclusion from nancial services carries a number of costs for those excluded:

l	It denies them the ability to borrow and thus to arrange their nancial affairs optimally or it forces them to borrow from ‘unofcial’ sources, possibly at very high interest rates.

l	It denies them discounts on many bills available to people able to pay by direct debit.

338

....

FINM_C12.qxd 1/18/07 1:28 PM Page 339

12.1 Borrowing and lending problems in nancial intermediation

l	It greatly reduces their ability to deal with household and personal emergenciesbecause of their lack of insurance.

l	It greatly reduces their ability to plan for the future and to cope with old age andsickness.

Because nancial exclusion is concentrated both among particular groups and

geographically, whole communities are disadvantaged in these ways.

One of the principal criticisms of the banking system in relation to nancial

exclusion has been the closure of bank branches, a high proportion of which have

been in poorer areas of the country. A Nottingham University study published in

early 2006 found that between 1995 and 2003 some 4,041 branches were closed across

the UK and only 1,074 new branches were opened. The majority of the branches lost

were located in poorer urban, traditional manufacturing areas and in parts with a

higher proportion of students. The report said people whose branches closed faced

higher transport costs and a feeling of ‘abandonment’. Further, the loss of counter

services and cash transmission created major problems for local businesses. The report

suggested that branch closures threatened to widen the gulf between poorer and

more afuent areas.

This pattern of bank closures has arisen because banks do not make signicant

prots from the provision of current accounts. High prots come from the sale to

current account customers of other high-prot-margin services – loans, credit cards,

insurance, sale of investment products, etc. In particular, account holders who make

frequent use of accounts but save little and who are regarded as high risk from the

point of view of potential default on loans are unlikely to be able to afford high-

prot-margin services so have little attraction for the banks. One approach to this

was the government’s requirement that banks offer ‘basic bank accounts’. These

allow customers to pay in wages or benets and set up direct debits. They come with

a card for use in cash machines, but have no cheque book or overdraft facility, over-

coming the problem of default risk for the banks and also reducing the possibility

that account holders unable to manage their nancial affairs will become heavily

indebted. There are seventeen providers of basic bank accounts including all the

major high street banks. Since April 2003, 1.3 million of these accounts have been

opened but recently there has been a steady decline in the number of new basic

bank accounts opened each year. It has been suggested that many providers give

little publicity to the possibility of opening such an account.

An alternative to a basic bank account is the Post Ofce card account, which

enables customers who are relying on state benets and pensions to have payments

credited to an account that can be accessed through machines at Post Ofce branches.