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Chapter Two Background to Financial Inclusion

Introduction

2.1 This Chapter looks at what lies behind financial inclusion (and by definition exclusion) and its theoretical underpinnings. It also considers the current policy responses to financial inclusion within the UK and then specifically within Scotland. Reference is also made to the situation in other developed countries as appropriate.

Financial Inclusion

2.2 Following deregulation of the financial markets in the 1980's, financial products, especially credit and mortgages, are now more widely available than ever before. Increasing participation in the financial services market has been promoted by:-

• An increase in living standards and disposable income for a majority of the population;
• Increased use of electronic money transfer mechanisms for the payment of wages and benefits from the Department of Work and Pensions;
• Growth of telephone and internet banking; and
• Increased participation of women in the labour market ( HM Treasury 2004a).

2.3 However, there remains a small, but significant, minority of people who lack access to financial products and services resulting in growing academic and political interest in the issues surrounding financial inclusion.

2.4HM Treasury ( HM Treasury 2007a) consider financial inclusion as being about ensuring that everyone has access to appropriate financial services, enabling them to:-

• Manage their money on a day-to-day basis, effectively, securely and confidently;
• Plan for the future and cope with financial pressure, by managing their finances to protect against short-term variations in income and expenditure, and to take advantage of longer-term opportunities; and
• Deal effectively with financial distress, should unexpected events lead to serious financial difficulty ^.

2.5 Financial inclusion, as defined by the Scottish Executive (2005), relates to:-

"access for individuals to appropriate financial products and services".

This includes having the capacity, skills, knowledge and understanding to make best use of those products and services. Financial exclusion by contrast, is the converse of this: that is a lack of access to products and services, and or capacity, skills, knowledge and understanding.

2.6 Interestingly, the definition of financial inclusion currently employed by policy makers extends to those who have access to products and services but, for whatever reason, fall into financial difficulties. In this way the definition is moving on from earlier ones that defined financial inclusion and exclusion largely in terms of physical access, to a wider definition covering access to and use and understanding of products and services.

The Extent of Financial Exclusion

2.7 In November 1999 the Social Exclusion Unit published a report to the Treasury on Access to Financial Services ( HM Treasury, 1999). The report estimated that around 1.5million low income households in Britain made no use of mainstream financial services at all. Such households managed their finances without a bank or building society account, and had no savings, investments, pensions, mortgages or insurance. The implication was that they operated in a cash economy.

2.8 In addition Kempson and Whyley (1999) noted that:-

• A further one in 5 households made very limited use of financial services;
• One in 10 had just one product, most likely a current account with a bank or building society;
• A further one in 10 had only 2 products; and
• Face-to-face money advice fell far short of demand.

Causes of Financial Exclusion

2.9 Kempson et al (2004) outlined multiple explanations for the exclusion of individuals from the banking system in a number of developed economies. Contributing factors were believed to include:-

• Physical access;
• Refusals by banks to provide services to some people;
• Inability to meet identity requirements required in order to access products and services;
• The terms and conditions imposed;
• Bank charges; and
• Psychological and cultural barriers: in essence self exclusion.

2.10 This analysis suggested that there were a number of reinforcing factors that could influence, or drive, financial inclusion: some were institutional, that is responses on the part of the organisations delivering products and services, whilst others reflected the actions and perceptions of individuals.

2.11 One of the key institutional factors is increasing competition and technological advances, such as telephone and internet banking, which have reduced the need for face-to-face transactions. One response has been the closure of banks and building societies branches: what has become known as financial desertification (Sinclair, 2001). However, those on low income are less likely to be able to benefit from these technological changes. They are therefore at increased risk of exclusion. Their problems are sometimes compounded by the lack of reliable, and cheap, transport to reach other branches. There may therefore be a disproportional impact on rural and deprived urban communities. However, whilst there is some evidence that access restrictions increase psychological barriers to the use of financial services, Kempson and Whyley (1999) report that this does not seem to be one of the main reasons cited by individuals to explain their lack of engagement.

2.12 Identity requirements have become increasingly important in recent years as the government and the banking industry have taken action to combat money laundering and terrorism. Indeed the UK Financial Services Authority ( FSA) recently fined two major high street banks for failing to carry out adequate identity checks on prospective customers. Until recently, banks were required to ask for a range of personal identification, including proof of address and photographic identification, before they could open a bank account. Passports and photographic driving licences were the most widely accepted forms of identification. For people without such identifying documents it may be difficult to provide acceptable identification. Kempson et al (2004) discovered this problem in other countries where, as in the UK, identity cards are not a compulsory requirement. Identity requirements may be particularly problematic for those on low incomes, the homeless and refugees. However, recent changes to the money laundering regulations have eased this situation. While proof of identity is still required to open an account, this may now come from a trusted third party in the form of a letter.

2.13 There are also a range of terms and conditions attached to service use that might prevent or deter use of financial products and services amongst some social groups. Whilst Kempson et al (Ibid) recognise that these barriers differ between countries, it is also true that there are similarities. Barriers to engagement arising from terms and conditions include:-

• The requirement for a minimum balance to open an account, which may be beyond the means of financially excluded individuals. This has also been a cause of concern in France, Canada, the United States of America ( USA) and Australia;
• Conditions relating to minimum use of a bank account. In Belgium it has been reported that accounts have been closed by banks when customers fail to use them with sufficient regularity or withdraw money too soon after they are opened;
• Lack of safeguards against unintentional use of overdrafts. This has been a major cause of concern and criticism in the UK where being overdrawn by a small amount for only a few days may result in bank charges, bounced cheques and failed direct debits. Fear of this situation arising, and the charges incurred as a result, are the main reasons cited by individuals for closing their bank accounts;
• Those with a history of bad debt may be offered very limited facilities or facilities that are inappropriate to their situation; and
• Bank charges have been shown to be a significant deterring factor in all countries studied, with the exception of the UK where transactional banking is generally free as long as there are sufficient funds in the account. In other countries charges may be applied for:-
  • Failing to maintain a minimum balance;
  • Over the counter transactions (most frequently used by low income groups); and
  • Exceeding the permitted numbers of free transactions.

The situation in the UK may, however, be set to change as a number of banks have recently indicated that they are considering the introduction of compulsory monthly fees on current accounts, as is common in the USA and Europe. Any such move is, however, likely to result in heavy criticism from organisations such as the National Consumer Council and the Independent Banking Advisory Service.

2.14 Research undertaken by Kempson et al (2004) also discovered that a minority of people in the UK and the USA, Australia, Belgium, Canada and France lacked access to banking facilities as a result of being denied an account by a bank. There is also evidence to suggest that people who have been refused rarely appeal against the decision, even when they have the legal right to do so. This situation has been observed despite the implementation of new laws and voluntary codes to strengthen the right of access to a bank account (see Paragraphs 2.59 to 2.64).

Types of Financial Exclusion

2.15 Kempson and Whyley (2000) identified 6 principal types of financial exclusion:-

• Physical access exclusion, brought about by the closure of local banks or building societies and lack of reliable transport to reach alternatives;
• Access exclusion, when access is restricted through risk assessment, with people being denied a product or service as they are perceived to be high risks;
• Condition exclusion, when conditions are attached to products or services thereby making them inaccessible to some;
• Price exclusion when products are available but at a price that is unaffordable;
• Marketing exclusion, where sales and marketing activity is targeted on some groups, or areas, at the expense of others; and
• Self exclusion, when individuals do not seek financial products and services for reasons including fear of failure, fear of temptation or lack of awareness.

As the evidence base grows, and the theory becomes more sophisticated, policy has been developed and adapted to tackle these issues.

Characteristics of the Financially Excluded

2.16 Kempson et al (2004) report that financial exclusion is most prevalent amongst those on low incomes. Unemployed people living on social security payments from the state are therefore especially vulnerable, as are low income households from ethnic minority communities who may also have relatively low levels of engagement with the financial services industry. Kempson et al (ibid), supported by evidence from the Family Resources Survey 2002-2005, report that uptake of financial products and services is lowest amongst African-Caribbean, Black, Pakistani and Bangladeshi households in the UK. However, for some members of these groups religious beliefs may provide a partial explanation for this apparent exclusion.

2.17 Age has also been highlighted as an important factor in identifying those at risk of financial exclusion, with those at the extremes of the spectrum seen to be at most risk. This is illustrated by Kempson and Whyley (1999) who note that very young householders, aged under 20, may not yet have acquired any financial products, whilst householders aged over 80 may have retired prior to the rapid expansion of financial services. However, it may also be that age is not the key determinant here, but low income, with those at the extremes of the age spectrum being relatively poor. This is explored in greater detail below.

2.18 Those with a history of bad debt may face additional barriers to financial inclusion especially in relation to gaining affordable credit and opening a bank account. Kempson et al (2004) report that this is a major cause of banking exclusion in Sweden and Germany, despite there being near universal access to banking in these countries.

2.19 Additional characteristics associated with high levels of financial exclusion include:-

• Households headed by a single person, including single people who live alone both above and below pensionable age and lone parents;
• The age of the householder when they left full time education. Whilst it is not true to say that a low level of education leads directly to financial exclusion, educational attainment is linked to income which has been shown to affect use of financial products and services (Kempson and Whyley, 1999); and
• Households headed by a woman, including lone parents, single pensioners, widows and separated women (Small Change Partnership, 2006).

Once again it is likely that members of these groups may also have low incomes.

The Spatial Dimension

2.20 Geographical location is a further factor which may contribute to financial inclusion. This may impact through:-

• Physical access restrictions, the focus of traditional thinking on financial exclusion; and
• The overall level of deprivation in the local authority area. Thus, the more deprived people there are within a local authority area then the more people there will be who are classed as financially excluded. This shows the significance of poverty, and other deprivation characteristics, as causes of financial exclusion. It is also likely to be self fulfilling in that the higher the level of deprivation then the less likely it is that financial providers will see a market for their services.

Kempson and Whyley (2004) noted that those living in rural communities were less likely to hold a bank account whilst the Treasury Select Committee (2006) and Citizens Advice (2006) highlight the difficulties and costs faced by those in rural areas and deprived urban communities who lack access to free cash machines.

The Implications of Financial Exclusion

2.21 The factors contributing to financial inclusion are multiple and complex. Such factors are not mutually exclusive, indeed they often overlap and reinforce each other with a resultant detrimental impact on individuals, the communities in which they live and society as a whole.

2.22 In the paper "Promoting Financial Inclusion" HM Treasury (2004b) suggests that, for the individual, the most significant costs associated with financial exclusion included:-

• Higher charges for basic financial transactions and credit;
• Being unable to access certain products and services, for example services requiring payment by direct debit;
• Lack of security in holding and storing money;
• Barriers to employment; and
• Entrenching exclusion as having no formal banking or credit history is often as much of a disadvantage as a poor credit history.

2.23 In the wider community, financial exclusion has been shown to: -

• Exacerbate the harm caused by child poverty. This is highlighted by the Child Poverty Review ( HM Treasury, 2004a) which notes the negative impacts of debt and high charges for services on family life;
• Place additional strain on the benefit system, as claimants may be forced to rely on high cost credit ( HM Treasury, 2004b); and
• Contribute to wider social exclusion (Social Exclusion Unit, 1998).

Addressing Financial Exclusion in the UK

2.24 In an effort to increase financial inclusion, the UK government, in the 2004 Spending Review, announced the establishment of a £120 million Financial Inclusion Fund to support initiatives to address financial exclusion. The government also announced the creation of a Financial Inclusion Taskforce to monitor progress of the fund. The Spending Review committed the government to try to make progress in 3 priority areas:

• Affordable credit;
• Free face-to-face money advice; and
• Banking.

As part of the Fund, £45 million was allocated to support an increase in provision of face-to-face money advice in England and Wales. This money is to be administered by the Department of Trade and Industry.

2.25 Funding is to be split over a 2 year period; £15 million in 2006/07 and £30 million in 2007/08. An additional £6 million will be used by the Legal Services Commission to pilot financial advice outreach initiatives, including debt advice, aimed at those who do not normally seek help.

2.26 A further £36 million from the Financial Inclusion Fund has been ring fenced for the establishment of a Growth Fund to increase the availability of affordable personal loans through third party (not for profit) lenders such as credit unions and community development finance institutions. This fund is to be administered by the Department of Work and Pensions who will evaluate bids from service providers in deprived areas of England, Wales and Scotland. To date 5 third sector lenders in Scotland have been allocated a proportion of the Growth Fund ¹.

2.27 In addition, the Facilitating Access Campaign "Lets Talk Money" was launched on 31 ^st January 2007. This is a UK wide multi-media campaign launched by the Department for Work and Pensions and funded by the Financial Inclusion Fund, to raise awareness among low income groups about access to banking services, low cost loans and advice on how to better manage their money.

2.28 The Financial Inclusion Taskforce also has a budget of £3 million, which is being used primarily to conduct research and enhance the knowledge base on financial inclusion.

Scotland: Closing the Opportunity Gap

2.29 Financial inclusion forms a part of the Scottish Executive's "Closing the Opportunity Gap" strategy to address poverty in Scotland. One of the 6 objectives is:-

"To reduce the vulnerability of low income families to financial exclusion and multiple debts - in order to prevent them becoming over-indebted and/or to lift them out of poverty".

2.30 This objective is supported by the target of increasing the availability of appropriate financial services and advice to low income families by 2008. Promotion of greater financial inclusion will also contribute to wider aims of the Executive's policy, such as:-

• Growing the economy;
• Delivering excellent public services;
• Building strong safe communities; and
• Developing a confident democratic Scotland.

2.31 "A Partnership for a Better Scotland" (Scottish Executive, 2003) outlined commitments by the Executive for tackling financial exclusion and poverty over the next 4 years. These included:-

• Supporting an extension of money advice services;
• Implementing the Debt Arrangement and Attachment (Scotland) Act 2002;
• Supporting the development of credit unions and community banking arrangements;
• Investigating the feasibility of community based insurance schemes;
• Encouraging local enterprise and trading schemes; and
• Working with the Department of Trade and Industry to tackle harassment by loan sharks and introduce fairer credit systems.

2.32 The Executive, in partnership with Communities Scotland, aims to meet the commitments set out in the Partnership by focusing upon 3 priority issues:-

• Financial services;
• Advice and support; and
• Financial education.

These are outlined in the Financial Inclusion Action Plan (Scottish Executive, 2005) which aims to tackle these issues by working in partnership with local authorities, banks and other financial institutions, the money advice agencies and credit unions.

2.33 In parallel with the publication of the Plan the Executive allocated £5.3 million to the 11 local authority areas having the greatest concentrations of financially excluded residents, for each of the years 2006/07 and 2007/08. The money was routed through the relevant Community Planning Partnerships and was to develop financial inclusion programmes and plans. It has been spent on a variety of initiatives, including the employment of financial advisers, funding training and outreach work, supporting credit unions and employing staff to promote financial advice through other departments such as housing.

Recent UK Initiatives - Basic Bank Accounts and Cash Machines, Savings and Financial Capability.

2.34 In the UK, as in Australia, access to basic banking has been possible through voluntary arrangements with high street banks. The conclusions of the Policy Action Team examining social exclusion in 1998 provided a blueprint for a basic bank account which offered a full range of facilities but had no overdraft facility and no cheque book: all transactions were therefore to be "real time" ( HM Treasury, 1999). Despite all banks complying with recommendations to make such accounts available, Kempson and Whyley (2000) reported that such accounts are not always promoted to those who may benefit most from them. This assertion is supported by the report of the Treasury Select Committee 2006 (The House of Commons, 2006a). This suggested that many financially excluded people were still facing problems in opening basic bank accounts, including problems of identification, administrative delays and lack of access to appropriate literature. It is also reported that the vast majority of banks restricted access to basic accounts for those who were undischarged bankrupts, in spite of it being an appropriate way for them to manage their finances.

2.35 In operating basic accounts the Treasury Select Committee stated that some banks were failing to meet their obligations under the Banking Code, the provisions of which, in relation to basic bank accounts, were that banks should:-

• Give clear information explaining the key features of the services and products in which potential customers express interest;
• Assess whether the customers' needs were suited to a basic bank account and offer the product if appropriate;
• Provide information on a single product or service if the customer had already made their mind up;
• Explain what information was required to satisfy identity requirements;
• Provide information on products and services offered in more than one way (for example, on the internet, over the telephone or face-to-face in branches) and explain how to find out more; and
• Inform customers if basic bank accounts (if offered) can be used in post offices.

2.36 In spite of this code a mystery shopper survey undertaken by the Banking Code Standards Board ( BCSB) in 2005, summarised in the report of the Treasury Select Committee, revealed that:-

• Four high street bank chains displayed no literature on basic bank accounts in 90% of their branches;
• In 2 chains, 40% of applicants were unable to obtain, or encountered difficulties in acquiring, information on basic bank accounts;
• Three chains actively dissuaded customers from opening a basic account; and
• In 3 chains 45% of customers were required to send original identification documents away to a processing centre.

2.37 In light of these findings the BCSB made recommendations to strengthen the code of practice which included:-

• Mandatory display of literature on basic accounts in branches;
• No credit searches being undertaken using credit reference agencies as they are not necessary to open an account;
• Implementation of a standard time for a bank to open an account so as to reduce unnecessary delays; and
• In branch verification of identification documentation

2.38 It may be that these, and other initiatives, are now beginning to have an impact. For example, in 2004 the Government, in partnership with banks, agreed a shared goal to halve the number of adults living in households without access to a bank account, and to make significant progress on this goal within two years. The 2002-2003 Family Resources Survey ( FRS) showed that there were 2.8 million adults living in 1.9 million households without access to a bank account. Early analysis of the latest FRS shows that steady progress has been made: in 2005-06, the number of adults without access to a bank account had fallen from 2.8 million to 2 million adults living in 1.3 million households ( HM Treasury, 2007a).

2.39 There have also been recent initiatives to improve free access to money through the cash machine network . In December 2004, following concern regarding the rapid increase in the number of fee charging Automated Teller Machines ( ATMs), the Treasury Committee announced an inquiry into cash machine charges. The enquiry concluded that fee charging machines were a legitimate business model but that their spread could raise public policy concerns if they displaced existing free machines (The House of Commons, 2005). A debate on the Treasury Committee report was held in February 2006 when calls were made for the systematic analysis of the geographical locations of free cash machines to discover which low-income areas lacked access. The ATM Working Group was therefore to investigate:-

• The transparency of cash machine charges;
• The location of free and charging machines;
• Changes to the LINK interchange arrangements ²; and
• Whether it would be possible to secure a commitment from the banks to keep cash machines free and to expand into any under-served areas identified by the research.

2.40 The study resulted in an announcement in December 2006 that agreement had been reached between banks, machine operators and the government that more than 600 free ATMs would be installed in socially deprived locations across the UK. In December 2006, it was reported that more that 200 of these machines would be located in Scotland (The Scotsman, 2006). It might be possible to assess the impact of these changes using future SHS data sets.

Savings and Financial Capability

2.41 Saving and asset building is a key part of the Governments financial inclusion agenda and as a result a series of measures have been introduced to make it easier for people to save small amounts. Over 17 million people now save with an Individual Savings Account and in 2005 the Child Trust Fund was introduced as a universal savings account into which children are automatically enrolled at birth.

2.42 To encourage saving among lower incomes groups, the Saving Gateway, a matched incentive scheme, is being piloted and has provided evidence to suggest that matching incentives can indeed encourage additional saving and new savers ( HM Treasury, 2007a). A report by the Scottish Council Foundation saw merit in linking incentives savings schemes with financial literacy. The report observed that matched savings schemes stand out as a promising way to improve financial literacy among low to middle-income consumers (McCormick et al, 2005).

2.43 In 2006 the FSA published the results of the Baseline Survey of Financial Capability (Everitt, 2006). The survey looked at 5 dimensions of financial capability: -

• Making ends meet;
• Keeping track of your finances;
• Planning ahead;
• Choosing financial products; and
• Staying informed about financial matters.

2.44 A score was developed for each of the 5 aspects, and for the first time the UK's population was described in terms of their relative accomplishments in terms of these capabilities.

2.45 Key themes to emerge from the Baseline Survey are:-

• In relation to forward planning, the study found that people from all sections of society were not taking the most basic steps to adequately plan ahead, whether for retirement or to guard against an unexpected expense or a drop in income. This was not always because they lacked the money to do so: indeed many respondents were aware that they had issues to address but were often unsure of where to start. The study also found that, given the need to manage money effectively to get by, some of the most capable consumers were those on low incomes;
• Many people did not take adequate steps to choose financial products that met their needs, with many failing to shop around for the most appropriate products. It was concluded that many people take unnecessary risks by making poor product choices or by lacking awareness of the risks they face. This was considered a result of people finding it difficult and confusing to deal with the financial services industry;
• Half a million people are already experiencing severe problems with debt. A further one million have fallen behind with some of their debt payments at some point and the study found that a further 2 million households are only just coping. For them, even a small adverse change in their circumstances could lead to debt repayment problems; and
• The study revealed that the greatest demands were placed on those least equipped to deal with them. The under-40s were found to face a considerably more demanding environment than their parents and were generally less capable than their elders. For example, the costs of higher education and retirement are increasingly being borne by individuals rather than the state or employers. This means that the cost of lacking the necessary skills to make financial decisions is becoming increasingly significant. There is, therefore, a particularly pressing need to equip young people with greater financial capability.

As the Survey is likely to be repeated in 3 years time, it might be possible to align some of its questions with those in the SHS.

2.46 The FSA leads the National Strategy for Financial Capability in partnership with the Government, industry and the voluntary sector. The FSA programme of action to improve financial capability is being delivered through:-

• Schools: Learning Money Matters, which is operational in England only;
• Young Adults: helping Young Adults make Sense of Money;
• Workplace: Make the Most of Your Money, which works with employers to develop employees' financial capability;
• MoneyMadeClear, which is a handbook to explain financial terminology;
• Syndicating online tools, including such things as a debt check;
• Parents Guide to Money; and
• Money Advice.

2.47 The need for a step change is illustrated by figures taken from the Baseline Survey which show that Scotland is failing to plan ahead for retirement or an income shock. For example in Scotland ( FSA, 2007):-

• 82% have not considered making financial provision for retirement, yet 63% are confident their retirement income will give them the expected standard of living;
• 74% have not considered making financial provision in case of an unexpected drop in income; and
• 65% agreed they would rather have a good standard of living today than in retirement.

2.48 In Financial Capability: the Government's Long-Term Approach published in the January 2007 ( HM Treasury, 2007b) the UK Government set out aspirations to ensure that:-

• All adults in the UK have access to high-quality generic financial advice to help them engage with their financial affairs and make effective decisions about their money;
• All children and young people have access to a planned and coherent programme of personal finance education, so that they leave school with the skills and confidence to manage their money well; and
• A range of Government programmes are focused on improving financial capability, particularly to help those who are most vulnerable to the consequences of poor financial decisions.

2.49 From a Government perspective key challenges include:-

• The Child Trust Fund, where additional payments are to be made from 2009;
• Implementation of Personal Accounts from 2012, which is part of the push to ensure that everyone has pension provision; and
• The provision of affordable "generic", that is personalised but unregulated, financial advice

2.50 The Government intends to review the policies and programmes which have the potential to raise financial capability and then to set longer term goals for:-

• Children, young people and families: improving information and advice for young people, promoting opportunities for children to learn about money, and sign post information and advice for parents through extended schools and Sure Start Centres;
• The curriculum: giving financial education a secure place on the educational agenda and issuing revised curriculum guidance;
• Child Trust Fund: promoting the CTF as a learning tool to bring personal finance to life in the classroom;
• Adult skills: integrating financial education into basic skills learning and promoting the use of financial education as a route to literacy and numeracy skills;
• Planning for retirement: making better use of pensions information to equip people to take decisions about their retirement; ensuring that the introduction of personal accounts is supported by appropriate information and generic advice;
• Parents and carers: ensuring that personal finance resources prepared for parents are effectively distributed through trusted intermediaries; and
• Ensuring there is effective information and advice about personal finance from a range of Government services such as the Social Fund and Jobcentre Plus.

2.51 In the future the Government will also:-

• Set up an independent feasibility study, led by Otto Thoresen, Chief Executive of AEGONUK, to research and design a national approach to generic financial advice;
• Establish a ministerial group, chaired by the Economic Secretary to the Treasury, to develop, oversee and coordinate the Government's work; and
• Publish an action plan, by the end of 2007, setting out how financial capability will be integrated into existing services, particularly for those most vulnerable to the consequences of poor financial skills.

2.52 To some extent the type of initiatives that have been set up in the UK are mirrored in other countries. Some of these will now be considered.

Financial Exclusion in other Countries

2.53 Kempson, et al (2004) , in a report prepared for the Department of International Development, considered the extent to which individuals in developed economies were excluded from mainstream banking services. Countries considered in the report were the United Kingdom, the United States, Canada, Belgium, France and Australia. It was found that between 1% and 17% of adults in these countries had no bank account of any kind. The exact proportion varied between countries reflecting the differing levels of inequality that existed.

2.54 Their analysis showed that high levels of financial exclusion were most likely to be found in countries where income inequality, as measured by Gini coefficients for equivalent disposable income ³, was most marked. Table 2.1 looks at the percentage of adults without access to a bank account. The United Kingdom sits in the middle of the range, albeit that, as the figures relate to 2000, there are likely to have been changes since then.

TABLE 2.1 Adults Without Access to a Bank Account in 2000

Source: Kempson et al (2004).
Note:-
1. The figure for Portugal relates to access to any type of account, not just a bank account.

2.55 The report also concluded that account holding tended to be higher in countries like Germany and France where local savings banks and Post Offices are important players in the provision of banking services. Similarly, in countries such as Australia where social security benefits and pensions have been paid into bank accounts for many years, fewer adults lack access to bank accounts.

2.56 However, one of the issues internationally, is how to capture information on wealth, savings and asset building. For example, the need for quality data on the saving patterns of New Zealanders has long been acknowledged. Such information is vital in informing policy debate in areas as diverse as retirement provision, social equity analysis, consideration of microeconomic trends in consumption and asset prices, and broader macroeconomic policy for growth, balance of payments constraints and foreign investment patterns.

2.57 The 2001 Household Savings Survey ( HSS) was the first major national survey of wealth to be conducted in New Zealand (The Retirement Commission, 2002). This reflects, in part, the internationally recognised difficulties of collecting information in this area, particularly given the sensitive nature of the information sought, the wide range of asset and liability types involved and the inherent difficulties of assigning market values to these instruments.

Policy Responses in Other Developed Countries

2.58 Concern over access to financial services in the United Kingdom is mirrored across most developed nations in Europe, North America and Australasia (Kempson et al, 2004). The study also notes that, rather perversely, financial exclusion only emerged as a major issue when the vast majority of the population had access to financial services. In such circumstances, lacking access to financial services is costly and serves to reinforce social exclusion. In this sense, financial exclusion is a symptom of poverty as well as a cause.

2.59 Whilst financial inclusion has only featured prominently on the political agenda in recent years, some countries have had legislation and initiatives to promote inclusion that predate this interest. For example:-

• In Sweden banks are not permitted to refuse a customer a deposit or savings account under Section 2 of the Banking Business Act 1987;
• In France the Banking Act 1984 recognised the principle of a right to a bank account; and
• In the USA federal legislation, passed in 1997, rates banks on their efforts and effectiveness in serving low income communities. Although there are no formal sanctions for banks receiving an "unsatisfactory" rating, the majority strive to achieve "satisfactory" or "outstanding" ratings if only for the publicity that this may bring.

2.60 Some countries have also taken steps to introduce legislation enforcing commitments to tackle financial inclusion in order to address the shortcomings of voluntary codes. This legislation generally ensures a universal right to a bank account and defines the nature of banking services that must be provided. Such legislation was introduced in France in 1998, Belgium in 2001 and by some US states.

2.61 In 1998 the Canadian federal government task force on the future of the financial services sector published recommendations on reform measures, which were subsequently incorporated into legislation placed before Parliament in 2001. Reforms required all banks to provide accounts to all Canadians regardless of employment or credit history, with minimum identification requirements and without a minimum opening balance. In addition the Act allows the government to introduce further regulation relating to the provision of low cost accounts. Banks were however, given the opportunity to address this voluntarily before regulations were introduced, which many subsequently did.

2.62 Whilst the legislation outlined above helps to ensure access to a deposit account, it provides no further guidance on the nature of services which should be offered with that account. Wider concern over social exclusion has led to developments in this area, such as voluntary codes of practice developed by the banks and legislation, although, as yet, it is too early to comment on the effectiveness of such initiatives.

2.63 Amongst the earliest voluntary codes of practice was that introduced in 1992 by the French Bankers Association. The code committed banks to opening affordable accounts with access to facilities including:-

• A cash card;
• Free access to a cash machine network;
• Bank statements; and
• A negotiable number of cheques.

2.64 A voluntary code was also introduced by the German Bankers Association in 1996 to provide an "Everyman Account" offering basic services without an overdraft facility, whilst the Belgian Bankers' Association followed suit in 1997 with a voluntary code to introduce a deposit account offering money transfers, deposits and withdrawals and bank statements. Individuals can choose to upgrade these services and facilities should they wish.

Conclusions

2.65 The debate about financial exclusion has moved on rapidly in recent years, from a focus upon physical access to one that is concerned with far wider issues including knowledge and understanding. The debate has been paralleled by a growing number of initiatives set up by governments and financial institutions. Governments in some countries have gone down the legislative route whilst in the United Kingdom the approach has been twofold:-

• To set up specific initiatives to try to promote financial inclusion; and
• To work with the banks on a voluntary basis to try to get them to make basic services available to those who might otherwise be denied access.

2.66 These initiatives have been set against a growing literature that has explored the characteristics of the financially excluded, including their socio economic status and location. Although, at the margins, the characteristics of the financially excluded can be quite complex, what generally emerges is a strong relationship with indicators of poverty and with those areas where poverty is concentrated.

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