Could Financial Inclusion be at a Turning Point?

This pressure is coming from a joint initiative by Fair by Design (a consumer advocacy group) and the Financial Inclusion Commission, an “independent body made up of experts from financial services, businesses, the charity sector, academia and parliamentarians from all major parties”.

The thrust of their approach is an interesting one. They’re not asking for the FCA to directly tackle financial inclusion as an objective or principle. Instead, they’re asking the Treasury Committee, as part of its review of financial regulation, to ensure that the FCA adopts a cross-cutting “must have regard” to financial inclusion.

So what does this mean? This quote from a Financial Times article best illustrates their purpose:

“As Martin Coppack, Fair by Design’s director, puts it: “we don’t expect regulators to do social policy. We’d like them to consider, monitor and report on how regulation affects financial inclusion and where people are falling between the cracks.”

Bring Out the Data

The thrust of this initiative then is to bring out the data on financial inclusion that has been lacking. The FT article explains the problem:

A lack of data means it can take years to get traction on obvious problems because there isn’t the information available to convince policymakers that action is needed. The FCA’s work in tackling the “loyalty penalty” in insurance is seen as a success, but took years of campaigning, research and a super-complaint to the Competition and Markets Authority from the charity Citizens Advice to force the issue.

So will this initiative succeed? And if it does, what implications could it have for insurers? And if it doesn’t succeed, what legacy will it leave behind? This and more I’ll explore in this ‘Analysis’ piece.

Let’s be clear about some of the detail first.

The key ethical issue that financial inclusion raises is fairness. And it brings into play two particular dimensions of fairness: fairness of access and fairness of need. A lot of the debate around financial inclusion is in fact a debate about equality of fairness. In other words, how you balance the interest of insurers in fairness of merit, with consumers’ interest in fairness of need and of access.

An Essential Service

A key point in this financial inclusion initiative is that insurance is now seen as an essential service. Think of motor insurance and getting a job. And it can deliver much more. For example, if you’re a person with a disability, this means getting out of the house and around the area where you live. And think of life insurance and owning a house.

This reflects the success with which insurance has embedded itself into key life events. The quid pro quo here of course is that as an essential service, those key life events should be open to everyone. So insurance may be a private market run on a profit basis (nothing wrong with that), but it should then ensure that people do not fall between the cracks.

What Financial Inclusion Means

Let’s bring in what exactly is meant here by financial inclusion. This is best done through this quote from an open letter sent earlier this year to John Glen, the Economic Secretary to the Treasury:

Everybody should have access to financial products and services that meet their needs over the course of their lifetime. For this to happen effectively the market needs to be able to accommodate the specific needs of people on low incomes and with certain characteristics, such as those with a physical disability or experiencing poor mental health – regularly referred to as consumer vulnerabilities. However, a market has evolved where those who have the least resource and are most vulnerable: a) struggle to afford, or have to pay extra for, appropriate products and services because they are deemed to be a higher risk/not as desirable to serve; b) are not able to access products and services that meet their needs because they are ‘nonstandard’; c) are excluded altogether.

What is Being Asked For?

And before getting into the meat of this analysis, let’s be clear about what exactly is being asked for. There are two components to this. Firstly, the ‘must have regard’ provision, which would require the FCA to consider, and where necessary address, financial inclusion across all of its work. Then there is a reporting provision, which would require the regulator to report to Parliament on an annual basis, covering:

• the state of financial inclusion in the UK;
• measures that the FCA has taken, and is planning to take, in order to advance financial exclusion, and;
• recommended additional measures which could be taken by Government and other public bodies to promote financial inclusion.

This can be summarised as simply ‘to inform policymakers’. To be honest, it doesn’t sound like that big an ask.

The Interested Parties

Let’s look first at some of the views circulating around this initiative.

The Treasury (part of the Government) acknowledged that “must have regard to financial inclusion” is an option but then went on to dismiss it. They think that the FCA has shown that it can already address these issues. It’s a stance that’s driven in part by the Treasury’s preference for the FCA to be given objectives relating to growth and international competitiveness.

Then there’s the regulator itself. They want to avoid being overloaded with new mandates. And rather oddly for a conduct regulator, they want to avoid dealing with social issues. This might surprise some of you. After all, this is a regulator whose work is defined by a set of ‘Principles for Businesses’ that reference fairness, honest and integrity. Yet it is also the regulator whose chairman once declared ‘we don’t do ethics’.

So why is the FCA so wary of social and ethical issues? Being stuffed full of economists is one possible reason. A habit of seeing things through a market lens rather than a consumer lens could be another. And I suspect a perception of social and ethical issues as complicated and difficult could be one more reason.

We saw this with the pricing super-complaint. The FCA’s long held view was that the market itself determined the fairness of an insurance price. Just read this Beesley lecture in 2016 by their Chief Economist. They had the data telling them the scale of the problem (in field trial reports) but just ‘didn’t see it’.

Hold on, some of you may say. What about those access to insurance and vulnerability reports that the regulator has produced? Well, it turns out that they were more peripheral than many would have thought. Sure, those reports raised the issues but they then seemed to have been pushed quietly into the side-lines.

The culture at the regulator sees social and ethical issues as ‘not in their remit’. Yes, they’ll look at them from time to time, but then get back to ‘their real work’. So the obvious question then is: in whose remit do those social and ethical issues lie?

That turns out to be a hard one to nail down. The Treasury, the PRA and the Bank of England agree it’s not them, which leaves Parliament. What happens then is that Parliament is starved of regulatory insight into social issues like financial inclusion because no one in the regulatory structure set up for financial services wants to take on responsibility for reporting on it.

So who else is involved? The insurance sector seems to be keeping quiet, but I’m sure will be making it known through various channels that they would prefer the present arrangements to continue. This is for two reasons. Firstly, they fear the regulatory costs and complications from a more formulated approach to financial inclusion. And secondly, they would much prefer the regulator to take on new objectives more aligned with their interests. Namely, to promote growth and international competitiveness.

Then there are the involvement of consumer groups. They know that the regulatory route is the best way to achieve the changes they’re advocating. Yet they know from experience that the regulator can be reluctant to engage wholeheartedly, unless their hand is forced (as the super-complaint did).

So will the ‘must have regard’ approach succeed? That will depend on the extent to which the Treasury Committee (part of Parliament) sign up to the case put to them in committee session by Fair by Design. You can watch the session here.

How Events May Unroll

I believe the Treasury Committee will be sympathetic, but I don’t yet feel able to call how emphatically that support will be written up in their final recommendations. This is pretty much the same as the extent to which the Treasury itself will feel obliged to heed the Committee’s recommendations.

Let’s say the Committee gives the initiative their support and the Treasury incorporates ‘must have regard’ into the FCA’s statutory obligations. I think that, for a while, there will be little discernible change. The FCA will gather data, report to Parliament and leave it at that.

After a year or two, clear patterns will be confirmed and the political manoeuvring by consumer groups will scale up. That is what insurers have to be prepared for, which in effect means that they should consider building their own internal reporting on financial inclusion in order not to be caught by surprise. Some will already have some level of such reporting, while others will be starting from scratch.

Let’s now consider what might happen if the initiative fails. I think it will have at least put a spotlight on the gap in the regulatory framework for financial services. And the Treasury Committee will then exert pressure on that regulatory framework at subsequent hearings dealing with access and fairness. So the deal would be ‘we will give you promotion of growth and international competitiveness’ but in return ‘we will push you hard on financial inclusion’.

Is that perhaps too much wishful thinking? I think not. Consider the headline used in the recent FT article.

“Why aren’t we trying to create a financial sector for all? Post-Brexit regulation is preoccupied with the sector’s concerns and disregards everyone else”.

If the UK’s leading business newspaper thinks the balance of what the Treasury and regulator want is wrong, then that will be noticed.

Insurers can see then that either which way, they will be expected to know how their business is performing relative to financial inclusion, and to evidencing how they’re managing that.

The Wider Problem

The FCA has a wider problem in relation to social policy issues. Its tendency to stand back from them means that it more often than not tends to find itself standing with, and listening more often to, the insurance and banking sectors being regulated. And perhaps this is not that surprising, given how similarly professionally and culturally they tend to be.

The quid pro quo of this of course is that the regulator seems to engage less enthusiastically with consumer groups. After all, consumer groups have a tendency to ask questions about things the regulator doesn’t think fall within its remit, but about which they also can’t keep quiet.

This less than level playing field can be seen in different initiatives the regulator has relating to data. Consider the Artificial Intelligence Public Private Forum. Its purpose is to...

“...provide a forum to further dialogue on AI/ML innovation, and explore means to support safe adoption of these technologies within financial services.”

Yet this is a forum made up entirely of people from regulators and industry. No consumer groups are being asked for their opinion on the ‘safe adoption’ of artificial intelligence and machine machine.

And consider this speech by Jessica Rusu, the FCA’s new chief data scientist. She was talking about the FCA’s new data strategy and its approach to innovation. Again, no mention of consumer interests (more on this here). You can see the contrast here between the regulator offering data sets to insurers, while consumer groups feel starved of data relating to financial inclusion. However the FCA may explain it, it just doesn’t look good.

Key Points for Insurers to Consider

Firstly, while insurers may have a preference for less regulation, what they do want is orderly regulation. Disorderly regulation is disruptive for strategies, systems and management. It also tends to be more reactive – just think of the upheavals caused by the pricing super-complaint. It all ends with trust in the sector being further eroded.

This I think points to insurers preferring discussions around responsibilities for financial inclusion being addressed thoroughly, so at least a clear picture emerges that they can adapt to.

Secondly, the research that the Institute and Faculty of Actuaries published last year with Fair by Design on the poverty premium is relevant here. If you combine its key finding that insurance is now the biggest component of the poverty premium, with the likely debate about responsibilities that I mention above, then this points pretty clearly to financial inclusion needing to move up the typical insurer’s ‘pay-attention-to-list’.

And thirdly, I think that this overall situation evidences a problem with principles based regulation. The regulator’s recurring narrative that insurers need to ‘work the issue out for themselves’ (in order to really understand it) doesn’t work if the regulator itself is less than clear about what it itself is willing to address (in this case, social and ethical issues).

I’m not saying ‘drop principles based regulation’. I am saying that it relies on principles being clearly scoped and explained, which looks to be lacking here.

Steps Insurers Should Consider Taking

I would recommend insurers take the same approach that is being urged on the FCA. In other words, understand what’s involved, gather data and join up your thinking. Here are five steps to consider...

• Determine the level of in-house understanding about financial inclusion. Is it sufficient, and in the right place?
• Estimate the level of poverty premium being produced by your underwriting strategy, relative to that in the actuaries’ report. Is this a surprise, and are you happy with it?
• Make sure you have a joined up narrative on financial inclusion, so that you can follow and engage in the emerging debate. Is your firm ‘talking the walk’?
• Look at your approach to fairness. Does it encompass issues relating to financial inclusion?
• Make sure your radar on financial inclusion is balanced. Who are you listening to on financial inclusion? Is there the right (and strong enough) customer voice there?