Why the UK needs a Responsible Banking Ordinance and how we get it
Carl Packman, CHASM, University of Birmingham, PhD student.
There’s rarely been a more urgent time to make big changes to the way we provide financial services to consumer-citizens in the UK.
The cost of living is increasing much faster than wages in the UK. The price of food, transport, household heat are all increasing while incomes fail to keep up in real terms.
The number of people moving into poverty is sharply rising. Around 13.4 million people were living in poverty in the UK in 2020/2021, including 3.9 million children. It's expected that one million more people were pushed into poverty during the winter of 2022.
Many households face the agonising choice of whether to eat, or heat their homes. 2 million households are doing neither.
All the while, problem household debt is increasing at a dangerous pace. 1.3 million people have reported saying that loan and interest payments are a heavy burden for them. Banks are preparing for an increase in personal debt defaults as economic recession looms. Almost three quarters (74%) of consumers currently in debt admit to a fear of becoming trapped by debt in the future. Household finances are in a real mess.
Meanwhile financial exclusion remains a big problem in the UK. Just over half a million adults live in households without a transactional/savings bank account. 60% of households earning £15,000 or less per annum have no insurance contents cover. Over two million households are in debt to high interest lenders like an illegal loan shark or a doorstop lender.
There isn’t going to be one single solution to fix this entire mess. The responsibility for all of the facets of the cost of living/household debt crisis are spread thinly across government, market regulators, and suppliers of essential services. This makes fixing the problem more complex, but no less urgent.
Top of my list of things needed is an overhaul of the way we do financial services provision in the UK. Too many people are excluded from mainstream services. But for those who are served by banks, the relationship is often not productive. Problem debt statistics are proof of this. We need something that changes the relationship people have to financial services in the UK, whilst addressing the problems caused by financial exclusion.
To that end, we need a Responsible Banking Ordinance (RBO) for the UK. Introducing an RBO would create a productive relationship between creditors and borrowers. An RBO obliges financial institutions to disclose detailed information about how much credit is being lent and to whom in a particular area. This in turn gives government, regulators, and civil society organisations a way of identifying where there is unmet credit need and how that can be met in the future. It is community banking in its truest sense.
How will we get a Responsible Banking Ordinance in the UK?
The Collins Dictionary’s word of the year for 2022 was “permacrisis”. A portmanteau of “permanent” and “crisis”, it neatly sums up the feeling that everything is going wrong all of the time; not just as a temporary short blip but as a constant state. The cost of living and household debt crisis (or CoL/HD for short) feels less like something that is going to pinch Britons for a painful, but short period, and more like something that is going to be a permanent fixture of financial life for a long time to come.
In order to solve for the CoL/HD permacrisis, we are going to have to think big.
Responsible Banking Ordinances would do a lot to restore something the UK’s financial institutions/banks lack considerably: trust.
A Responsible Banking Ordinance is very simple: it’s an audit of financial inclusion in a defined geographical area. RBOs have been around since the early 1990s in the United States. Cleveland was among the first examples of an RBO in 1991, the City of Philadelphia in 2002, San Jose in 2010, Seattle in 2011, Pittsburgh, New York City, Los Angeles, Portland, Kansas City in 2012, and more beyond.
One of the intended aims of the RBO was to entirely end redlining practices among banks and other financial institutions. Redlining describes a practice where banks define whole neighbourhoods - often identified along racial grounds - and halt lending to them entirely, keeping Black and Hispanic families from gaining wealth through homeownership. Before the introduction of the Community Reinvestment Act in the US in the 1970s, redlining was very common. While discrimination still exists in other ways, redlining as a practice is illegal.
Unique to the RBO is the disclosure of information that would determine whether a bank is engaged in redlining practices or discrimination more broadly. Information required of financial institutions includes:
- Residential lending information
- Small business lending information
- Community development loans and investments
- Branches and deposits information
- Consumer loan data
- An affidavit by an authorised officer
- A Community Reinvestment Act evaluation
- Copy of branch closing policy
- Information regarding number of minorities, females and city residents employed by the depository as loan officers/senior staff etc; and
- Any additional information requested at a local level.
When this level of detailed information is obtained by government or a regulator, they can determine who is (and isn’t) accessing essential financial services in a local area. Having access to the number of people denied credit gives more accurate information about unmet need. If this information is shared with other providers of financial services, such as community lenders and credit unions, they stand a chance of understanding their target market much better.
What results? Disclosure data leads to understanding how to serve under-served communities.
A progressive addition would be to oblige mainstream providers of financial services (like banks) to forfeit part of their profits to support alternative financial services providers who do serve people with unmet credit needs in a particular area.
In the UK, the Financial Conduct Authority (FCA) would ultimately be tasked with overseeing an RBO. They would obtain the information from all providers of financial services, big and small, in a uniform manner (so any information collected can easily be compared). This would then reveal unmet credit need and simultaneously reveal the challenge ahead for how much would be required to fund the alternative provision of credit in an area.
Government would need to instruct the FCA with this task. And it would be in their interest to do so. Previous government initiatives to increase the supply of alternative, responsible lending via Community Development Financial Institutions and credit unions (such as the Credit Union Expansion Project) returned mixed results. Some growth, but nowhere near enough. And a lot of money spent.
An RBO would be the information revolution needed to kickstart solving the problem of financial exclusion in the UK. It would also signal to banks that more needs to be done to help people access essential financial services. Particularly now during the CoL/HD permacrisis.