Money: The millions finance forgot

Banks and insurers turn a blind eye to the less well off. Harvey Jones looks at efforts to redress the balance

Most of us aren't intimidated by the thought of applying for a bank account, a mortgage or household insurance. We take these financial services for granted. Yet millions of people are excluded, either through low income, a bad credit rating or their postcode.

Banks and insurers want to please shareholders by chasing the affluent, and the poor are being sidelined. Some three million adults do not even have a bank account.

Now the Office of Fair Trading has stepped in. It wants an overhaul of banking and insurance regulation to reverse the growing exclusion of vulnerable customers. John Bridgeman, the OFT's director-general, dismissed the finance industry's arguments that ethnic minorities, the disabled and those on low and volatile incomes choose not to use basic financial services. Current accounts, household insurance and short-term credit from high street banks are beyond their reach, he said.

New technology and telephone banking mean fewer bank branches, with a higher proportion closing in deprived areas. In 1989 there were 13,788 branches of the top 10 high street banks; by 1997, that had gone down to 11,776. Meanwhile, technology-driven risk assessment has enabled insurers to target areas of high crime and push up the premiums, so again the poor suffer.

Reports have suggested the Government could force banks to reopen or retain their branches in rural and inner-city areas and make them offer accounts to the poor. Another option would be to force banks to co-operate with credit unions and community groups.

Mike Young, director of the British Bankers' Association, claims compulsion is unnecessary. The BBA has just set up a six-month study with the Campaign for Community Banking Services into how to help those who cannot do their banking by telephone or computer.

Mr Young suggests banks need to provide basic accounts that stop the holder slipping into overdraft and also allow payment of utilities bills by direct debit to obtain discounts. These accounts should also give access to low-cost emergency credit.

He says Abbey National, Alliance & Leicester, Bank of Scotland and Halifax already have accounts for the socially excluded, and more will follow.

Malcolm Tarling, spokesman for the Association of British Insurers, admits his industry must also act. But there are obstacles: "If you are high risk you will pay a high premium."

One concern is the practice some companies have of "red lining" - refusing insurance to all residents in areas with high claims. Mr Tarling claims other insurers will fill the gap. But as there is no co-ordinated strategy, many people don't realise they may be able to get help. Some local authorities have had to step in to offer affordable contents cover for council tenants.

Marion Poole, general secretary of the Association of Friendly Societies, doubts banks and insurers will do much to target the excluded unless they are forced to do so. "Friendly societies and credit unions are the only organisations determined to be in that market," she says.

Friendly societies are mutual organisations that offer regular savings plans, pension schemes, life and health cover, and more recently general insurance. The plans target the less well-off.

Ms Poole welcomes government attempts to help the excluded but warns that similar plans have stalled in the past. The original intention of the new individual savings accounts (ISAs) was to encourage the less well- off to save, she says, but they were hijacked by the middle-class PEP and Tessa lobby.

However, there will be instant access ISA savings accounts, with interest paid tax-free. Only half the adults in the UK have any savings at all and the new ISAs are designed to be as easy as possible to use, and open for deposits of pounds 10 or more.

Friendly societies are now looking at introducing banking services, which will help many to get used to running a bank account. This will include taking out small loans. "Many people are forced into using legal loan sharks, which can charge up to 400 per cent interest, or illegal loan sharks, which can charge up to 1,000 per cent. The alternative is to borrow from drug dealers," says Ms Poole.

The other option is credit unions. There are 600 in the UK with more than 200,000 members, and they are in effect do-it-yourself savings and loan schemes set up by people with a common bond, such as a workplace or church. Members pay in regular sums for a set period and these are pooled. After three months a member can apply to the union for chea-per borrowing, at rates not available from the local shark. The unions do not do credit checks and rely on peer pressure to ensure loans are repaid.

Economic secretary Patricia Hewitt has already pointed to credit unions as an important method of encouraging financial planning among lower-income groups. Forthcoming legislation should enable credit unions to expand their role.

Supported by President Bill Clinton, credit unions and a community banking movement have proved successful in the US. The system combines community lending by large banks and smaller, co-operatively owned credit unions.

Lobbyists at Ludgate Communications have prepared a report on social exclusion. Stephen Lock, managing director of public affairs at Ludgate, believes the Government should follow the example of the US by compelling banks and other financial institutions to meet the credit needs of the communities they serve.

He says US banks have seen commercial benefits in working with credit unions. "There has been some crossover from unions to private sector organisations. Banks are making money out of community lending."

The Government needs to act. With phone and internet banking gathering pace, the financial services gap is widening.

n For information on friendly societies and credit unions, ring the Financial Services Authority on 0171-676 1000.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Engineer / Software Developer

£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before