Lack of bank transparency hampering fight against financial exclusion in the UK



As consumers across the UK prepare for the last full shopping weekend before Christmas, a new report from nef (the new economics foundation) and the US-based Woodstock Institute says that UK banks could be doing much more to help some of the poorest people in the UK, simply by being clear and open about where they do business.


The report, Full disclosure: why bank transparency matters, released today, Saturday 16 December, provides the first detailed comparison with the US, where banks have disclosed information since the mid-1970s.  It shows how information revealed by the banks has been used to combat financial exclusion in some of the most deprived areas of the US, and has played a pivotal role in ensuring that over US$4.2 trillion of loans and credit reach people living in low income areas.  nef believes that bank disclosure in the UK could prompt a real shift in the way banks view, act in and invest in some of the UK's most disadvantaged areas.


For the quarter of UK households denied access to mainstream credit, it is more vital than ever that banks disclose full information about their branch location, basic account provision and lending.  The recent scandal over the collapse of Christmas saving scheme Farepack again revealed the vulnerability of those on very low incomes.  And, with an estimated 3,000 post offices set to close over the next two years, accurate information on the availability of banking services in vulnerable communities will be critical in the fight against financial exclusion.


“While the headlines focus on legitimate concern about levels of credit card debt among average consumers, the real scandal this Christmas is that the most vulnerable people in Britain are prey to interest rates ten to forty times higher than a credit card for small loans for children’s toys or to meet a winter gas bill, or must trust loosely regulated savings schemes.  Bank transparency on lending practices and branch location by postcode would mean that the availability of banking services could be clearly identified – a central part of tackling financial exclusion.” says Jessica Brown, Head of Access to Finance at nef and lead author of the report.


Full disclosure illustrates the practical value of bank disclosure through detailed case studies comparing Charter One Bank in Chicago in the US – where banks have disclosed local lending practices since the late 1970s, with its parent company Royal Bank of Scotland in Manchester – to review the level of information available and the impact that this has.  The report, endorsed by the chair of the Treasury’s Social Inclusion Task Force, Sir Ronald Cohen, sets out to reinvigorate the debate on bank disclosure in the UK and to create a better understanding of why it should be demanded of banks. While some UK banks have taken steps to release selected information on their activities in disadvantaged areas, there is still a significant and damaging gap in publicly available information.


The report contrasts the simple, publicly available information in the US with the available information on small-business lending, bank branch availability and basic bank account opening in deprived areas of Manchester - three critical components of UK policy relating to financial exclusion.   The analysis shows that in the UK; data on these factors is generally difficult to obtain, has to be gained from a multitude of sources, is inconsistent, and in many cases incomplete.   The paucity and inconsistency of publicly available information in the UK means that it is not possible to draw any meaningful conclusions on banks’ progress in tackling financial exclusion in an area like Manchester.  By contrast, detailed and meaningful analysis can be carried out with the information that US banks disclose by area which in turn can be used to combat financial exclusion.


In the US, publicly available information has been used to keep bank branches open in low income communities, and directly combat financial exclusion.  For example:


    * In September 2003 HSBC announced the closure of two of the very few remaining branches in lower income communities in Buffalo City, New York.  Community organisations were able to analyse HSBC’s performance from publicly available data on the local area and use this to make a case that persuaded the bank to keep one branch open and operate a combined community centre and bank in the other

    * When JP Morgan Chase acquired Bank One in 2004, community organisations in Chicago were able to negotiate consistent disclosure and systematic monitoring of its lending practices which resulted in a total of $80 million in community development loans provided in the Chicago area every year.


nef’s assessment of bank disclosure in the UK reveals that there is still virtually no area-based disclosure by UK banks.  And, the report says, transparency can also highlight the positive contribution banks make to deprived communities and can facilitate working partnerships between banks, third-sector lenders, and other community-based initiatives to build new products and operating models.


“Six years ago, the Social Investment Taskforce recommended that bank disclosure should be made on a voluntary basis. To date, this has achieved only partial success, I believe that the time is right to re-examine what is required to bring about a robust commitment on the part of the banks to disclose their lending patterns in the UK,” says Sir Ronald Cohen, the Chair of the Social Investment Taskforce.


Transparent and public information on the services that the banking sector provides to deprived communities means that:


    * It is possible to identify who the banks are actually reaching, and who remains outside of the banking system.

    * Financial exclusion is often localised, meaning that banks need to disclose information on a local-area basis that is consistent with measures of deprivation.

    * Bank transparency can ensure the effective targeting of scarce resources to deprived areas, and information on which banks positively invest in local areas can give local authorities the information that they need to attract the best performers to their community.


Without area-based bank disclosure, communities are left in the dark on how their savings and resources are being invested. The report concludes that since voluntary disclosure by the banks in the UK has not achieved significant results, the Government should now consider mandatory bank disclosure along the lines of the Community Reinvestment Act in the US as a key component of the fight against social exclusion.