Building an inclusive and responsible credit system in Australia: Three lessons from the UK
20th Sep 2018
The Government’s response in November 2016 to the review of payday lending and consumer lease laws was considered a good start in further supporting Australians struggling to make ends meet. Unfortunately, nearly two years after the Government’s response, the laws remain unchanged. This example shows that legislative reform should not be relied upon as the only tool to improve access to affordable and appropriate credit for consumers.
Australia has similarities to the UK in its approach to this issue: both jurisdictions have similar laws regulating the sale of credit and a growing problem of poor access to credit for disadvantaged consumers. But the UK is showing strong leadership in building momentum for change, with Theresa May pledging a commitment to make Britain ‘a country that works not for a privileged few, but for every one of us’.
Theresa May’s commitment prompted me to research the UK’s approach to building an inclusive and responsible credit system. With support from the Ascham Leadership Scholarship, I travelled to the UK to meet with experts in this area. This article shares three successful initiatives which are used, in conjunction with law reform, to improve access to credit for UK consumers.
What is the problem?
Credit plays an important role in smoothing a person’s expenditure and protecting against income shocks. It is also a key determinant of a consumer’s wellbeing. An inability to access appropriate credit can place people in financial hardship, increase their vulnerability to risky financial products and negatively affect their social, emotional and health outcomes.
Unfortunately, a significant proportion of the Australian population is excluded from accessing credit that is affordable and appropriate for their needs, often turning instead to high-cost credit products.
In Australia, the most common forms of high-cost credit are Small Amount Credit Contracts (SACCs), commonly known as payday loans, and consumer leases, which are contracts to rent an item for a period of time. These products are generally used by low and middle-income consumers. For example, many of the consumers who use SACCs are excluded from mainstream forms of credit, with up to 25% of those borrowers having incomes below the poverty line. In the UK, over three million consumers use high-cost credit, including payday loans and consumer leases.
How is the UK improving access to affordable credit?
Lesson one: There are innovative and effective partnerships
There is a belief in the UK that supporting fairer credit for all requires collaboration in designing new systems.
This belief is at the heart of the Supported Rent Flexibility initiative, delivered by the Centre for Responsible Credit, Well Thought and Optivo Housing Association. The pilot provided a group of Optivo’s social housing tenants with the opportunity to set up a personalised schedule of rent payments, allowing them to underpay and overpay on their rent at different points in the year. The pilot was designed to test if allowing tenants to tailor their rent payments based on their own knowledge of likely pressure points over the year could make it easier for people to pay their rent, without recourse to credit.
Results from a recent evaluation show a reduction in the use of credit to meet essential needs, an improvement in living standards and less money worries for tenants. Some tenants participating in the pilot reported an improvement in their physical and mental health, as well as in their ability to take control of their finances and plan ahead.
Lesson two: A variety of sources prioritise access to sustainable capital for alternative credit providers
The UK recognises that diversifying the market for affordable and appropriate credit requires reliable investment in socially minded credit providers. The Fair By Design Fund, which invests in companies with a social interest mandate, is one initiative evidencing this culture. The UK government’s 2018 commitment to funding financial inclusion initiatives with 55 million pounds from dormant bank accounts is another example.
This support of fair finance has led to the rise of a number of not-for-profit credit providers in the UK. Fair For You, a not-for-profit providing affordable credit to finance the purchase of essential items by low-income households, is a welcome challenger to the consumer lease industry in the UK. A recent evaluation shows that the total cost of goods is much lower when purchased through Fair For You, with an average saving of at least £527 (AUD $950) per item when compared with mainstream consumer lease providers.
Lesson three: The UK’s Minister for Financial Inclusion improves accountability
Financial inclusion for all UK consumers has been on the agenda for the past 20 years, culminating in the Financial Inclusion Commission in 2015.
The Commission is an independent campaigning body made up of parliamentarians and experts, aiming to promote financial inclusion on the public policy agenda. To foster leadership in this area, the Commission recommended that the UK designate a senior minister as the government lead on financial inclusion, and establish a ministerial champion for financial inclusion in each interested department.
In response to these recommendations, in 2017 the government appointed a minister for pensions and financial inclusion. In 2018, the government established a Financial Inclusion Policy Forum, chaired by the minister for pensions and financial inclusion, which brings together government, consumer groups, industry and the regulators. The Forum’s mission is to ensure that people, regardless of their background or income, have access to useful and affordable financial products.
While it is too soon to evaluate the success of these initiatives, consumer groups are optimistic that leadership from the government will ensure accountability, coordination and progress.
Legislative reform is an essential tool to protect consumers from unfair lending practices. However, developing an inclusive and responsible credit market requires initiatives beyond law reform. With the Banking Royal Commission due to release its interim report in September, now is the time for Australia to reflect on what similar jurisdictions, like the UK, are doing to make sure that the poor do not pay more for credit.
Dana Beiglari started her career as a lawyer at the commercial law firm, Allens. Her passion for social justice law led her to Legal Aid NSW. Dana is a Senior Solicitor in the Consumer Law practice group. Her team of 10 solicitors assists some of the most vulnerable people in NSW to access their consumer protection rights in credit and insurance matters. Dana was recently awarded the Ascham Leadership Scholarship to research initiatives used overseas to improve access to affordable and suitable credit for disadvantaged consumers. The views in this article are the writer's own, and do not reflect the views of Legal Aid NSW.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).