Community finance leaders have hit back at claims made at last week’s annual Community Development Finance Association (CDFA) conference that there’s no need for new legislation to force banks to offer greater support.

Comments from Irene Graham from the British Bankers’ Association (BBA) explaining “why legislation isn’t necessary” were met with dismay from a number of representatives of finance institutions including Unity Trust Bank, CCLA and the Community Investment Coalition. 

Graham, the executive director of business finance at the BBA, said that “this country has a very broad and diverse range of finance options” and that “banks provide around £95bn in finance to other financial institutions” including “asset financiers, Community Development Finance Institutions (CDFIs) and peer-to-peer lenders".

She continued: “For the reasons of this being a market led economy... and the fact that universal credit is already in place, we don’t think legislation is necessary.”

Director of CCLA and chairman of the Community Development Foundation Andrew Robinson told Pioneers Post that the BBA view that legislation was not necessary was “laughable”.

At least 2 million disconnected from mainstream finance

This week the Financial Inclusion Commission led by former diplomat Sir Sherard Cowper Coles published its final report. It revealed that almost two million people in the UK do not have access to a bank account and called on central government to take a leading role in eliminating financial exclusion across the country.

It is a tragedy that millions of people in the UK do not have access to the most basic financial services and products.

The report also highlighted that the culture of saving was rapidly disappearing from British society, with 13 million people not having enough savings to support them for a month if they had a 25% cut in their income.

Head of social finance at Bates Wells Braithwaite (BWB) Luke Fletcher told Pioneers Post: “We live in a society in which access to bank accounts, savings accounts, loans and insurance are absolutely essential. It is a tragedy that millions of people in the UK do not have access to the most basic financial services and products.

“At the same time, we see viable businesses being turned down for loans and struggling to find the capital needed for essential equipment and expansion.”

At the CDFA’s conference, the CEO of social investment bank Big Society Capital Nick O’Donohoe cited the concentrated nature of the UK’s banking market as one of the key causes of financial exclusion. 

The market is dominated by four big players – Lloyds Banking Group, Barclays, HSBC and Royal Bank of Scotland – who as of January 2015 “control 77% of the personal current account market and 85% of small business banking” according to the Financial Times.

CDFIs operate in a different orbit from the mainstream banks. As social enterprises they have social impact built into their business models and lend money to both businesses and individuals unable to access finance from the high street banks because they are seen as too much of a risk. 

CCLA’s Robinson said: “To do community finance well requires cultivating relationships with entities that are bankable  but don’t fit standard criteria. This requires the ability to see value beyond conventional terms and develop relationships with a wide range of stakeholders and partners. 

“It is also the case that some very small deals can have quite complex arrangements with multiple layers of funding from a wide range of sources." He concluded: “The job requires a constant juggling of priorities – between business objectives, community need, market conditions and financial feasibility; and also between value, acceptable debt servicing, market demand and management capacity.”

There seems to be a lack of understanding about the community finance sector, despite growing evidence demonstrating the demand there is for it in the UK. For example, the CEO of Yorkshire-based CDFI Moneyline, Diane Burridge, said that their business saw demand between January and February of this year increase by 40% compared with the same period in 2014.

Peter Kelly, business development and marketing director at Unity Trust Bank, explained the challenges facing organisations such as Moneyline. "To an extent CDFIs and credit unions fall between two stools," Kelly said.

“The CSR community do not readily understand them as they are not charities seeking donations. To the commercial bankers they are wrongly considered as being too risky as they lend to those that the banks decline. However, these community finance organisations provide the perfect conduit for the financial services sector to channel support to underserved communities,” he said.

Peter Kelly, Unity Trust Bank. Photo credit: CDFA

“The time for debate is over”

While the Financial Inclusion Commission has set out proposals including placing a statutory duty on the Financial Conduct Authority to “promote financial inclusion as one of its core objectives”, many in the sector are calling for the introduction of a Community Banking Act or a piece of legislation of a similar nature.

There is no doubt that we need a Community Finance Act

Kelly told Pioneers Post: "The time for debate is over. A Community Banking Act would create a much needed framework for positive engagement and would enable banks to be incentivised for innovation and good practice. In this way everyone would be a winner but above all the most vulnerable in our society."

He said that the banking industry had made positive progress in publishing deprived area data and that the BBA had played "an important and proactive role". But at a time when banks had "never had more reason to rebuild confidence and trust" there was a concern that apart from a few pockets of CSR funding there appeared to be "an absence of leadership, strategic engagement or meaningful support for the community finance sector". 

His comments were met with agreement from Jennifer Tankard who leads the Community Investment Coalition. She said: “A Community Finance Act would demonstrate political commitment, help government departments and others to prioritise financial inclusion activity and create clarity for financial services markets and players about expectations.”

And also by BWB’s Fletcher, who told Pioneers Post: “There is no doubt that we need a Community Finance Act, as almost any significant change in the architecture for community finance, would require primary legislation because the regulatory environment has not been designed with community finance in mind. 

“I would like to see the political parties committing to establish a high-level commission to explore in detail what exactly a Community Finance Act should include.”  

Across the Atlantic

Community finance legislation is not a new concept globally. In the US the Community Reinvestment Act was introduced in the 1970s and encourages all financial institutions to “meet the credit needs of all community members, including residents of low- and moderate-income neighborhoods”. 

While clearly the societal contexts of the US and the UK differ substantially in many ways – the US has a much bigger population and arguably more deeply rooted issues around social inequalities – “the US ‘system’ provides some positive examples of responses to the challenges facing the UK community finance sector by providing a framework, a context and information,” said Robinson.

The Act requires banks to keep public records showing their lending activity, which are then assessed by regulators. If the banks prove that a good proportion of their lending is in low-income areas, they receive a better rating. This rating translates into becoming a better candidate regarding potential mergers and bank expansion.

Robinson concluded: “We need legislation because deeper involvement from UK banks is not possible without ‘a system’ for them to engage, as well as a reason to do so.”

Photo credit: CDFA