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The Government’s announcement of an additional £132.5million of Dormant Assets funding for Fair4All Finance—50% greater than expected—offers a glimmer of hope in tackling financial exclusion—against the backdrop of a Financial Inclusion Strategy which has received at best, lukewarm reviews (you can read our full response to the Treasury Committee inquiry into the strategy here).
While the Strategy falls significantly short and lacks monitoring frameworks for inclusion and affordable credit provision, the extra funding for Fair4All is an opportunity to lay the foundations for more strategic and systematic change.
Below, we set out our key priorities for how this new funding should be used:
(1) Identify the scale of unsafe lending
The Fair4All Finance consultation concerning the future use of its funding starts by calling for better data and stronger evaluation frameworks. We agree.
The reality is ‘inclusion’ isn’t about access to credit per se. 74% of low-to-middle income (LMI) adults already have access to legal consumer credit. This is barely different to the 79% for the population as a whole. Yet for millions, credit is doing more harm than good. We therefore welcome the objective for financial inclusion, set out in the Government's strategy, to secure access to "safe, affordable and responsible credit".
Unfortunately, our research suggests too much credit is unsafe, unaffordable and irresponsibly lent. The fact is millions of people can’t afford it:
For example, StepChange’s recent survey tells us:
- 22 million adults would need to borrow to cover a £1,000 shock, but
- 8 million of them cannot afford to borrow to cover that shock, because they have no capacity to repay after essentials.
The affordability crisis is now so deep that 3.4 million LMI adults use credit to pay for food and bills; while a quarter of the poorest households spend over 60% of their income on debt repayments.
These borrowers aren’t excluded, they are trapped inside an extractive, unaffordable credit system.
With growing affordability issues, Fair4All Finance should aim to set a mark on the scale of harmful lending take place. This would likely show that credit markets are not merely exploiting people at the margins, they systemically extract revenues from people who are already in financial hardship. We need a strategy that provides them with escape from this system, not one which encourages greater participation within it.
(2) Scale the models that work: support interest-free and low-cost credit
If credit is going to help at all in the ongoing cost-of-living crisis, it needs to be interest-free, or at the very least, highly subsidised. The new funding for Fair4All should in part be directed to help scale this.
Take Fair for You. Our prior evaluation of their low-cost loans and interest-free ‘Food Club’ with Iceland Foods, shows this has delivered unquestionably positive impacts. Reduced arrears, lower financial stress, less foodbank use.
The Government’s No-Interest Loans scheme is another significant achievement. Interim reviews show NILS fills an important gap. We, and many others, would like to see NILS, and schemes like it significantly expanded.
What is important here is that Fair4All uses the new resource not just for innovation, but to scale what already works.
(3) Research the connection between inadequate safety nets and lending costs
Yet, even where credit is interest-free, missed payments are still common – often driven by inadequate benefit levels and administrative problems. Our benefit system generates payment difficulties, and these incur costs for lenders. Fair4All Finance should research these effects and use evidence regarding the causes of missed payments to advocate for an improved safety net.
(4) Raise the bar on impact measurement across community finance
Our recent work for Fair for You also identified several problems with impact reports being published by other lenders in the sector, including non-weighted methodologies, poor survey design, and improbable counterfactuals – e.g., assuming all borrowers would have used now vanished door-to-door moneylenders.
This makes it difficult for investors, including Fair4All to reliably compare lenders, and allocate scarce capital. It also undermines confidence in the sector as a whole.
Robust social impact reporting is not a niche issue. It is fundamental to ensuring that Fair4All Finance's investments are doing what they are intended to. We believe Fair4All should take a lead in straightening out social impact assessment in the sector, through developing a transparent, standardised approach. This protects borrowers and increases investors’ confidence. It rewards lenders who demonstrate the most positive outcomes, not just those who produce the rosiest report.
(5) Apply serious scrutiny to CDFIs charging high costs
We are also extremely concerned that some Fair4All Finance funded CDFIs charge costs perilously close to high-cost payday lenders. One provider currently charges £425 in interest and fees for a £500 loan, only marginally short of the 100% payday cost cap.
Promoting partnerships between sub-prime credit card lenders and these high-cost CDFIs makes little sense. It is hard for us to see how customers declined for sub-prime credit cards with typical APRs between 33.9% and 42.9%, can afford and benefit from one-year loans at 280% APR.
We believe these lenders business models have not received the scrutiny they deserve—and that considerable harm, including debt dependency and over-indebtedness could be being caused.
We therefore call for Fair4All Finance to adopt a robust evaluation framework for all funded lending partners. Future funding should be conditional on clear thresholds for responsible lending and consumer outcomes.
(6) Innovate the credit reporting architecture
Current credit reporting systems fail to capture the complexities of people’s lives. As a result, millions of people are excluded from affordable credit, with many trapped in the ‘sub-prime’, and highly extractive credit card market.
Yet AI and Large Language Models means the technology now exists to create a more relational and dynamic credit reporting architecture, empowering borrowers, rather than leaving them at the mercy of an opaque, unfair system.
This could allow borrowers to provide context for missed payments (such as a temporary job loss, or spell out of work as a carer), and provide for fairer and more forward-looking lending decisions.
Behaviours by lenders should be included too, including their reasoning for credit decisions and their responses to forbearance requests. This would provide greater accountability, and could drive positive changes in lending practice.
We believe that Fair4All Finance should support pilots with the community finance sector to lead this redesign. Working with credit reference agencies, these pilots could help transform credit reporting from a one-way surveillance mechanism into a genuine tool of financial inclusion.
(7) Build towards a Fair Banking Act
Fair4All Finance's consultation on the use of the new funding contained a critical open question about achieving lasting systemic change. Fair4All’s current model relies on filling gaps left by mainstream banks, which is not sustainable or equitable in the long-run.
However, its small sum loan pilot, which looks likely to operate in the FCA’s regulatory sandbox, risks weakening consumer protections and shifting responsibility from highly profitable banks to the public purse.
It is therefore time for the UK to introduce a Fair Banking Act, modelled on the U.S. Community Reinvestment Act. This would rate banks on how well they serve equity and affordable credit obligations and use regulatory tools to expand responsible lending – which could be in partnership with credit unions and genuinely affordable CDFIs.
We believe Fair4AllFinance should use its convening power—and now its expanded funding—to build the evidence base for a Fair Banking Act. This should include working with banks to design a rating system taking account of their funding for the community finance sector, and their wider financial inclusion activities.
(8) Integrate affordable credit with wider local support schemes
Finally, the lives of people on low incomes are complex, and any intervention that ignores this will have limited impact.
That’s why we support integrated service models –where affordable credit sits alongside local authority outreach, high-quality debt and benefits advice services, and services targeted at people’s health.
Our Financial Shield project is an example of this inaction: shared data is the foundation for coordinated service delivery, and effective responses to client needs that can be met and tracked across multiple agencies.
We propose Fair4All Finance creates a dedicated funding stream for integrated service partnerships, to ensure affordable credit becomes part of a holistic support ecosystem rather than a standalone product.
This would recognise that financial inclusion challenges are often the thin end of the poverty/inequality wedge – integrated support is essential for people in financial difficulty to get the support they need.
