Cuts without banking reform will endanger economic recovery, say campaigners

nef (new economics foundation) and the Better Banking Coalition call on the Chancellor to announce major banking reform and regulation in the Mansion House speech on Wednesday 16 June.

Banks are still not lending – not to businesses nor households. This will create further contraction in the economy and have a disastrous effect on enterprise and business confidence. It will also mean more people borrowing from sub-prime lenders, reducing disposable income of the poorest and increasing poverty. Banking transparency and an obligation to invest in communities rather than exotic financial instruments would transform our economy for the better.

nef and the Better Banking Coalition believe that Government must legislate and regulate to bring banks back into the productive economy  and to assist the millions at risk of a worsening economic situation because of public service cuts. The failure of the Office of Fair Trading in its 15 June report to suggest solutions to the problem of high interest lenders means that the Government must step in to help people in the grip of doorstep lending.

We call for:

• A Universal Banking Obligation for the unbanked and the communities without local banks
• A cap on credit interest rates to stop the averse affects of non-mainstream lending to those who can’t access credit through mainstream routes
• Disclosure by banks to see where banks are lending
• More lending to get the economy moving again
• An obligation on banks to start addressing financial exclusion
• An increase in the diversity of financial services provision
• A publicly owned Post Bank based on the Post Office network
• Stronger links between banks and small businesses
• Expansion of responsible and affordable credit products for low to moderate income households

It is clear that the Government’s cuts programme will not lead to the growth in the economy that is needed unless the programme is accompanied by major banking reform which will enable the productive economy to function. Banks must install systems which get credit flowing again, to business and to hard pressed households.

Executive Director of nef, said: “The reform of our banking system is central to the recovery of our productive economy and the building of a sustainable economic future. To take action on cutting services without reforming the banking system is to treat symptoms and not the disease”.

of the Better Banking Coalition said:  “This is a once in a lifetime opportunity to create a new mandate between the finance sector and society. A mandate that promotes transparency, fairness and ensures access to all sectors of society are not left behind.”

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For more information or to arrange an interview please contact:

Lindsay Mackie, Communications, nef (the new economics foundation)

t: 0207 820 6392 m: 0796 8821 390 e: lindsay.mackie@neweconomics.org

Lucy Marples, Co-ordinator, Better Banking Coalition
t: 0207 280 4926 e: lucy.marples@acevo.org.uk

Notes to editors:

1.     About nef
nef (the new economics foundation) is an independent think-and-do tank that inspires and demonstrates real economic well-being. We aim to improve quality of life by promoting innovative solutions that challenge mainstream thinking on economic, environment and social issues. We work in partnership and put people and the planet first.

2.     About the Better Banking Coalition

The Better Banking Campaign has brought together nearly 200 organisations to call for fundamental reform of the banking system.

3.      Facts and figures

Around 6 million people in the UK don't have access to credit from banks, so must borrow from other sources, (with loan interest rates av. 180% for Home Credit lenders, and over 1,000% for pay day lenders.)

Home Credit lenders lend to around 2.3 million people a year, making an excess profit of around £75m per year. Given that the average Home Credit loan is £300, were these loans made at 130% through Community Development Financial Institutions (which Fair Finance estimates to be sustainable) that would save the average borrower £156- a saving of more than half the original loan. Those borrowing at these rates are driven into inescapable cycles of debt.

Many ethnic minority groups suffer financial exclusion: 68% of those financially excluded live in the 10% most deprived areas, and ethnic minorities are more likely to live in the most deprived areas.

4.      Better Banking are calling for the following legislative changes:

To gain a clear idea of who is financially excluded, and direct government spending more appropriately, we need financial institutions to fully disclose who they lend to;

A cap on credit interest rates, to stop the averse affects of non-mainstream lending to those who can’t access credit through mainstream routes: 180% apr is average for Home Credit lenders, and over 1,000% apr for pay day lenders. As the largest Home Credit lender - Provident Financial - charges £82 for every £100 lent, enforcing lower interest rates would have a dramatic impact on helping borrowers escape from a cycle of debt.

Incentives for financial institutions in the form of a UK version of the US Community Reinvestment Act, whereby financial institutions are rewarded for showing that they support those communities who are often unfairly denied access to credit and financial services, either directly, or via intermediary lenders such as credit unions and CDFIs.