This report makes the case for a place-based approach to building credit. We argue that improving aggregate credit scores at the local authority level can help to address the problems of unaffordable credit, financial exclusion, indebtedness and in-work poverty that are negatively affecting individuals and communities in the UK.
In addressing how local credit building strategies can help individuals and households take control of their financial lives, we focus on the role that both public and private sector employers can make in helping to turn around deprived communities. We examine the potential of ‘salary-deducted lending’ – a scheme where employees can apply for loans to be delivered through their employer’s payroll mechanism – as a more affordable option to other sources of credit, such as bank loans, credit cards or payday lenders.
We estimate the potential economic impact and the beneficial effects it can have by:
Enabling employees to spend less money on highinterest repayments, thereby improving their financial situation, allowing them to spend more on local goods and services, and to contribute to savings and other investments, such as pension plans.
Enabling employees to more effectively manage their own finances, through consolidating debt (from other higher-interest sources) providing more affordable repayment terms and financial education, thereby improving individual wellbeing, mental health, and workforce productivity.
Upgrading the average credit score of deprived local areas, potentially driving other economic improvements by reducing indebtedness and raising the purchasing power of the UK’s most financially challenged communities to boost local economies.
This report provides a platform for salary-linked lending, savings and financial education as part of a broader set of place-based solutions to help employers and employees make local communities more productive and prosperous.
Guy Opperman MP, Parliamentary Under Secretary of State for Pensions and Financial Inclusion, commented:
“The Government is committed to improving financial inclusion and tackling indebtedness. We have already brought forward a range of proposals, from auto-enrolment to the Single Financial Guidance Body. But ResPublica’s report unveils an exciting and interesting new set of ideas to lessen debt and the cost of debt.
“ResPublica’s argument for salary-linked lending to become the norm across both the public and private sector, is an important contribution to the debt reduction debate and one that I will be discussing with ministerial colleagues.
“I will be interested to see if the public sector – whether locally or nationally – can play its part in exploring, and piloting, the possible benefits and practicalities of developing a system of salary-linked lending for the UK’s civil servants.”
Phillip Blond, Director of ResPublica, said:
“Despite the welcome continued economic growth, high employment rates and low unemployment, for many the 2008 credit crunch has never gone away. Traditional high street banks have reigned in lending to those on low and middle incomes. What this means is when a personal crisis happens, those with little or no money are forced to turn to unscrupulous companies, who use grossly inflated interest rates, with an APR as high as 1500%. We describe the phenomenon as the poverty premium, where those who are least able to pay are charged eye-watering interest rates for credit.”
“Given the Government’s policy of wage restraint in the public sector, finding other ways to support hard pressed workers is common sense. Across Government, some 5.5 million people are employed, many of whom are on low incomes. Offering all of these people access to affordable credit will improve workforce retention and productivity. It will also help to put another nail in the coffin of predatory companies. But this solution does not have to be limited to the public sector. Large private sector firms account for just 0.1 per cent of all businesses in the UK but account for around 40% of all those in work.”
“The Government should support a pilot scheme similar to Boston’s. We believe this is the most comprehensive programme anywhere in the world tackling the problems of unaffordable credit. Local and central Government should replicate if they are serious about tackling Britain’s debt time bomb.”
Published: 12 September 2018
Key recommendations of the report include:
Given the geographical concentration of poor credit and indebtedness we recommend that:
All local authorities should take a place-based approach to credit building.
All public-sector employers should adopt salary-deducted lending and savings systems and promote financial education in the workplace.
The public sector should seek to lever the benefits of salary-deducted lending by including this as an indicator of social value in their assessment process for public procurement.
Local Government and Local Enterprise Partnerships should use their convening power to encourage private employers to adopt salary-linked lending.
Government should explore the benefits of an area-based credit building pilot.
Government should provide greater capital for fair lenders like Credit Unions and Community Development Finance Institutions.
Government should provide a visible policy lead on this agenda.
The Money Advice Service should seek to devolve the commissioning of resources for debt advice to local authorities and Metro Mayors.
The Money Advice Service should consider the introduction of Kite Marks to standardise financial advice and guidance.
All education institutions should embed financial education and advice as part of their pastoral care, and where appropriate their curriculum.
Mark is ResPublica’s Localism Lead. He will be focusing on our new projects and workstreams, working in partnership with city-regions, to radicalise the localism agenda and realise a new vision for local economic growth and public sector reform.