Lords debate on Financial Inclusion: New Technology - July 6

Lord Holmes of Richmond 

To ask Her Majesty’s Government what steps they are taking to promote financial inclusion through the use of innovative financial solutions and new technology, including open access to payment infrastructure, smart phone applications and distributed ledger technology.

Lord Holmes of Richmond (Con) 

My Lords, it is a pleasure and a privilege to have secured this short debate on financial inclusion and the role that fintech can play in delivering that for citizens right across our communities. I welcome my noble friend Lord Bates to the Front Bench. We have, as we heard even this morning, a productivity crisis in our nation. With my noble friend covering not only DfID but Treasury matters in this House, it is fair to say that he is doing more than his bit to address this issue.

I was lucky enough to be a member of the Select Committee on Financial Exclusion. Our report had 22 recommendations. I ask the Minister to give us a hint of when the Government will respond to those incredibly important recommendations. On one of them we do not have to wait any longer for a government response because I am delighted that we already have our first Minister for Financial Inclusion in the form of Mr Guy Opperman, who stood at the Bar for pretty much the whole Second Reading of the Financial Guidance and Claims Bill yesterday evening. This is a tremendously positive step for the Government to take, and it will be critical that the Minister has cross-governmental reach as the issues around financial inclusion—or exclusion, depending on which perspective you take—are certainly not limited to one particular government department.

I am delighted to be co-chair of the All-Party Parliamentary Group on FinTech. I believe the Financial Guidance and Claims Bill currently going through your Lordships’ House will have a number of opportunities to raise issues around financial inclusion, some of which may also be raised today.

Why am I interested in fintech? I am interested because it is innovative and disruptive and has the potential to address some of the issues that have dogged our society for decades, not least the inability for SMEs to have consistent and timely lines of credit. Perhaps even more significant is the fact that so many hundreds of thousands, nay, millions, of our fellow citizens have been effectively locked out by being underbanked or unbanked. There has been no real sense that pressure has been put on, or desire felt by, the major financial institutions to lend to SMEs or address questions around the underbanked and unbanked of our society.

Why am I interested in inclusion? This goes right back to the beginning for me. It seems extraordinary that everybody would not be interested in how we enable and empower every single member of our society to play their part and to be fulfilled in whatever field they want. Financial inclusion is critical to this. When we set it alongside digital inclusion, we have two of the most significant building blocks that have to be so well set if we are going to address some of the most significant issues facing citizens in Britain right now.

If noble Lords need any more justification for that statement, they should just look at the close connection between financial exclusion and digital exclusion. It is not entirely like for like, but the connection is all too clear. If we are truly to build a nation which works for everybody, as good a starting point as any would be financial inclusion and digital inclusion.

What is financial exclusion? It is the inability of citizens to get their hands on mainstream financial products and services. What is fintech? It is the wave of technology linked to financial products which has the potential to transform and revolutionise how we do finance not only in this country but globally. The G20 recognises this and the connection between fintech and financial inclusion. Its 2016 report put together eight principles to suggest how fintech can play a positive role in the enablement of financial inclusion. Will the Minister tell the House the Government’s view on those eight principles and where he believes the UK is in relation to them?

The role of regulators is critical in this space. From a fintech perspective, we have an excellent regulator in the FCA. Its role in driving competition has been critical in enabling fintech not just to boom in the UK but to be a global leader. That is seen not least in the regulatory sandbox, which has delivered such great results for the founders, the companies involved and, through that, for the nation. In the light of this, does the Minister believe that it would make sense to increase the responsibilities of the FCA and enable it to have responsibility for financial inclusion?

It is also important to note the great work done on this by Innovate Finance, which connects everybody involved in fintech and has actually established a working group specifically on financial inclusion. This demonstrates just what a prescient issue it is. Indeed, if I return to the All-Party Parliamentary Group on FinTech, the most important principle that we set when we established the group was around financial inclusion. It is clear that the impact and the potential can be great, but if we do not get that regulatory framework in place, we will potentially not only let another generation of financially excluded people down but we will lose a massive opportunity in terms of economic growth and potential exports for this country.

Sir Mark Wolport did an excellent report on some of the technology that underpins fintech. Can I ask my noble friend the Minister for the Government’s response to, and thoughts on, that report? It was particularly wise and thoughtful about the potential uses and impacts of distributed ledger technology and how that can be deployed.

Moving to the European perspective, the European Investment Bank has been an excellent funder of fintech, not least in the role that fintech has played in securing financial inclusion. This will obviously disappear on Brexit. Will the Government commit to at least equalling the support that the EIB has given for fintech once we leave the European Union?

Moving slightly beyond the scope of this debate, but worth mentioning, can I ask the Minister for his view on a duty of care on financial institutions? I have done a deal of consultation on this and it has been extraordinary how many times, when I have mentioned this, respondents have believed that financial institutions already have a duty of care towards their most vulnerable customers. Not a bit of it. So when the Financial Guidance and Claims Bill comes to Committee, I will be looking to bring an amendment to probe the Government on this point—I ask the Minister for his response.

Moving to some of the opportunities where fintech is already delivering in the area of financial inclusion, access to bank accounts is of course a critical point. If we look at the Lloyds data, if you bank online you are likely to save between £500 and £700 per year—not insubstantial—through the control that you are able to gain by having that online service, to set up text alerts, to be far more closely connected to your funds, to not end up, potentially, in those financial crises which can push people back into financial exclusion.

Identity is incredibly important; there is much work being done on online verification, not least by GOV.UK Verify. This is incredibly significant and can be so enabling for people who currently find themselves without a bank account. This is not hundreds of thousands of people but, in Britain today, 1.7 million people without a bank account.

Looking at some of the services being offered by some of the fintechs, MiCard connects physical identity with digital identity. If we look at the Pockit example, it creates a clear online platform to get around some of the issues that have pushed people into an unbanked situation. Another is dopay, which is a system whereby employees can receive their pay directly from their employer even if they do not have a bank account. Such systems are innovative, insightful, enabling and including.

The question of physical location is incredibly significant when it comes to financial services. With the open banking initiative there is a real potential to look at how there can be an aggregation of fintech services put through a potential physical location. It drives down costs through that aggregation, yet still enables a potential physical location on the high street for people who want to engage with financial services in that manner.

Affordable credit is a critical issue and always has been. We have some particularly pernicious examples at the extreme end of so-called credit services in Britain today. Fintech enables a revolutionary approach to the assessment and consideration of credit, enabling people, responsibly, in a risk-based matter, to find themselves with lines of credit. This is a far more significant consideration of the elements that make up a credit score, rather than just the all-too traditional means of simply saying no.

Financial literacy is significant. Again, this goes to the Second Reading of the Bill yesterday, but a lot of what we need to address is around financial capability. Financial literacy is obviously critical to that, and fintech can play an important role by connecting with individuals, not least young people, in a very different, innovative and natural way.

Perhaps the most important part of society where fintech can play its part is around the delivery of benefits to recipients. We have seen a number of really interesting proofs of concept delivered via the DWP, not least through GovCoin and a similar project through RBS. What we see is the use of blockchain, distributed ledger technology, tied with a smartphone to enable recipients to have a far greater and more immediate connection to their finances—to feel enabled and empowered through this. It is innovative not just in terms of the tech but in terms of how this is then being delivered and in the proof of concept. Recipients find themselves enabled and far more connected, and within a short space of time they are actually coming up with suggestions and improvements for the programme—they are not just passive recipients but active, co-producing members of a proof of concept. Will the Minister consult with colleagues, not least in the DWP, to discover when we might see these proofs of concept taken to scale? They have incredible potential, but they need to be taken to scale, and we are not even at pilot stage yet. We have had some great proofs of concept, but we need this to get to scale and then we will truly see the impact and the difference that fintech can make in terms of financial inclusion.

From inclusion to my conclusion: I call on everybody involved in fintech to do all they can to consider how they, their tech and their businesses can interact, collaborate and relate to make a positive impact to enable financial inclusion. Similarly, I call on the Government to do everything to support the fintech sector in this country. It is a great, booming and world-leading sector, not least in what it does for financial inclusion. Let us ensure that it continues to thrive, continues to deliver and continues to be a great British enabler and a great British export, through and long beyond Brexit.

Baroness Stedman-Scott (Con) 

My Lords, I will speak very briefly about a different slant to the subject matter of the debate. My noble friend Lord Holmes referred to financial exclusion. I am not the sharpest knife in the box when it comes to tech, as was proven this week when I got a new telephone—I will not mention the number of hours of help I have needed to get it running. Our young people in this country are really great at getting to grips with new technology, and by giving them the skills and opportunities to do that, they become financially included in our society.

I watched 60 young people in a rural community, who were not very well grounded in life and were causing a lot of problems but who had great technology skills, help SMEs to develop and grow their businesses. The impact of that involvement meant that they were able to reduce the number of policemen in the rural community because these young people were so well integrated and included. Promoting financial inclusion and innovative new technology certainly has a social impact as well.

Baroness Stowell of Beeston (Con) 

My Lords, I am also grateful for the indulgence of the House to allow me to speak briefly in the gap. I congratulate my noble friend Lord Holmes not just on securing the debate today but on the interest that he has taken in this topic.

I am an interloper today—I was in the Chamber and decided to stay to hear what my noble friend wanted to raise. I want to be a little more basic even than my noble friend Lady Stedman-Scott. I find all this really interesting; the scope and opportunity is clearly vast. The Minister may tell me, “If you had been here for this or that debate, you would have heard all this”, but, beyond the technicalities of inclusion, exclusion and fintech, are we yet introducing at school a more basic introduction to financial management? All this technology is fantastic, but there is a big gap in helping people understand basic financial management and good finances.

Lord Kirkwood of Kirkhope (LD) 

My Lords, it is a pleasure to speak on behalf of the Liberal Democrat Benches as the spokesman for our party, and I am grateful to my colleagues for their support. I am pleased to take part and grateful to the two noble Baronesses who just spoke, who both made short but powerful points. The Minister should pay attention to them.

I am finding it difficult to keep up with the noble Lord, Lord Holmes of Richmond. Every time he raises a subject, I have to come to the Chamber, because he raises such apposite and important points. I am overawed by his work rate. I think that his Whip should tell him to take the weekend off so we can get a little respite.

He made a powerful speech. He played a significant role on the ad hoc Committee on Financial Inclusion. I know that because I sat alongside him. I am delighted that he, who sits on the government side, has decided to take a continuing interest in fintech’s potential, because I hope that that means that the constructive pressure we put on the Government will continue. It is good if we can count on his continued interest and leadership from the Conservative side, because everyone is aware of the potential.

Like the noble Lord, I have had my eyes opened to the extent of fintech—its £6 billion contribution to the economy, although that figure may now be out of date—and its 60,000 employees in the United Kingdom. It is a big player. For that reason alone, we need to pay attention to it.

We like the Minister less in his Treasury role than in his other role; we like him in both, but he has to work harder to get the same likeability. I hope that he understands that. In his 12 minutes answering all the other important questions—perhaps he cannot do it in 12 minutes—I would like an idea of the vision. I know that a lot of valuable and important work is going on. I am very impressed by the Government Digital Service: it is doing some invaluable and innovative things. As the noble Lord, Lord Holmes, said, we have a Minister whom we can look to, who was with us yesterday. That is all very positive.

However, I struggle to understand the strategy—I know that that is a pretty meaningless word, but what is the overarching vision over the next few years? Obviously, the Treasury has an important role, and we have BEIS, the DWP and the Cabinet Office. If I have a criticism, it is that, if the Government have a plan clearly set out to deal with fintech and all its different manifestations, I am not aware of it. Like the noble Lord, I have been looking at this area as closely as most people. It is a fast-moving area. If the Minister can satisfy me that somebody, somewhere knows what is happening, that would be really reassuring. It is very important to manage this area of public policy, because it changes so fast, and managing change is a key component to getting this right—otherwise we will lose the leads that we have established in this area.

The noble Lord, Lord Holmes, is right to compare and contrast digital and financial exclusion. They are parts of the same problem, but they both need to be fixed at the same time, otherwise it is the people at the bottom of the pile who will be left out. Opportunities are created for young people, and others with smartphones, to gain open access across the globe to new levels of service with distributed ledger technology, blockchain, and the like. There are fantastic opportunities. The downside needs to be managed as acutely and as carefully as the upside; that is very important.

We also need to work with business and universities. I notice that Strathclyde now has a new master’s programme for fintech, which starts in September. Are the Government nudging the university and FE sector into that area, encouraging it to do it, and making it easier for it to do? There is also an emerging concern about the fact that we are quite good at conceiving the ideas, but scaling up some of these small, innovative, disruptive businesses is not something that we are properly paying attention to; other countries and other parts of the world are using the talent that we have.

I know that this is hard to avoid, and I apologise for mentioning it, because we are all going to get sick of it, but Brexit will have a skilled workforce issue; there are already some signs that people are beginning an exodus because of the uncertainties. However, there are huge opportunities, such as the payment services directive. Whether we are in or out of Europe, there will be new standards and a new drive, as well as a new international context for those small disruptive businesses that we are so good at creating—not just at the Old Street roundabout. There are some very good examples of that in Edinburgh and other parts of the United Kingdom; there are hubs, mainly around universities, that can feed off the back of the financial and technology expertise that they are generating. So they are capable of making their way in a very successful fashion after Brexit, if we are alive to the opportunities.

The noble Lord, Lord Holmes, was right to mention regulation. The FCA has done very well, with its sandpit ideology of allowing new innovative businesses to come into the place and work with clients in an open but controlled situation to see whether it works, making sure that the regulator can establish the risks and maintain a light-touch regulation as much as it can. The FCA sometimes gets a bad press for gold-plating things, but it has established a reputation for not doing that in the fintech sector—but it is something that has to be guarded against in future.

The noble Baroness, Lady Stedman-Scott, does an enormous amount of work with disadvantaged communities and on creating jobs for people, which is important. With the client group that both she and I are interested in, it is about getting some kind of identification or verification that is guaranteed. There is an obvious digital way of doing that now. I know that the GOV.UK Verify programme was designed to support that and develop it, but what is going on in that regard? How successful is it? To what extent is it being used—is it yet useful? The last time I heard, it had just been started. The banking provisions and the requirements of knowing your client—KYC—means that the requirements for identification may be more onerous than can be easily coped with by people at the bottom of the financial pile.

I will finish on that, except to say that I hope we can rely on the noble Lord, Lord Holmes, to use his energy in future to continue coming regularly, if not frequently, to the House, as it gives the Government the chance to say what they are doing and what their plan is, and it gives us the opportunity to check that we are all content with the direction of travel. I am grateful to the noble Lord, Lord Holmes, and I look forward to the Minister’s reply—in his ministerial role for the Treasury.

Lord Stevenson of Balmacara (Lab) 

My Lords, I should declare my interest as a former chair of StepChange, the debt charity and, alongside the noble Lord, Lord Kirkwood, I am also a member of the Financial Inclusion Commission; I will refer to some of its recent report on this area in concluding my remarks. We are all very grateful to the noble Lord, Lord Holmes of Richmond, for securing this debate and leading with his chin on some of these issues. When I read the wording of the Question, I was hoping—I am sure others were as well, including the Front Bench opposite—to have a bit of a seminar on what he meant by,

“open access to payment infrastructure”,

and “distributed ledger technology”. I am sure he has the expertise hidden away and can share it with us at a moment’s notice. I am certainly still struggling, but I am sure the Minister will enlighten us to the extent he feels necessary as we move forward. It is a question that hangs over the debate, as to what exactly he would have done with that sequence.

Having said that, the noble Lord made an excellent speech, following his excellent speech yesterday. He does not need any lessons in productivity—two speeches coming from his heart, commitment, knowledge and experience, and both very well worth listening to. We are all grateful to him for that. Of course, he also brought in two blow-ins, who decided that they ought to join in the fun; I am sure they were not just sheltering in the wonderful ice-cold atmosphere here and escaping from the blazing heat outside. They asked rather good questions. The noble Baroness, Lady Stedman-Scott, asked how this all fits together with social cohesion—a really sharp observation that we need to bear in mind. The young get this technology very quickly and can be brought into it in a socially cohesive and helpful way; we should think very hard about how that can work. The noble Baroness, Lady Stowell, with all the art and artifice that goes with being an experienced politician, asked the obvious question in a way that I think will cause considerable difficulty to the Minister. Of course, the answer to her question is that this is not happening yet in schools but, as she hinted, that should be where we start. I hope she will pursue that as we move this debate forward.

The noble Lord, Lord Holmes, mentioned in his substantive address the G20, which happens to meeting his weekend, so it was an appropriate reference to make. The high-level principles it has been working on since 2010 are a substantial piece of work—I had already given notice to the Minister that I might raise this—and it is worth thinking about them, because they set the tone for this arrangement. The idea is that digital financial inclusion will benefit from an approach using fintech—we have enough evidence now to express that. We are talking about a major issue and the G20 paper echoes this in its introductory remarks. Two billion adults globally do not have access to formal financial services and are excluded from opportunities to improve their lives, but digital financial services, together with effective supervision—an important regulatory requirement—are essential to closing these gaps. Digital technologies offer affordable ways for the currently financially excluded, the majority of whom are women—an important point to make, following the preceding debate in your Lordships’ House—to save, make payments, get business loans, send remittances, buy insurance and do all such day-to-day activities around the world in a way that allows them to engage directly and reduces the poverty penalty. Importantly, by making access more democratic, the barriers to effective inclusion are also reduced, through the digital route towards the financial inclusion activity.

I would like for a moment to focus on the principles. The G20 encourages countries to provide action plans relating to their own country context and national circumstances to try to ensure that the advanced economies move together on this issue. That is obviously a necessary but not sufficient condition for this to work. But of course, the key question is: what has happened to our action plan? I hope that the Minister will be able to enlighten us, because surely if the G20 has recommended it, we will be doing it.

Some of the principles are motherhood and apple pie and I would not want to go through too much of them in detail. However, they start with the premise that without,

“coordinated, monitored, and evaluated national strategies”,

the work that needs to go into adopting a digital approach to financial inclusion will be worthless. That is worth reflecting on. There is a balance to be struck between innovation and risk. It is all very well getting carried away with bitcoin or distributed ledger technology, but if we do not understand them and the risks they raise, it will end in tears. It is important that somebody work on this—presumably the FCA, but other areas of government, which we might hear about, might deal with it.

Principle 3 talks about making sure that there is a,

“proportionate legal and regulatory framework for digital financial inclusion”.

There is a bit of a tension here which is worth exploring, albeit we cannot necessarily do it today. The basics of financial activity will always be the same. There are those who have resources and those who do not, and those who need to buy goods and services. Money or an equivalent authorisation needs to flow between those who are acquiring stuff and those who supply it, but basically the system will not change. That is the basic underlying truth, but the way it happens will be radically different. What is the role of money in this? Physical notes and coins will probably not survive the financial revolution, if it goes forward, because authorisations—provided identity is secure and other safeguards are in place—may well replace them. However, it is important that a balanced and proportionate legal and regulatory framework is at the heart of this. Again, I ask the question: is this happening and if so, when will we see evidence that the Government’s thinking is bearing fruit?

Principle 4 states that the system must be all-inclusive. There is no point trying to tackle only parts of it. It needs to include services, goods and all people. That is probably obvious but it is important to reflect on it because it implies that there has to be physical infrastructure to support that work. This Government in the last Parliament brought forward a much touted digital Bill. It contained the basics—which we support—of a universal service obligation for broadband. However, it was noticeable that in the debates and discussions we were unable to persuade the Government to set a high standard. The basic understanding is that we must have high-level, high-quality broadband. We proposed—and, indeed, got such an amendment through this House—an ambitious 2 gigabit target for the speeds that should apply to the USO. That was reduced by the Government to 30 megabits. There is no comparison between the two. If we are going to have this, it has to be done properly and well.

We sought to prioritise small and medium-sized enterprises getting early access to broadband. The Government resisted that. We suggested that all the work going forward on the new generation of broadband should start in rural areas—as is done in Germany—and then network back to the cities, on the grounds that investment is most needed where the need is greatest and the resources are smallest. However, the Government did not accept that. I ask the Government again: is it not about time to rethink this, because without a proper infrastructure and real support, we will not get to where we want to be?

Principle 5 seeks to:

“Establish Responsible Digital Financial Practices to Protect Consumers”.

That is probably self-evident.

“Digital and Financial Literacy and Awareness”,

starting in school comes under Principle 6. Principle 7 refers to the need to consider identity in the virtual space. It is far too easy to conflate this with ID cards or their equivalents, but the digital space is very different. It is populated by objects and avatars—things that one cannot imagine. It is not populated by real people, but we need to be able to identify and nail down who is carrying out these things. Not enough work is being done on that in the virtual space. And, of course, we should track what success is achieved. These are broad, high-level principles, but they set an agenda which the Government should consider seriously, as it would be to their advantage to do so. I hope we will hear from the Minister that that work has already started

I mentioned the Financial Inclusion Commission. It has produced a substantial report which has already been referred to. Large amounts of it were picked up in the ad hoc Select Committee of your Lordships’ House and I will not go further on that, other than to repeat the request to know when there will be a response to it. The report made 22 very good recommendations. One has already been implemented, as we know, but 21 remain to be implemented. There is a Bill going through the House and perhaps we should use that.

Finally, I have a suggestion for the new Financial Inclusion Minister, whose appearance in government circles is very welcome. I hope that he will be given support, as he cannot do this on his own. It is a major initiative that needs to be thought about very carefully. It will probably be difficult for him to do it independently of the Treasury, because the Treasury controls the purse strings on many of the issues that we have been talking about here.

It would be good if two things happened—one of which we mentioned yesterday, which I would like to return to. It should be part of the government response to financial inclusion to try to create a sense of engagement across Whitehall, and I hope that that will be thought of as worth while. In previous Governments, where a cross-departmental issue was difficult to land among the various departmental interests, a system of champions was devised under which a nominated Minister in each department was given responsibility to work with the lead Minister. My suggestion is to have a Cabinet committee joining those people up. The Minister will probably say that organisation of government business is way above his pay grade. I understand but I hope that he will take the message back, because it seems to me that this is another of those wicked issues which, if there is not a co-ordinated and considered approach, will wither on the vine, which seems sad.

Finally on this point, I think it would be helpful to the new Minister if there were a facility to create a group of experts involved in this work to advise him and his team from the outside. A number of groups could fulfil that role. This strategy was adopted in relation to financial inclusion in its first iteration, when a work group established by Sir Brian Pomeroy was appointed to advise the Treasury on how to implement a financial strategy. It worked very well. That has now stopped but it is something that the Minister should perhaps consider again. I hope that that will be helpful to the Minister when he responds.