Labour backbenchers fighting to bring opportunity back to low-income areas
A proposed new bill could see banks scrutinised on their track record within underserved communities. But despite backbench support and strategic alignment, is it doomed already?
Addressing economic inequality remains, on paper at least, one of the current government’s priorities. Missions like kickstarting economic growth and breaking down barriers to opportunity sound great. But what’s actually being said and done to pursue them?
For us living in the world of community development financial institutions (CDFIs), the American example is often still worth following. In the US, over 1,000 CDFIs operate supported by some surprisingly robust legislation.
A clear case for US-style CDFI legislation, but where’s the action?
This week saw efforts from backbench MPs trying to recreate some elements of that environment here in the UK. The Guardian reported on a bill from Labour’s Gareth Thomas which resembles the 1977 US Community Reinvestment Act (CRA).
The bill would oblige banks to report and be rated on their track record of lending to economically underserved communities. It would encourage far closer collaboration between banks and CDFIs, through whom banks typically carry out their CRA duties.
According to Thomas, “Given the cost of living crisis, we need to unlock far better access to cheap loans for the millions of people on low and middle incomes to help them through the financial emergencies that everyone faces at some point, while also making it easier for talented entrepreneurs to find the affordable finance they need to get their businesses up and running.”
Meg Hillier, chair of the Treasury select committee, adds: “I’m pleased my colleague Gareth is drawing attention to this issue. All too often, improving financial inclusion is treated as an abstract box-ticking exercise rather than a core responsibility of a modern, progressive society.”
Meanwhile, Michelle Ovens, founder of Small Business Britain, said: “Many small businesses and individuals continue to face barriers to accessing fair and affordable banking. This bill would be an important step towards tackling financial exclusion by increasing transparency and accountability across the banking sector.”
CDFIs playing a vital role in the UK’s forgotten local economies
But despite all these kind words and best wishes, the bill isn’t likely to get anywhere. CDFIs will have to rely on existing regulations like the Consumer Duty, along with generous helpings of goodwill from traditional finance sources.
Does it not feel counterintuitive to relegate this kind of discussion to the backbenches? Especially when legislation like the CRA has been proven, at scale, in one the most competitive environments on the planet?
The Department for Business and Trade concluded in December that, “There was a strong consensus … from all sectors that CDFIs are essential actors in widening access to finance, particularly for:
- Businesses in coastal and industrial communities
- Women-led and ethnic minority-led businesses
- Those with limited access to traditional lenders”
The government acknowledges a strong positive relationship between CDFIs and mainstream finance players. Responding to a call for evidence on access to finance in the UK, it confirmed an upcoming CDFI roadmap.
This will outline the sector’s next 5-10 years, and aim to address the “key themes [which] emerged as fundamental to growing the sector:
- Increased capital funding
- Capacity-building grants from the private sector
- Improvements to the referral process for customers”
The report stresses that improved referrals, and particularly improved overall awareness of CDFIs, is important to widening access to finance. But in the next breath, it confirms that the government doesn’t intend to pursue legislation like Gareth Thomas’ bill.
So to recap, simply signposting people away from banks to CDFIs is okay. But scrutinising banks is a step too far, “given the differences between the US and UK contexts and banking landscapes.”
Stephen Waud, our Chief Executive, sums up the situation: “We always support any government discussion which would lead to a better environment for CDFIs. But this is far from the first time we’ve heard this particular discussion.
The government acknowledges a strong working relationship between traditional and alternative lenders. And it accepts that this relationship is central to helping entrepreneurs in underserved communities access funding. What’s needed now, as always, is political will and commitment to meaningful change.”
Business Enterprise Fund will continue championing this change, and working with SME owners to create opportunities in locations which need them most.