Budget 2018: Crucial investment in the responsible finance industry will scale its economic impact, says industry body
The social and economic value that responsible finance providers generate is significant; for every £1 responsible finance providers lend, they generate £7 in economic value, says Responsible Finance.
With Brexit on the doorstep, the future of the financial services industry and within it, the responsible finance sector remains uncertain. However, transformation is on its way and the Government should bet on a transformation that strengthens the financial system while making it more accessible, fair and equitable. Crucial investment is needed to support the responsible finance sector so it can continue to support local economic growth.
The responsible finance sector generates £7 for every £1 that it lends. During 2017 the sector lent £235 million to 60,000 people, businesses and social enterprises; it financed 5,000 businesses and 350 social enterprises; it enabled the creation of 6,000 jobs and protected another 2,000 that were at risk; and helped 4,000 new businesses and social enterprises start up, adding £0.25 billion back to the economy. The industry is growing. But it needs significant investment to scale its economic impact.
Responsible Finance is the trade body representing responsible finance providers. In its Autumn Statement representation, it presented a set of policy proposals that would support the sector to further stimulate economic and social development in the UK.
Despite the continued growth of the sector, it urgently needs support and investment. The Government needs to commit to the following action to enable the sector to become a powerful engine for economic growth and development in the post-Brexit era:
1.Launch a Responsible Finance Fund
A significant growth constraint for the sector is the lack of a dedicated responsible finance fund, similar to that seen in the US. A £150 million fund would unlock significant private sector investment and scale up the sector’s impact on excluded and undeserved communities.
2.Invest in access to affordable credit
To ensure the capacity of the sector to expand its reach and strengthen its impact, Responsible Finance is calling for the establishment of a strand of funding from the Dormant Accounts fund to be allocated to personal lending responsible finance providers. This injection of capital would bring commercial investment and incentivise the creation of public-private partnerships. A £50 million fund could stimulate around £1 billion in lending over 10 years to support the financial capability of low income and vulnerable consumers.
3.Replace EU funding and instruments
After an 82% drop in funding for the sector from the European Union since the referendum, it is facing an enormous challenge to replace this. The Chancellor guaranteed that key projects dependent on European funding that support economic development across the country will continue to receive funding. It is essential that those facilities which incentivise commercial investment into the responsible finance sector, namely EaSI, COSME and ERDF, are replaced, or access is maintained.
4. Launch a guarantee and/or a tax-relief for the personal lending sector
A guarantee or tax-relief for the personal lending sector would enable the industry to gain competitiveness and improve its resources to reach and benefit more people. A guarantee mechanism could cover the risk of bad debt in the long term, and a tax-relief could improve the proposition and investment profile of responsible finance providers allowing it to attract more commercial investment.
5. Ensure FCA rules and fees are proportionate
The responsible finance industry is regulated by the Financial Conduct Authority (FCA). But much of this regulation is designed for large-scale financial institutions and hamper the type of diversity in the system that would lead to greater access. Small firms like responsible finance providers have increased regulatory and reporting requirements and costs. Proportionate and fit-for-purpose regulation would enable fair, small providers to grow and innovate.
6.Ensure greater transparency and regulation in the business lending sector
Currently the business finance sector is unregulated. This has led to the establishment of practices among some lenders that are aimed at maximising profit at the cost of the consumer. Protection mechanisms and must be put in place to promote fairer practice and responsible lending.
The responsible finance industry is well positioned to work with the Government in creating strong and diverse industries and an inclusive and resilient economy and believes these key commitments from the Government will help shape the financial services of the future into a system that is competitive, diverse and inclusive.
For further information visit our website, www.responsiblefinance.org.uk or follow us on Twitter @resp_finance