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Britain's poorest, excluded from banking, turn to high-cost credit
[LONDON] Poorer people in Britain are being excluded from the financial system and forced to rely on expensive and substandard banking products, according to a report by British lawmakers published on Saturday.
There are 1.7 million adults in the country that do not have access to a bank account, the report said, raising the risk that they will turn to high-cost sources of credit such as payday loans, 'doorstep' loans sold at a customer's home, and a system known as rent-to-own.
In the latter method, a company rents consumer goods to a customer at a high cost, with ownership not transferred until the final payment. Usage of rent-to-own has more than doubled in the last five years to over 400,000 households in Britain, according to Christine Allison, financial inclusion fellow at the Centre for the Study of Financial Innovation.
StepChange Debt Charity estimates 2.6 million people in Britain are struggling with severe problem debt, and another 8.8 million show some signs of financial difficulty.
Particularly at risk are those in the lowest income brackets, the report said, defined in British government data as having an average weekly household income of £130 to £240 (S$227.41-S$419.84).
Regulation of short-term payday loan companies has been effective in curbing some of their practises such as exorbitant interest rates, but other forms of high-cost credit have flourished instead, according to Claire Tyler, a lawmaker in the House of Lords who chaired the committee on financial exclusion. "There is a poverty premium where the poor pay more for credit," Ms Tyler told Reuters in an interview.
The report called on the Financial Conduct Authority to establish new rules requiring banks to have a duty of care towards their customers to address some of these problems, but left the definition of that duty up to the regulator.
Britain's Treasury department and nine of the biggest banks in 2014 agreed new guidelines stipulating that so-called basic bank accounts should be fee-free, in an effort to widen access to banking.
Ms Tyler said data were not yet available to show the impact of those new rules.
The report also said Britain's poorer and more vulnerable people were hardest hit by bank branch closures, echoing a report by Reuters last June that showed banks were disproportionately closing branches in the lowest-income areas while expanding in wealthier ones.