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The exclusion zone

Many people on moderate incomes take for granted their ability to hold a range of different financial products. Although we might moan about our banks, we hardly notice the benefits they provide us with. Try imagining running your finances, indeed your life, totally excluded from mainstream financial instruments. It soon starts to get difficult, yet this is the situation that many thousands of people find themselves in.

Financial exclusion is a big issue and has risen up the Government agenda in recent years. Progress is being made.

By April next year, all adults in the UK will have to have some form of account, either with a high-street bank or at the Post Office. The Government has put a priority on this because it wants to pay benefits electronically, which is cheaper. In many ways, this is positive. It certainly helps tackle financial exclusion but it is not the whole answer.

Financial inclusion is not achieved by simply giving everyone a bank account. Policymakers are beginning to recognise that this needs to be understood as a broader problem. One way of understanding the full scope of the challenge that policymakers face is to think about the breadth and depth of financial exclusion.

First the breadth. People on low incomes require access to a range of appropriate financial products, just as those on higher incomes do. This includes insurance, credit and appropriate savings products.

Many, even if they have a current account do not have access to these services. Around one in four people do not have home contents insurance, over a third of households have no savings, pension provision or other investments and over-indebtedness among the poor has increased considerably. More and more people find themselves forced to resort to expensive alternative credit providers. This can bring acute financial insecurity.

Without access to this wider menu of products, people should still be considered financially excluded.

What about the question of depth? This is really an issue concerning the quality of people&#39s engagement with financial services.

Much of the Government&#39s strategy to date has focused on making products available and accessible. However, there is also a need for policy to build financial awareness. It is essential to equip adults with the skills and confidence to make intelligent choices in the marketplace.

To an extent, the Government has recognised the importance of raising financial awareness and the role of information and education. The FSA has a legislative responsibility to promote consumer awareness. However, there are limitations to what the FSA can do alone. Other policies and approaches are required.

Of course, once we raise the issue of education and information, not far behind is advice. This raises some difficult questions. What is the relationship between information, education and advice in raising awareness?

What role should the Government, the financial services industry and community-based organisations play in creating a more financially literate and aware populace? How can appropriate advice be delivered to people on low incomes?

These are complex problems to which no single and simple solution offers itself. No single sector or organisation will be capable of providing the whole solution. However, the specific issue of providing financial advice is one area where IFAs have a potential role to play.

One model is being tested in Birmingham by an organisation called Birmingham Settlement. It involves local community-based organisations working in partnership with IFAs to provide advice for people on low incomes.

Local not-for-profit organisations act as the main contact for clients. Because they are more likely to know the needs of their local population and because they are more trusted, they can access gro- ups who would otherwise not receive advice.

In many cases, people&#39s financial problems can be dealt with by the local organisation, in ways similar to existing money advice agencies such as the Citizen&#39s Advice Bureau.

For some, though, it will be more appropriate to be referred on to an IFA. This is often because they will have a complex problem requiring the specific skills of an adviser regulated by the Financial Services Act.

The local community-based organisation effectively takes on the role of gatekeeper and will help to assess people before it is decided if they need to be referred to an IFA.

This partnership approach draws on the comparative advantages of the different partners. Local organisations provide the outreach and much of the education and information. To provide a more complete and enabling service, IFA skills are also used.

If financial exclusion, in all its depth and breadth, is to be significantly reduced then new innovative partnerships will be required. Different organisations will need to work together as they are doing in Birmingham.

The challenge from a policy perspective is to learn from examples of good practice and provide a framework to spread across the country. The challenge is also for IFAs to play their part in tackling financial exclusion.

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