New report explores barriers to growing the UK’s purpose-driven finance sector

We talked to Marloes Nicholls and Dr Gemma Bone Dodds of the Finance Innovation Lab to learn more about the report’s findings

A new report by the Finance Innovation Lab argues that the UK’s purpose-driven finance sector has the potential to expand.

Published last month, the paper examines the challenges faced by the sector, which includes credit unions, community development financial institutions (CDFIs), building societies, ethical banks and mutual banks (which are not yet trading).

According to the research, there is space for all of the players in this ecosystem to grow particularly by collaborating and strengthening the collective impact of purpose-driven banking.

Marloes Nicholls, head of programmes at the Finance Innovation Lab, says some of the barriers faced by the sector include a lack of public awareness, confusion from regulators who are used to working with bigger and for-profit firms, access to capital, and adapting to an increasingly digital economy.

“Collaboration could go a long way in all of these areas. The government’s own research shows that most people would like their money to do good for people and planet,” she said.

“The purpose-driven finance sector could help if only more people knew about it! We can join forces to raise the visibility of purpose-driven finance efficiently and effectively.  

“The government has expressed support for the purpose-driven finance sector, and we can work together to turn this into political support that delivers meaningful policy change.

“Our recent survey of community lenders, undertaken with Fair4All Finance and Innovate Finance, found that they typically have an IT budget that’s less than £50k – there’s very little you can do with that. If tech was shared, that money could go a lot further, and they could demand services that align with their values and the needs of customers and members,” she added.

The report found that there is a strong link between an organisation’s culture and its governance, arguing that is a role for more participatory forms of leadership in purpose-driven banking.

Dr Gemma Bone Dodds, senior fellow at the Finance Innovation Lab and the report’s author, thinks co-operative and mutual institutions could be at an advantage in this respect but warns that culture and leadership remain important.

She said: “Certainly, it is not surprising that most of the purpose-driven organisations we looked at were mutual in form, from credit unions and building societies to the emerging mutual banks. Embedding purpose in the structure of an institution by placing members at the organisational heart provides a buffer, which can help them prevent a collapse to the normal status quo in banking. However, we have seen with some building societies and executive pay that being a mutual does not always prevent this. So, culture and leadership are also very important to hold purpose steady. “

Another report finding was that purpose driven banking is small in comparison to equivalent sectors in other European countries.

“Historically we had more diversity, but the big bang reforms in the ‘80s really promoted and enabled bigger institutions to hoover up all the smaller, more local and more mutual banking institutions,” said Dr Bone Dodds.

“In other European countries and North America people are used to banking with a greater diversity of banking institutions,” added Ms Nicholls. “There, it’s much more normal for people to be members of credit unions or for businesses to get finance from state-run banks. The huge power a small group of shareholder-banks hold in the UK is a big problem, but it’s not insurmountable.”

She expects to see a review of financial sector policy in 2021, which, he argues, will present a “once in a generation opportunity”.

“We need policy makers and regulators to pay special attention to the opportunities to support the purpose-driven finance sector as part of this review. 

“For example, the Bank of England is developing a new ‘strong and simple’ approach to regulating small banks. This could help cooperative banks set up in the UK for the first time. Regional mutual banks only became possible a few years ago following the implementation of the Cooperative and Community Benefit Societies Act 2014. Now they need regulation that’s fit for purpose – rather than having to navigate a system designed for the likes of international corporations like HSBC.

“The forthcoming credit union legislative review is the first chance to properly update that regulation since the initial 1979 Act. It promises to enable much more innovation and collaboration.”

A registered charity, the Finance Innovation Lab was set in the wake of the 2008 financial crisis by founding partners The Institute of Chartered Accountants in England and Wales and The World Wide Fund for Nature (WWF). The lab’s work focuses on growing purpose-driven finance, shifting mainstream finance, influencing law, regulation and policy, and building a community of systems-changemakers.

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