Articles - Strengthening financial capability and inclusion for all

 By Nikhil Rathi, FCA chief executive, at the Fair4All Finance Delivering Financial Inclusion Together Conference.

 Similarly in Bournemouth, I met a volunteer for Christians Against Poverty who was once a client. They explained the lack of confidence to even pick up the phone and speak with creditors in the midst of personal crises and anxiety.

 I heard from Age UK in Truro about the issues in rural communities, with many not knowing how they can pay for basics without cash. Formally ‘included’ but effectively excluded in practice.

 These stories are more common than most realise – and reflect a structural issue. We, like Fair4All Finance, have been involved in the development of the new Financial Inclusion strategy which will be published shortly.

 The UK has made solid progress. Ten years ago, basic banking was out of reach for many. Today, more people have accounts than ever before, digital banking has opened access, and cash availability has been protected.

 We are working, alongside F4AF, to increase the supply of affordable credit through partnerships and innovation. You have helped expand access and deployed dormant asset funding on inclusion.

 On insurance too, working to improve take up among often excluded groups. These steps matter because inclusion is about more than simply opening the door to new products. It is not a once-and-done exercise. It’s about expanding availability of choices at predictable points in life when financial decisions are made. More people, making confident, informed decisions, and choosing the right tool to help.

 The capability gap
 Increased access alone doesn’t guarantee successful outcomes for individuals – or the wider system. Those depend on financial capability: the knowledge, confidence and support to make good choices or avoid bad ones.

 And this is where a particular problem lies. Over the past decade access to new products has exploded and yet, while we have seen some improvement in capability, the rate has not been anywhere near the same.

 That imbalance carries consequences. As of May 2024, 67% of renters did not hold contents insurance. That can decide whether a theft or leak is a minor inconvenience or a serious financial setback.

 One in 10 adults are not confident in their ability to identify a potential scam, rising to 16% for adults with a household income of less than £15,000 and 17% for those over 75. Households which may not be able to stand the shock of losing money to scams. Research shows that fewer than 15% of consumers consistently pay down their highest interest balance first.

 These aren’t necessarily failures of personal responsibility or intelligence. They’re the result of people reaching key financial decisions without the support, confidence or tools to act well. But why has financial capability lagged behind increased access?

 Rapid digitisation has played a major role, placing complex products at people’s fingertips. Crypto, Contracts for Difference (CFDs), FX: all traded through apps. A global phenomenon. The OECD is looking at whether financial capability strategies are keeping pace.

 Secondly, there’s fragmentation. A lot of activity across government departments in different nations, the Money and Pensions Service (MaPS), banks, insurers, schools and charities, but with scope for greater coordination. Good initiatives not always reaching the people who need them most.

 Thirdly, capability is still too often treated as an add-on under community engagement rather than a key part of how firms design products and services.

 We know some firms do this well but for others it feels like more of a gesture – and where understanding isn’t built in, and communications aren’t built for customers, then confusion thrives.

 Meanwhile, responsibility and risk for financial decisions is increasingly shifting to individuals. Auto-enrolment, credit offers, tenancy decisions – all personal choices with real consequences.

 But the right support mechanisms haven’t kept up. More access to information than ever before, yes. But is it the right type of information, at the right time?

 Finally, the benefits of capability are hard to measure effectively. Because their impact shows up in avoided harm rather than headline growth, the debate over investment risks being distorted. But evidence we do have points in the same direction – better understanding reduces arrears, complaints and scam losses. We don’t need a single multiplier to know that less of this, and better coverage, will strengthen firms and the system. These dynamics reinforce one another. Fragmentation makes delivery uneven. Add-on treatment makes capability a nice-to-have, rather than essential. The measurement debate delays action.

 So what do we do?
 We now need to connect financial inclusion and capability. Improved inclusion should be the goal, but capability needs to be enhanced at the same time and potentially more quickly. The Treasury Select Committee underlined this point in their recent work on ISAs, warning against pushing people into riskier investments without the understanding to manage them. They called for a focus on stronger capability and access to advice.

 If we expand access with capability baked in, we build individual resilience and security. We need to build skills that let people navigate products that may not even yet exist – in an AI-driven and automated future – while reaching those excluded from the system and encouraging those who opt out to re-engage.

 This is not the responsibility of one institution like the FCA. Neither financial inclusion nor improving capability are within our exclusive remit. But we are uniquely placed to help fill some of the gaps. We can remove barriers – either perceived or actual – that stand in the way of firms wanting to do the right thing. Our innovation services have helped firms providing non-traditional affordability and credit scoring tools. Our research like Financial Lives shines a light on where problems exist and our behavioural economic research helps develop solutions.

 We are also rebalancing risk in the system – not just to encourage growth but because there is benefit to consumers. Now, we have heard that with more risk come fewer consumer protections, more chances for things to go wrong. If we intervene more with ever more granular restrictions, we may in fact limit the type of innovation required to bring people into financial services.

 We have been upfront that some of our revolutionary targeted support changes may result in a worse outcome for some. But not acting leaves millions facing the risk of no support when making key financial decisions. On mortgages too, lenders have told us that they can now lend around £30,000 more, following clarification of our mortgage stress test rule.

 We judged this a risk worth taking, allowing more people the security that comes with home ownership. People need to be able to make informed choices about the services they are buying, not just be prevented from making any choice at all. That’s why we will help bring together those with an interest in these issues.

 To focus on capability-by-design at key moments, plain-language explainers, and shared evaluation so successful models can scale. We will say more about this next year. We will also build an evidence base – reviewing existing research and commissioning new work to help fill gaps. We will make findings public, so others can align their work.

 We will continue to warn about scams. Our innovation services will continue to support firms developing products that drive inclusion. We will explore whether our colleagues can use their volunteering days to support financial education, helping to make a real difference on the ground. We will play our part, but we are not the only ones on the pitch.

 To Government: coordinate and lead.
 Once the Government has published its Financial Inclusion Strategy, the next step will be to implement it – turning ambition into clear outcomes. We would urge the Government to deepen and embed the work in schools, working with others. We are committed to supporting workplace savings and will continue to collaborate with Government and others to promote the successful roll-out of these schemes.

 MaPS can act as the coordination hub: reducing duplication, setting shared standards, and aligning delivery around predictable life moments. On funding, we also welcome the new focus of dormant assets on financial capability initiatives that could reach the most financially vulnerable.

 To industry: build on what already works.
 Banks fund financial education in schools – around £7m each year. Many run initiatives to help excluded people open bank accounts. The task now is to expand that good work, so it is consistently ready and available for individuals. That means embedding support into product design, not tacking it on at the end. Employers have a unique role at the start of and during working life. But we must also reach those outside traditional employment – including self-employed. And do more to test and publish what works and what doesn’t.

 Conclusion
 We have made much progress on financial inclusion. But widening access without raising capability leaves people with more choices they don’t feel ready to make. If we lift capability to match inclusion, buffers rise; cover improves; more people save and invest with confidence; scams fall. And decisions are taken at the right time, for the right reasons. Trust in the system grows. Government can coordinate, legislate where needed, and sustain this momentum.

 MaPS can lead on capability and alignment. Industry can build capability into journeys, not bolt it on. And the FCA will play our part by convening, building and sharing evidence, providing clarity, and promoting innovation. Inclusion gives people the tools, and the choice. Capability helps them to use those tools. Getting both right strengthens households and stabilises the system. The direction is set. The momentum is building. Let’s take advantage of it to finish the job and transform financial capability.