Responsible Finance CEO: The level of poverty in the UK is unacceptably high for a wealthy country
With Christmas approaching, the busiest time of year for responsible finance providers, Theodora Hadjimichael, the new CEO of Responsible Finance, talks to PoliticsHome about her passion for tackling financial exclusion.
Theodora Hadjimichael, the new CEO of Responsible Finance, is just a few weeks into her role when we sit down at the Responsible Finance offices in Westminster. Hadjimichael has already been at the organisation for 6 years, returning from maternity leave with the exciting promotion to CEO.
Responsible Finance is the voice of a network of 50 finance providers, who offer business loans and consumers credit to people who struggle to get support from mainstream commercial lenders.
So, what makes an organisation a responsible finance provider?
“It is really about their lending philosophy,” Theodora responds, “whether they lend to businesses, consumers or social enterprises, they are there to empower their customer through finance.”
“It is that social vision,” she adds, “at the core of the ethos is treating every customer with respect.”
Responsible finance providers have a long and proven track record - over the past 10 years, they have lent almost £2 billion to 410,000 businesses, social enterprises, and individuals.
Theodora Hadjimichael started her career in the US’s responsible finance industry 10 years ago,
“I saw how much investment can transform a community and people’s lives, and that’s why I got really inspired and interested in it,” she stated.
“In the US, banks were essentially drawing red lines around communities as they deemed them too high risk.”
“When I moved over to the UK, there was similar market failure happening here,” Theodora explains.
The recent high-profile collapse of pay-day loan firms QuickQuid and Wonga have shone a light on the “poverty premium” in the UK: low-income households usually pay the highest rates for credit (and for many essential utilities and services) and often only have high-cost credit options available to them. The enormous cost of this credit simply compounds their financial exclusion. The Financial Conduct Authority was criticised for their conduct and some MPs have argued that its regulations contributed to the companies’ collapse.
Whatever the reason for the businesses failing, “the fact that the demand is there and growing means that there needs to be a fair, affordable option for consumers who are unable to access mainstream finance” Theodora comments.
Indeed it is. The FCA’s most recent figures demonstrate that 50% of UK consumers show at least one characteristic of potential “financial vulnerability.” Over 8 million individuals are already relying on credit to pay for essential household bills, often in the form of credit card debt, overdrafts, and high- interest loans.
In recent years UK households have experienced an unprecedented squeeze on income, and our interview takes place with Christmas just around the corner. However, Theodora is confident her members are prepared for the increased demand:
“They have all invested quite heavily into their digital infrastructure, so that more people can hear about them and access their loans.” Access to capital remains crucial to the sector meeting increasing demand.
If people can’t access responsible finance, the harms can be significant.
“The FCA’s research has not yet found a huge movement towards illegal money lending”, Theodora says, but “that is always a risk.”
“Then there is turning to friends and family, which is largely undocumented,” she continues, “and we can’t measure that, but it is not a sustainable option.”
And, of course, there is also the risk of simply going without. If your boiler breaks down, just not buying a new one - a risk with heighted consequences over the winter period. For a “healthy society which wishes to reduce inequality”, these are “not sustainable or good options,” Theodora emphasises.
“We know that the sector can do a lot more so that is why we need the right environment and support,” she confidently states.
The CEO welcomes the support of the Government for members over the years, however emphasised the fact that: “what we need to make sure is that there are long term solutions.”
In the past support for the sector has come in short term programmes which creates funding “cliff edges” when not renewed: “The cliff edges are not helpful for the sector as they can’t reach the scale they need to really make an impact on their communities.”
A report released in November by Big Society Capital’s Community Investment Steering Group highlighted the unique impact that responsible finance providers have on driving inclusive growth through supporting small businesses, and called for central and local Governments to develop a dedicated funding source for the sector.
Responsible Finance supports this recommendation and wants to see funding such as the Regional Growth Fund (RGF) programme expanded further. The fund was created in 2010 with the intention of promoting the private sector in areas most at risk from austerity. It provided finance for small businesses, and at the end of 2018, this fund of £60 million, delivered through responsible finance providers, had supported over 2,450 businesses and created or saved over 10,500 jobs.
Community Investment Tax Relief
As Responsible Finance’s CEO, Theodora also wants the next Government to update Community Investment Tax Relief (CITR) to ensure it remains “fit for purpose”.
The tax reliefs and guarantee schemes are tools widely utilised by the responsible finance industry to leverage commercial investment, and CITR has proved effective. However, personal lending by responsible finance providers does not currently qualify for access to CITR tax relief as the legislation targeted only qualifying enterprises.
This is a key change Responsible Finance wants to see, and propose extending the tax relief for use by the personal lending sector.
Theodora also argues that EU funds which currently incentivise commercial investment into the responsible finance sector must be fully replaced by the UK's Shared Prosperity Fund. The previous Government had committed to replacing EU structural funds with a UK version designed to decrease regional disparities, however there is as yet no detail on how the much-vaunted Shared Prosperity Fund will be administered.
Brexit and the future
The responsible finance sector stepped in after the 2008 financial crisis to provide lines of credit to the businesses and consumers who needed it. With a recent CBI forecast warning of “modest” economic growth over the next two years, and continuing confusion around Brexit, Theodora is keen to state her industry is ready for an economic downturn.
Her optimism shines through: “There is a lot of uncertainty around, but one of the things we are certain about is that the sector will, again, step in and step up for those businesses, consumers and social enterprises who need responsible finance, who can continue the great work that they are doing.”
But the finance CEO is frank about the current situation: “The levels of poverty and inequality have reached really high levels for a wealthy country, and that is not acceptable.”
Regarding post-Brexit Britain, “there has been a lot of talk about the need to invest in the UK and the need to invest in good jobs,” Theodora points out.
“Place based investment increases the social wellbeing of a place. Our members are great examples of how it works – they are located in the community, investing into businesses and people and projects in that community, and much of that investment is spent or re-invested into that community, driving local inclusive growth.”
With a new Government just around the corner, and new MPs waiting to be sworn in, Theodora invites them to visit their local responsible providers.
“We encourage all MPs to get involved and to really understand how they can get behind the responsible finance sector.”
“They are driving local wealth building and local change.”
For any political party looking to reduce poverty in the UK, Theodora has a message for them:
“Getting behind the responsible finance industry is a direct way of fulfilling these commitments - to reduce inequality, to create a more fair and equitable society and invest in good jobs. It is at the core of what our members do and what they have demonstrated impact doing.”
Concluding the interview, the new Responsible Finance CEO has a compelling vision:
“If the responsible finance sector has the right environment it can really drive these outcomes. The UK will be a more equal society.”
“We would like to see a world where there is complete access to appropriate finance for all those who need it.”
To read more about Responsible Finance's work, click HERE.