Fair By Design: Ending the ‘poverty premium’

Fair By Design: Ending the ‘poverty premium’

Look at the poverty map of Fair By Design and discover, had you not already known, that London has more than its fair share of people struggling to get by. A city defined for some by The Apprentice and tales of the global super-rich is thrown into sharp relief by the dark bruises covering much of the map. They represent percentages of households paying a “poverty premium” or, as Fair By Design puts it, “the extra cost of being poor”.

Fair By Design is dedicated to alleviating that extra cost, which accrues from the higher amounts paid by people on low incomes for everyday products and services compared with those who are better off.

The poverty premium is extracted very largely through payment arrangements made by the less affluent for things such as energy, credit and insurance and even for getting access to cash.

For example, people with buoyant bank balances are more likely to pay for their gas and electricity by means of a bank account direct debit, confident that sufficient funds will always be there. By contrast, those without steady, reasonably well-paid work who need to be in close control of every penny day by day are more likely to ask for individual quarterly bills. These allow more time for payment, giving poorer customers sometimes welcome flexibility, but energy suppliers charge for providing them. The final effect can be an additional expense of around £100 a year.

The same sort of thing applies with car insurance. In its case, an upfront annual payment is smaller than a series of 12 monthly ones. A person or household without much money is less likely to be in a position to stump up a year’s worth in one go – hence, their premiums have a poverty premium on top. And they are likely to be more expensive in the first place for those living in poor areas.

Monthly insurance payments are effectively serving a loan, with the customer effectively borrowing money to pay in advance for cover for a one year period. The costs of all loans or credit are higher too if you don’t have much money. A “buy now, pay later” option can be the only one for a hard-up household in urgent need of a new fridge or furniture, which means a debt that has to be serviced. The ultimate example is the “pay day loan”.

Another example of a “poverty premium” is its extraction in low-income from those who prefer to make transactions in cash as a way of keeping closer track of their day-to-day finances as they may be increasingly reliant on fee-charging cash machines.

All of these things add up, including in the poorest parts of London. Zoom in on the darkest of those bruises on the Fair By Design map corresponding to the parliamentary seats of Tottenham, Hackney South & Shoreditch, Bethnal Green & Bow, and Camberwell & Peckham and learn that a third of households in those areas are caught in a self-perpetuating cycle of having to cough up more for heat, light, credit and insurance than those more able to afford it.

Hackney North & Stoke Newington, West Ham and Barking aren’t far behind. A whole cluster of others hover at around 30 per cent. Even largely affluent suburban seats, such as Twickenham and Beckenham, have poverty premium percentages in the high teens.

The inequalities are getting worse. Martin Coppack, Fair By Design’s director since 2019, explains that credit and insurance companies have become better at finding out information about individuals, which means, he says, “they’re better able to chase the healthy and the wealthy with the best deals”.

Those are the customers they want most: “They’re cheaper to serve, less likely to make a claim on insurance and less likely to get into trouble in terms of paying back credit. Because they are the best bets, they charge them less”. And, of course, the reverse applies too. “As a rule of thumb, the poorer you are the more expensive credit and insurance is,” Coppack says.

Insurance is the biggest poverty premium driver, and there are different aspects to it. The cost of policies relates to where people live – crucially, where they can afford to live. Rates are linked to postcodes. This can feel very unfair to people who live in low-income neighbourhoods designated high-risk because very often they are in no financial position to move. It’s an issue likely to be particularly relevant to Londoners who live in social housing.

Figures indicate that the poverty premium for home insurance is quite small. It’s a different story with cars. Over 40 per cent of London households don’t have a car, and the capital’s poorer households are the least likely to have them. But those in high risk areas who can’t do without them can end up paying a poverty premium of several hundred pounds.

Fair By Design seeks to eradicate the poverty premium by persuading regulators, politicians and businesses to design it out of essential goods and service charging formulas, drawing on a range of lived experiences from across the country. To the moral case it can be added an economic one.

“The poorer you are, the more likely you are to spend your money locally,” Coppack says. “So if you’re thinking about money going back into local communities, putting it into the pockets of the poorest means that money is more likely spent locally too. So I think that links quite well to the idea of the growth economy”.

This argument, Coppack believes, should hold some appeal for Chancellors of the Exchequer, present or future, perhaps especially given the sorry state of the UK’s public finances. “There’s two ways you can address poverty,” he says. “You can increase incomes or reduce costs. A lot of the recommendations we make don’t have to involve new money from the Treasury.”

The difficult trick will be getting the right combination of carrots and sticks in place to produce a change across market sectors that reverses the trend for the poorest to be paying the most and the affluent the least. Bringing about what Coppack calls “a systems change programme” that will require different types of organisations embracing it and moving in the same direction is a long, slow job for a campaign working a specialised area that doesn’t receive a huge amount of attention.

Earlier this year, Coppack welcomed the recognition in Labour’s plan for financial services of what he called “the link between financial exclusion and poverty premiums” and urged all parties to “make tackling the poverty premium part of their manifestos”. As the general election nears, Fair By Design’s work continues. Coppack provides a simple summing up: “We’re talking to as many people who will hear us as we can.”

This article is the third in a series of five to be published by On London in the run-up to the election for Mayor on 2 May. They are kindly supported by Trust For London, which provides  funding for each of the five projects covered. On London’s policy on supported content can be read here.

Categories: Analysis

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