Senior Labour backbenchers are urging the government to introduce legislation forcing UK banks to expand affordable lending to small businesses and low-income neighbourhoods.
The former minister Gareth Thomas has tabled a 10-minute rule bill – a type of private member’s bill – echoing the US Community Reinvestment Act (CRA).
Thomas said: “Given the cost of living crisis, we need to unlock far better access to cheap loans for the millions of people on low and middle incomes to help them through the financial emergencies that everyone faces at some point, while also making it easier for talented entrepreneurs to find the affordable finance they need to get their businesses up and running.”
Co-sponsors of the legislation include the Labour select committee chairs Meg Hillier, Liam Byrne and Sarah Owen, and the former shadow chancellors Anneliese Dodds and John McDonnell.
The Treasury published its own financial exclusion strategy last year, including a commitment to supporting the expansion of credit unions.
However, campaigners complained that it placed few specific duties on the financial sector, which the chancellor, Rachel Reeves, has praised as the “crown jewel in our economy”.
Passed in the 1970s, the CRA obliges US banks to report to regulators on their record in lending to poorer communities. They are then rated accordingly, and explain what they will do to improve.
Thomas’s bill, a longstanding campaigning aim of the Co-operative party, of which 41 Labour MPs are members, would establish similar reporting requirements for the UK.
Banks would have to “measure and disclose their performance in reducing financial exclusion, including exclusion from affordable credit, and in improving access to finance for small and medium-sized businesses”, and regulators would “establish a system for rating banks according to that performance”.
The legislation would also oblige the banks to back credit unions and community development finance institutions (CDFIs) that specialise in small-scale, face-to-face banking in underserved communities.
In the US, many banks fulfil their requirements under the CRA by collaborating with CDFIs.
Hillier, the chair of the Treasury select committee, said: “I’m pleased my colleague Gareth is drawing attention to this issue. All too often, improving financial inclusion is treated as an abstract box-ticking exercise rather than a core responsibility of a modern, progressive society.
“My committee has launched an inquiry into the Treasury’s proposals to improve financial inclusion. We will be looking at whether the government has the plan and resources to genuinely tackle the real barriers people face. If this is not done properly, we all lose out.”
Michelle Ovens, the founder of campaign group Small Business Britain, said: “Many small businesses and individuals continue to face barriers to accessing fair and affordable banking. This bill would be an important step towards tackling financial exclusion by increasing transparency and accountability across the banking sector.”
The bill has little chance of proceeding, but many Labour backbenchers are keen to float alternative economic approaches, given widespread dissatisfaction with the party leadership’s approach.
Thomas was a junior minister in the Department for Business and Trade until the September reshuffle caused by Angela Rayner’s resignation.
Reeves made the latest of a string of policy retreats last week, with the government promising additional support for pubs facing sharp increases in their business rates bill. It was the second U-turn in a matter of weeks, following the decision to significantly raise the threshold at which inheritance tax will be paid on farmland, after a year-long backlash.
A Treasury source stressed that existing laws and regulations, including the consumer duty, overseen by the City watchdog the Financial Conduct Authority, already place responsibilities on banks in respect of financial inclusion, and suggested Thomas’s bill risked duplicating these.
