Centre for Social JusticeJoseph Henson is a researcher at the Centre for Social Justice and author of Restoring the Balance and Maxed Out.

British households now hold £1.4 trillion in personal debt, a record high.

But while this is worrying there is another similar, albeit much smaller, number that is far more shocking. There are 1.4 million people who do not have a bank account, equivalent to one in every 36 adults.

These people are some of the poorest in society, whose everyday lives are harder and more expensive as a result. But they represent only the tip of a much wider problem that is driving debt and poverty in Britain.

People who struggle with problem debt suffer in ways that cannot be represented in monetary terms. Stress impacts on mental health, family relationships, performance at work and can result in addiction to drugs or alcohol. One-in -our debt advice clients see their family destroyed by their debt, and one-in-three contemplate or attempt suicide to escape the despair.

The market for financial services – everyday banking, access to credit and insurance to protect home and family – is broken, and fails to meet the most basic needs of around nine million people, or one in every six adults. This includes those without accounts, those who choose not to use one and the 6.6 million people who end up worse off because of crippling penalty fees and overdraft charges.

While politicians and the media have focussed on capping interest rates for payday lenders, they have missed the social injustice and complete market failure that means five out of six people pay almost nothing for banking and borrowing, while the poorest people struggle everyday to use these services without falling into debt. This is primarily the result of a lack of competition for banking that offers world-class financial services for mere pennies, but charges a small fortune to the poorest if they need to borrow £100 for a few days or accidently miss a bill payment.

Today the CSJ released Restoring the Balance, which contains a raft of radical reforms to fix this market and ensure low-income households have access to affordable and innovative financial services designed for them, rather than assigned to them as an afterthought. These reforms will make more of an impact and help to decrease problem debt in a way that the FCA’s interest rate cap for payday lenders never can.

The mere creation of an interest rate cap is an admission that the market is broken – something supported by the Competition Markets Authority – where providers have so little competition they can charge 5,000 per cent APR to vulnerable customers. Indeed an estimated 2 million people use high cost credit because no bank, building society or credit card provider will give them money.

We propose a new vision for social finance in the UK, where a range of ethical lenders will compete to serve the people the banks have left behind. Our reforms will help create a nationwide network of Community Banks – a new type of credit union free from regulatory restrictions on membership, interest rates and investments – that can exist without government subsidy and offer low-income households a true alternative to high-street banks and payday lenders. We have identified 12 larger credit unions with excellent leadership and that have the financial stability to thrive under these new regulations. This would just be the tip of the iceberg.

Other recommendations will remove the barriers that currently prevent a new generation of ethical for-profit “digital banks” from entering the market and offering cutting edge financial products to help people save and manage their money.

While no one proposal is a magic bullet, taken together these reforms can alleviate the debt and suffering for the nine million people the market ignores.

More competition is necessary, but it has to be a radically different type of competition. Simply imposing an interest rate cap or creating new “challenger banks” from the ashes of the Government bailouts will never achieve this goal.