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Westminster Hall
Thursday 9 December 2004
[Sir Nicholas Winterton in the Chair]
Long-term Savings
[Relevant documents: Fifth and Eighth Reports from the Treasury Committee and published Memoranda, Session 2003–04, HC 71, HC 275 and HC 394, and the Government's responses thereto, Fifth and Eighth Special Reports, Session 2003–04, HC 655 and HC 1119.]
Motion made, and Question proposed, That the sitting be now adjourned.—[Derek Twigg. ]
Mr. Deputy Speaker (Sir Nicholas Winterton): I call the respected Chairman of the Treasury Committee.
2.30 pm
Mr. John McFall (Dumbarton) (Lab/Co-op): Thank you, Mr. Deputy Speaker, for that introduction. It is a pleasure for me to introduce this debate on restoring confidence in long-term savings. The inquiry was a lengthy and detailed one. The Treasury Committee began it in November 2003, and we published our report and evidence in June 2004. We had 13 separate evidence sessions with 47 written submissions that we printed, and a further 23 that were not printed.
In the words of many who have read the report it is the most detailed analysis undertaken of the industry. We made a critical analysis of the industry, and it was important that we did so to determine problems and point the way for the future. The responses to the report that we received from the Government, the Financial Services Authority and the industry have been positive.
However, there is still work in progress in connection with the report. First, the industry promised the Committee that it would think about matters such as printing summary boxes on material and considering risk indicators. Industry representatives said that they would respond to us. I shall shortly write asking them to present their submissions to us by the end of January, so that we can assess what progress they have made. Some companies have been in close contact with Treasury Committee staff, and I know that they are getting down to the task, which is welcome news.
The second aspect of work in progress is the establishment of an industry forum. That was one of the key recommendations of our report. Since it was issued, I have had extensive discussions with the industry, the FSA and the Government and have received responses to the initiative. I am glad to say that the main responses were received today. I shall study them and work with the industry and the consumer for the establishment of the body.
The forum will be a forward-looking body and it will not duplicate any of the work that is done elsewhere by the Government, the FSA and others, but it will examine issues that have been raised to bring about alertness in the industry about the types of products that it sells and the way in which it goes about its business. As a result of verbal submissions made to me, I have agreed to chair the first two or three meetings. I shall
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then look for an independent chairperson to take over that role and set the forum on its way. In that way, the Committee will demonstrate the positive nature of its engagement in the issue.
Several of the points that we raised in our report concerned confidence in long-term savings; the need to improve product information, which was opaque, largely speaking; and the need to align the interests of savers and the industry. My colleagues will focus on areas such as improving distribution channels, with-profit products, Sandler products, the need for simplified products, tax and benefits and financial capability. Financial capability is abysmally low in this country, and there is an urgent need for the FSA and the Government to do something about it.
The financial services industry has been subject to a lot of interest recently. Broadly, we have seen the Myners report, the Sandler report, the Turner report, the "Tomorrow's Company" report on restoring confidence in the investment industry and the Committee's report. As well as those broad inquiries, there has been a string of investigations on narrower aspects of the industry, such as the Penrose report on the Equitable Life inquiry—Lord Penrose appeared as a witness on the issue—and the Morris review of the actuarial profession.
Any industry receiving such attention must be doing either very well or very badly. Sadly, the latter has been the case. The Committee found that the consumer, rightly or wrongly, no longer trusts the financial services industry. Ron Sandler memorably told us that the industry had now arrived at the point where the average man or woman in the street trusts his or her local supermarket much more than they do many of our largest financial institutions. The National Consumer Council told us that in a poll that it had conducted, 52 per cent. of people indicated that they just did not trust the pension industry any more. A string of other independent witnesses offered us similar views. It seems that the mis-selling scandals over the years have taken their toll on consumer trust in the industry.
The important point that the Committee must get out loud and clear is that we must put the situation right. A healthy financial services industry is essential to the future prosperity of the country. The industry is a major employer and provider of capital to British companies, and it is the major repository of the savings of almost every family in the country. It is worth almost £2 trillion, so policy makers simply cannot ignore it. We all have a duty to get together to restore the industry's health. My second point is we must have an agenda for action, as I have clearly illustrated with several points to which I may return.
So what needs doing? One problem is that major parts of the financial services industry have abandoned everyday Britain. Saving was described during our evidence sessions as a middle-class pastime. We tried to understand why those on lower incomes were not saving. The industry is not providing products for such customers, because it feels that doing so is not worth its while commercially. It is important, however, that the savings habit should be re-established. The need to connect with lower-paid individuals is crucial. The
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Government have gone some way along that road, with the introduction of stakeholder pensions, and they are now introducing a range of other stakeholder saving products, but the simplification of the products and the need to enlarge the market are extremely important.
The confidence issue is crucial, because of the danger of contagion, which hurts good and bad alike in the industry, as we found out in a past inquiry on split capital investment trusts. Such trusts are but a small part of the investment trust industry, but the whole industry was tarnished by apparent wrongdoing. The good need to work to ensure that we progressively eliminate the bad, so that the whole industry's reputation is restored.
That is why the Committee made some solid recommendations to try to cut the risk of further mis-selling scandals and to restore consumer confidence in the long-term savings industry. We thought that one of the best ways of avoiding mis-selling would be to ensure that clients have enough information presented in a simple enough way to judge for themselves whether a product is suitable. Too many savings products are sold today with key points of information hidden in small type. That is why we want a summary box, so that the consumer can understand. In our inquiry into credit cards, which in some ways continues, we challenged the banks and credit card companies to develop such summary boxes. I am glad to say that they responded to the challenge, and every credit card provider will provide a summary box on its products from March this year. Indeed, many products have summary boxes already.
Another of our conclusions is that the common theme of many recent scandals in the savings industry, such as endowment mortgages, precipice bonds and splits, was that relatively high-risk products were sold to people as relatively low-risk products. Such mis-selling would be severely cut, if not made impossible, if a simple, standardised indicator of risk had to be put in the summary box for every product. If that approach forces the industry to think long and hard about how risky some of the products that it sells really are, so much the better for the consumer, as well as for the industry in the long term. Summary boxes and simple risk measures can, I hope, appear quite quickly. What may take longer—
Mr. Andrew Love (Edmonton) (Lab/Co-op): I think that there is common consent that with-profits products are complex. Taking on board what my right hon. Friend said about financial capability, can he see a way in which we can educate consumers sufficiently to understand such products?
Mr. McFall : It is crucial to educate consumers, but we must first educate the industry. When Lord Penrose appeared before the Committee, he memorably asked whether with-profits products can survive without mystery. With such products, people do not know how their investments are doing. If, at some stage, someone finds that they do not like their investment, they ask for it to be cancelled, whereupon the industry imposes on the product a market value adjuster of perhaps 10, 15 or 20 per cent. In what other industry can one sell
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consumers products based on equities and then, without their knowledge or permission, have them transferred to bonds? There is a long way to go in the industry to get that right.
Overall, it is crucial that consumers are educated on finance. Many people approached me about mis-selling in relation to the Equitable Life debacle. Largely speaking, they were middle-class people such as lawyers, accountants and doctors, who put their money into Equitable Life thinking that something would materialise 25 or 30 years down the line. Like most of us, they did not ask many questions, but they were severely disillusioned at the end of the day. So financial education is not just for one sector of the population, but for the whole population, and it is crucial that it is provided in the long term. There are no easy fixes, and it is important that we realise that. We must be patient when considering this issue.
Mr. David Drew (Stroud) (Lab/Co-op): I am sorry to disrupt the flow of my right hon. Friend's speech, but does he agree—my friend Marie Jennings, who has done more to persuade me of this view than anyone, has always made this comment—that the fault lies with the people who give the explanations, and not with those to whom the explanations are given? These systems could be understood if people made the effort, but they are too often over-complicated. It should be the basis of any of the packages that it is the seller's fault if the buyer does not understand them. Does my right hon. Friend agree?
Mr. McFall : The Committee spent quite a bit of time considering that issue. Product complexity and opaqueness lie at the heart of many of the problems associated with the industry. Simplified products and plain English are important. One response that I received about the industry forum—I think it was from the Association of Private Client Investment Managers and Stockbrokers—said that plain English is essential. One thing that the forum should look at is how products can be explained in plain English, but we have a long way to go on that. I agree with my hon. Friend 100 per cent. on that issue.
Essentially, the Committee questioned customs and business models that have been around in the industry for decades, if not centuries. We feel that the industry does the same thing year after year, decade after decade, and that there is little innovation or entrepreneurship in its approach. That needs to change, as there is little doubt that it has fallen well behind the best standards of customer care and focus that have been developed in other service industries. The savings industry often fails to meet the basic standards of behaviour that consumers have come to expect. We cannot allow the financial services industry to become a museum piece in that respect.
I agree that the Committee is asking the industry to maintain some very high standards, but if it fails to meet them, customers will vote with their feet and put their money elsewhere. One debate about savings says that the level of savings is too low. I do not agree. Some people have examined the savings industry and said, "Wait a minute, I don't want to put my money there; I'll put it in housing." As a result, a lot of money has gone into housing and has been distributed. Like others, I want the situation to be rebalanced, but to achieve that, we must get the industry on its feet.
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I say to the Minister that there has been a positive response from the industry. Those who are alert to the problems realise that they must adjust and change, which is why they are coming together, along with me, in the industry forum. We still have a long way to go to flesh out what the forum will do, but it is worth while for me to put some aspects on the record today. I consider that the forum should identify the foundations in which trust is built and sustained, such as transparency, accountability, fair dealing and value for money.
We should recognise that ethos flows from ethics, and we should reach an agreement that long-term savings products require a basis of institutional trust. In addition, we must accept that the product and distribution industries are in an environment in which competition flourishes and individuals are entitled to earn a reasonable return on risk capital. I am delighted that the forum has received a positive endorsement from the Government and the FSA. The Minister's letter outlined the Treasury's commitment to the future of the forum. If we can put the arrangement in order over the next few months, we can start at an institutional, societal and political level in focusing on what the industry must do.
The basic message is that the industry needs to come into communion with the consumers. When it does that, it can be successful. Some industries in the retail sector, such as Tesco, Vodafone and others, have the consumer at the heart of their concerns. I look forward to working with the industry and the Government on such matters, and I recommend the report to this forum.
Mr. Deputy Speaker : May I help the House? I intend to call all Back Benchers who wish to speak. I shall then call the Front Benchers for the Liberal Democrat party and Her Majesty's Opposition, and then, of course, the Treasury Minister.
2.48 pm
Mr. James Plaskitt (Warwick and Leamington) (Lab): I am pleased that the House has taken time to debate this important report. I am also pleased to follow my right hon. Friend the Member for Dumbarton (Mr. McFall), who chairs our Committee, and to hear that he intends to chair the first few sessions of the forum that we are recommending. If he does so with the same professionalism as he chairs our Committee, the forum will succeed.
When the forum gets under way, perhaps it should begin by establishing what the savings problem is. If we are clear about that from the outset, the forum will be more successful. It has recently been suggested in the House in debates on the pre-Budget report and other occasions that there may be a problem with the savings ratio in general. It is worth looking at that, because I do not consider it to be the problem. Nothing unusual is going on with the savings ratio from an historical perspective. If we study the savings ratio in recent history, we find that it tends to track the cycle of growth in the economy fairly closely. It closely tracks the housing market, too.
If we consider the points at which the savings ratio stood at a very high level, 1980–81 stands out as an example—it was at 12 per cent. However, most of us can recall that the economy was in recession then. It was not
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surprising that people put a large amount by in savings if they did not believe that their job was secure. That was a rational way in which to react in the circumstances.
The next time the savings ratio climbed to anything like the same level was in 1991–92, when it rose to 11 per cent. Again, the economy was in recession at that time. Therefore, there was exactly the same reaction.
On the other hand, the savings ratio has been low at times of rapid growth. It was quite low in 1988; it fell to just 4.9 per cent. That was a period of rapid economic growth. People were feeling very confident. Consumer confidence was high, unemployment was falling, and there was a greater tendency to spend disposable income and to save less.
That puts the current savings ratio in its appropriate context. It now stands at about 6 per cent. and it has averaged 5.6 per cent. over the past few years. That coincides with a period of sustained economic growth, rapid falls in unemployment and high consumer confidence. Therefore, the current savings ratio is entirely consistent with the cycle over the past 20 years or so.
That is even more the case when the savings ratio is tracked against housing, which recent history shows is possibly the greatest determinant. From 1987 to 1989, the savings ratio was down at 5 per cent. or 6 per cent. At that time, the house price inflation index showed annual house price inflation at 20 per cent. The next time in the cycle that the saving ratio was that low, house price inflation was again at 20 per cent.
The house price index is slowing sharply from its highs of last year and, unsurprisingly, the quarterly figures show that the savings ratio is beginning to climb again. Exactly the same relationship that there has been time and again over the past few decades looks like repeating itself.
If house price inflation calms down, we should expect the savings ratio to continue to recover. I doubt that it will return to double digits or anything like that, because we remain in a period of low inflation and low unemployment. Confidence will stay high, and savings will come off the bottom, but they will not soar.
It is worth establishing at the outset that the savings ratio is not in itself a reliable statement on the savings regime, nor does it provide a definition of whether there is a savings crisis. The savings ratio is a consequential measure of lots of other things that are happening in the economy.
What is the savings issue, if it is not about the savings ratio itself? It is worth looking at the overall balances in households' wealth. Much has recently been made of the fact that, overall, household indebtedness has broken through the £1 trillion mark. Some people have sought to use that as an occasion to ring an alarm bell and to suggest that household debt has soared out of control. Too much is made of that. It is not a remarkable statistic in itself. The fact that the figure has gone through that level reflects 10 years of growth in the economy with very low unemployment and high household incomes.
Much of that £1 trillion debt is secured debt. There would be more cause for concern if a large proportion of it were unsecured debt. The key thing is to balance overall indebtedness against overall household assets. The recently published Turner report on pensions gives
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an interesting and useful breakdown of the figures. It reminds us that net non-pension financial assets in UK households stand at £1.2 trillion, that net private pension assets are at £1.8 trillion, that state pension rights are at £1.1 trillion, and that net housing wealth—I emphasise that that is net housing wealth, which leaves aside mortgage liability—stands at £2.3 trillion.
The overall balance sheet shows total household wealth at over £6 trillion, and that needs to be set against household indebtedness of £1 trillion. It is worth emphasising that, at £6 trillion, total household balances exceed six times over the size of the UK economy in terms of annual GDP. There is not a savings crisis in the sense of an imbalance between savings and assets.
The issue, which came out strongly in the course of our investigations, is more to do with distribution within the net assets in the economy, not the totality of those assets. It is clear that not enough of the total assets or the total savings are going into long-term savings instruments—into pensions, in particular. That becomes the definition of the problem, and if that remains clear as the forum gets under way, its task will be much easier.
It is difficult to know the exact size of the savings gap. There are lots of numerical estimates, but it is difficult to come up with a robust definition of what the amount should be. However, there is useful information on the nature of the gap in the Pensions Commission report, which reminds us that 11 million people are not making contributions to private pension schemes. That includes just under 2 million self-employed people. The Turner report also suggests that 3 million people are "seriously"—that is its word—under-saving.
We must ask why that is the case for long-term savings. The survey evidence is interesting. Most surveys that I have studied point to two major factors as being responsible for the lack of confidence in long-term saving. The first, which features heavily, is recent stock market performance. Four or five years of a sagging stock market has undermined confidence in investment instruments that rely on equities, and that is not a surprise.
The second factor, which goes to the heart of our report, is that people have a lack of confidence in the savings industry and its products. Some 52 per cent. of people responded that they did not trust the pensions industry. If more than half the adult population says that it simply has no trust, it is no surprise that, when households choose where to put what they save, pensions are not high on the list. Instead, there is a reliance on housing or other instruments. There is a fear that money and investments are not going to be safe with the pensions industry. That is the view not only of savers. Prudential gave evidence to the Committee and confirmed what many savers tell us. It referred to
If one of the large companies is prepared to say that, it is hardly surprising that consumers have lost confidence.
The challenge before us is to restore confidence, and everyone has a part to play in that. The Government could do something to help to restore confidence in long-term savings. If we maintain economic stability,
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that will help. Doing more to simplify the tax regimes, especially those that relate to pensions saving—and the Government are doing that—will help. If we move towards more flexible concepts and definitions of retirement, that will help. All that work is in progress and will contribute.
Regulators also have something to contribute. There must be a robust and fair system of regulation, which people can believe in and trust to do the job—one that will not allow some of the excesses that we have seen in the past. If consumers believed in such regulation and knew that it was there, that would help to restore their confidence. The industry—the third party—must clearly do something to help to restore confidence. It needs to conduct itself with greater transparency, it must deliver more product simplicity and improve its way of dealing with customers.
Everyone on that list—the Government, the regulator and the industry—can contribute to improving consumer education and financial awareness, which is an issue that I want to come to later.
Mr. Drew : The all-party group on building societies and financial mutuals has produced its report on building societies. One of the things that those of us who believe in mutuality and co-operation have been sore about in recent years, notwithstanding the Equitable Life debacle, is the way in which de-mutualisation has been seen as the salvation of a number of companies. That is palpably untrue. We have our own skeletons to expose in terms of accountability, but mutuality has a place in the financial market—if nothing else, because people trust it. Will my hon. Friend comment on that?
Mr. Plaskitt : I entirely agree. In fact, I would go further and say that as we see some new approaches to saving emerging, especially for those from lower-income groups, or those who have suffered financial exclusion, there is every possibility of seeing more in the way of mutuality replacing some of the vehicles that have de-mutualised. It seems that mutual savings devices come into being, start small and, as they grow bigger, there is a temptation to move out of that market. I hope that in the coming years we will see a replacement of some of the smaller, more localised and accessible vehicles. I think that many more of them will be on a mutual basis and this time I hope that they can sustain themselves.
A key element in restoring long-term confidence in savings will be dealing with the problem of risk assessment. We said in our report:
"The need for the industry to pay greater attention to assessing and clearly communicating the risk inherent in any saving product has been demonstrated by the problems encountered in a string of products in recent years."
I think that our phraseology was quite mild. If we were referring to problems such as Equitable Life, precipice bonds, splits or endowment mortgages, we could have used tougher language. I suspect that, if the right sort of risk assessment had been in place, it is possible that some—possibly even all—of those problems could have been avoided. The FSA told us that:
"there have been too many instances where the industry did not live up to its responsibilities to explain investment risk clearly to its customers at the outset."
For the main regulator to tell us that makes a forceful point.
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It is fair to conclude, on the evidence given to us, that the industry has damaged itself by its conduct. I think that the regulator is backing up that point, which is why I am puzzled as to why the industry seems strangely reluctant to embrace innovative solutions to the problem of risk assessment. That problem is soluble. I am convinced that the industry could make much more progress in that sector. It needs greater transparency and needs risk indicators to be attached to the products. It should not be difficult to get to that point, or to get the language clear.
We took evidence from the actuarial profession, which has recently published a report on consumer understanding of risk. I am pleased that it endorsed the point that we are making:
"In providing financial advice, the discourse should be in everyday language and require the customer to have no understanding of the underlying financial markets".
However, it spoils it by saying,
which fails to meet its first objective of putting things in everyday language. But never mind, its heart is in the right place and it is moving in the right direction.
It should not be difficult to get clear language on products. However diverse, sophisticated and complex they are, it should be and is possible for them to be explained in straightforward language. At the moment that is done through the key features document, which fails to deliver. That is why we are looking to the industry to develop concepts along the lines of the summary box, which was helpfully introduced in relation to credit cards and other credit products.
Product risk classification is also needed. Again, I am puzzled by the industry's reluctance to embrace that idea. It seems hesitant about going down that road. The interim reports that I have seen from the Association of British Insurers and the British Bankers' Association responding to our report, and statements that they have issued in the full knowledge that this debate was taking place today, are still not giving anything on trying to devise proper product risk classification. That will be a critical part of the solution if we are to restore long-term confidence in the products.
I cannot see the problem in making it clear in any promotional material on any product what the product is appropriate for. It should be possible to see quite easily whether a product is appropriate for short-term saving, medium-term saving or long-term saving. Those are three simple types of saving, but sometimes we find people choosing the wrong product in terms of what they expect to get from it. It should be straightforward to put that information on all promotional and introductory material for any savings product.
However, I think that we can go further. It should be possible to devise a fairly simple risk indicator. I have sometimes heard it suggested that a traffic light system will do, where the products are simply colour coded. I think that that is too simplistic and the market is much more complex than that. Having said that, it is still possible to have a fairly straightforward risk indicator system and one example would involve four essential groups.
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The first question would be whether the savings instrument was appropriate for the cautious consumer. Is the investment a cautious one? It is if the capital is absolutely safe; if someone will get a steady and predictable return and limited fluctuations. That is a type of product that the cautious investment consumer should go for.
The second category could involve a more balanced investment, where the advice would be that it should not be someone's only investment vehicle. They should not put all their eggs into that basket, but it could be one investment. The returns might exceed the average but they could go below it. There will be higher fluctuations, but the person's capital sum is protected.
The third category would be for the adventurous investor. Again, it should not be a person's only investment vehicle. The returns will be volatile and their capital is not completely guaranteed. The fourth and final category would basically be for the speculator, of whom there are plenty. It should not be someone's only savings vehicle. They could make a bomb on it, but they could lose their shirt.
It is possible to put pretty much every offer that is available into one of those categories. That would greatly assist consumers in knowing which savings vehicle is appropriate for their needs and would greatly minimise the risk of people finding their money invested in the wrong product, or the risk of not having had a proper explanation about what the product was when they took it on.
The final major area where we urgently need to see progress is consumer education. That gap must be plugged. The FSA—the regulator—told us in evidence that consumer understanding in that area is "worryingly low". The Treasury Committee endorsed that, on the evidence that it took. Product simplification would, of course, help.
The view that we heard from the actuarial profession on that should be condemned at the outset. It told us in evidence that expenditure on consumer education would be wasted money and that it would be ineffective. It could not be more wrong. It went on to say that:
First, that is nonsense, if one reflects upon it for any length of time. Secondly, it highlights the problem. For far too long, what we have had from the industry is slick presentation without sufficient consumer education to combat it. That is the blend that we have to obtain in order to solve the problem. Both areas need to be corrected. We need better standards in the industry, so that its presentations are genuine, factual and transparent, and greater consumer education, so that people can understand what is being offered.
Consumer education is, and has to be, in the industry's interest, because informed and confident consumers are far more likely to buy its products than those who lack confidence or lack information. As we saw in the distribution of savings that I mentioned earlier, if there is a tendency to push more money into housing because there is a lack of confidence in the industry, that is one way of solving the problem. If public confidence is built into that aspect of the savings industry, more products will go into it. There is no shortage of money to be saved, as I showed in my introduction. The thing is to get it into the right places.
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The Pensions Commission report hit the nail on the head:
"A purely free market for private provision may be severely inefficient given the inherent imbalance of knowledge between customers and providers".
That statement is universally applicable, and reinforces the recommendation that I would make to the forum that will now begin its work.
It is worth pointing out that the industry spends at best only £10 million a year on supporting financial and consumer education, but £1.4 billion on advertising and promoting its products. That is a serious imbalance. If the industry really wants to contribute to rebuilding consumer confidence, we can start to take it seriously if it shifts only a small proportion of the money that it spends on advertising and promoting its products to supporting consumer education.
Neither the Government nor the FSA have the resources to fix the consumer education deficit. The National Association of Citizens Advice Bureaux certainly does not have the resources, but the industry does, and it must contribute. It would be a win-win situation for the industry if it did contribute a few of its resources to rebuild consumer confidence, as greater consumer confidence means more purchases of its products. It would simply be a sensible investment for it to make.
As I said, the industry can be taken seriously in its professed commitment to helping to restore confidence only when it starts to make substantial contributions to consumer education and financial literacy. There are huge opportunities for it to do so. Products can be delivered to people's homes and to the workplace, and information can be attached to existing products that are expanding and will expand further on the back of the introduction of the child trust fund this spring.
The industry collectively has made the greatest single contribution to the loss of confidence, so it behoves it collectively to make the greatest contribution to restoring it. If it joins in the work of the forum that my right hon. Friend the Member for Dumbarton will chair, I hope that it will get the opportunity to make that contribution and to show its seriousness of intent. If it seriously engages in all aspects of this agenda, it will do itself, consumers, and the British economy a favour.
3.12 pm
Mr. Nigel Beard (Bexleyheath and Crayford) (Lab): There is no doubting the decline of public confidence in long-term savings. The bear market in equities since 2000 has played a major part in that, both in reducing the value of people's savings and in exposing the weaknesses of financial services that had predicated many products and practices on an ever-rising market.
The resulting casualties are numerous and widespread. Half of all with-profits insurance policyholders, with savings of about £160 billion, are now in closed funds with limited long-term growth prospects. Endowment mortgage policyholders are suffering a collective shortfall of about £40 billion, and Equitable Life policyholders are suffering a £3 billion shortfall. Precipice bondholders have suffered a capital
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loss of £2 billion, and investors in split-capital investment trusts are pressing for £350 million in compensation. It is false to look on that catalogue of disasters and conclude, as some may be inclined to do, that this is all the result of a force of nature; that force is the largest bear market in living memory.
The Treasury Committee has held hearings and taken evidence on all the issues that I have just listed. Every hearing raises serious questions about the conduct of business. Those questions have been highlighted by the falling market; they have not been caused by it. Long-term savings are an industry of about £2,000 billion, whose health is vital for the prosperity of savers and the whole economy. Savings depend on the free choice of millions of individuals, and their choices depend on confidence that their savings will be safe and that they will receive fair and reasonable rewards. There can be no doubt that consumer confidence has been damaged, and it is no accident, as my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt) pointed out, that the current ratio of savings to income is at a 10-year low.
The problems lie in what are often called retail financial services—that means financial services to the general public. Wholesale financial services for business are not included in the observations, but there is a danger of reputational contagion, because people abroad make no such distinctions and believe that the business practices of wholesale companies are under equal scrutiny. Such an effect would be particularly damaging at a time when immense opportunities for wholesale financial services are opening up in China and the rest of Asia, and throughout the European Union. It is essential for the financial services industry as a whole, for the United Kingdom economy and for individuals who have lost savings that the issues involved in the crisis of confidence are fully, frankly and openly addressed.
The beginning of a remedy is for the industry to recognise that many of the problems arise from its own attitudes and practices. Some of them might have been appropriate in the early part of the previous century, when the market for financial services was confined to a knowledgeable minority at the top of the income scale. The market is now far wider—and it is widening—and financial knowledge is limited. As my hon. Friend the Member for Warwick and Leamington said, it is essential that all retail financial products have a clear, accessible and succinct statement of their most salient characteristics and of the risks associated with them. The more such statements can be made in a summary box, with a common layout across all products, the more will individual understanding be enhanced, as well as competitiveness. Certainly the culture of microscopically small print, obscurely presented, needs to end. The appearance of deliberate obscurity needs to give way to a keenness to inform.
I have heard it said of some who criticise current practices that they want to abolish the principle of buyer beware. That is not true. Buyers cannot beware if they lack the basic information on which to make a judgment; neither can they beware if the inadequacy of products such as insurance policies or pensions are revealed only many years later.
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Another argument is that the misunderstandings that lead to charges of mis-selling could be avoided only by increased financial education of the general public—for example, by including financial education in the national curriculum. Here, I differ from my hon. Friend; in my view, that argument is a cop-out. If every interest group that wanted such an approach were allowed an insertion into an already crowded curriculum, children would be at school 27 hours a day, and the school leaving age might have to be postponed. Moreover, big financial decisions are rare in life; a mortgage, a loan for a car and a choice of pension are the three biggest financial issues that most people ever face. People are likely to be interested and motivated only when the choice faces them, and not if it is a distant and remote possibility; but at that point, they will need advice.
Independent financial advisers currently dominate the distribution of long-term savings products. The great majority of them are paid by the product provider through commission. The commission reward arrangements lead to some ambiguity as to whether a product is sold for the benefit of the client or because of an attractive commission. Moreover, many people do not have access to such advice.
The Financial Services Authority has moved towards requiring a full declaration of the fees paid by the client. The Committee felt that a fuller comparison between the client paying a fee and the adviser receiving commission would be preferable. It would certainly be much more comprehensive. What is unacceptable, especially as it is not at all obvious, is the trail commission, whereby the adviser receives about 0.5 per cent. of the value of the product every year throughout its life. The justification given is that the adviser is available to give advice after the first purchase, but the reality is that the relationship between client and adviser is often discontinued. None the less, the commission continues.
A serious drawback with this business arrangement is that the company devising financial service products has no direct link with the ultimate customer, so it is not directly in touch with changing needs in the marketplace. Equally, products are produced at the behest of independent financial advisers, who have an interest in something new, distinct and eye-catching, with a view to enticing new business from clients.
The result is increasingly complex and elaborate products, whose nature is ever more difficult for the customer to comprehend. The trend towards complexity was noted by Mr. Ron Sandler in his inquiry into personal savings. The so-called Sandler products that he proposes are simple and easy to explain, and a minimum of advice is needed, so a much lower fee is appropriate. Such products are an attractive answer to the problem of conveying information without the need for independent advice.
For a wide range of clients, particularly those on low incomes, such standardised products appear to be a solution to many of the recent problems. They could also provide a firm foundation for a range of products offering higher rewards, but with correspondingly higher risks. Such products would be available to people who wished to take those higher risks or were in a position to do so.
A surprising feature of the industry, which my right hon. Friend the Member for Dumbarton (Mr. McFall) mentioned, is the absence of any forum in which the
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industry, consumer groups, the FSA and the Government can meet regularly. Such a forum would allow those involved to give an early warning of problems that were arising and to identify best practice in changing circumstances. It could also keep under review the complementarity of standardised Sandler-type products and the innovations brought out by the industry, whose role it is, after all, to innovate. Happily, such a forum has now been agreed, and I am pleased that my right hon. Friend will chair the inaugural meetings. That will, I am sure, guarantee a good launch and great success.
In summary, the direction that change must take in the financial services industry is clear. First, there needs to be a general duty of care towards the interests of the customer or client. Secondly, there has to be a deliberate and sustained policy of providing information in a form likely to be understood by the target customers. Thirdly, the operations involved in, for example, calculating bonuses, must be clear and open. The mystery of with-profits insurance policies, for example, to which Lord Penrose referred, does not fit into the 21st century. Fourthly, the reward systems for advisers and those running companies and societies must be closely aligned with the interests of customers, not at odds with them.
The solutions to the problems that have diminished public confidence in financial services lie with the members of the industry collectively. One black sheep can contaminate the reputation of everyone in the industry, and it has done. The FSA has a role to play as the industry policeman, but as in normal policing, it can work only if the general standards of behaviour are good and there are few transgressors to be apprehended. The industry must develop an ethos under which it is self-regulating and self-policing. As the Bishop of London said this week in the City, such an ethos arises from the ethical standards of behaviour of all who are involved. That is the route to trust, on which public confidence depends.
3.25 pm
Dr. Vincent Cable (Twickenham) (LD): I welcome the opportunity to speak on this good, workman-like and well researched report, and congratulate the right hon. Member for Dumbarton (Mr. McFall) on having led the exercise and introducing the report today. I want to apologise—although it may not be necessary, as we are running a little ahead of time—as I have a long-standing appointment at 5.15 pm to discuss this subject with the Financial Services Authority. I apologise to the Minister if I have to leave before he finishes his remarks, if we are still going strong at that time.
It is useful to start, as the hon. Member for Warwick and Leamington (Mr. Plaskitt) did, with basic principles, and to ask the fundamental question: is there a shortage of savings? That seems to be the right place to start and the report started there. There are good reasons for advocating saving. As the report says, there are good reasons why individuals, and society as a whole, should take responsibility for saving for retirement and for unexpected events. We all have a life cycle and at the end of it we need to spend. That is why savings are important.
However, there are also bad reasons for saving. It is not inherently desirable. The classic Keynsian argument is that savings act as a barrier to demand, but we also
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know about the experience in the past decade of other developed countries such as Japan and, to an extent, Germany, which saved too much. Indeed, saving has been locked away in very unproductive activities and that has dragged their growth down rather than improving it. Savings are not inherently desirable, but, properly focused, they are clearly essential. That is why I agree with the hon. Member for Warwick and Leamington that fixing on a savings ratio is not helpful.
The report reaches exactly the right balance. Some benchmarking is necessary, and a better way of looking at the issue is the idea of a savings gap—a gap in savings required to meet sustainable income, of the kind that is talked about by independent institutes such as the Institute for Fiscal Studies and the National Institute of Economic and Social Research. The report accepts the consensus that there is a substantial savings gap measured against that criterion.
The key issue on which the three right hon. and hon. Members who have spoken have focused is why there is a lack of confidence in long-term savings products. I agree with much, although not all, of what they said. They all focused almost exclusively on the failings of the long-term savings industry. There are failings and it is right to acknowledge them, but that is by no means the end of the story. Unless I missed something, none of them made even a passing reference to chapter 9 of the report, which is an important chapter about tax and benefits and deals with incentive structures.
That is crucial, because one reason for our savings gap problem and for the lack of confidence in saving is that the system of tax and benefits provides a strong disincentive to save. As someone rather cryptically points out in the report, a person may save 22 per cent. on the way in, but will pay 40 per cent. on the way out, which, on any simple calculation, is not a good incentive.
Indeed, the Adair Turner report produced some striking statistics on the structure of incentives for pensioners. I think that 40 per cent. of them face a marginal withdrawal rate—basically, a marginal tax rate—of 50 per cent., which is the combination of the withdrawal from pension credit and the first rate of tax that they pay. A quarter of all pensioners pay a marginal withdrawal rate of 75 per cent., which is the combination of withdrawal of pension credit plus higher rate tax. There is a highly penal disincentive against saving in the tax and benefits structure.
The Financial Secretary to the Treasury (Mr. Stephen Timms) : I have listened to the hon. Gentleman's argument with interest, but just wanted to comment on the statistic he mentioned, which has its origin in the Turner report. He will accept, I think, that the figures that he quoted do not apply currently. The Turner report figure is based on an assumption that the indexation with earnings for the level of the pension credit will carry on for decades, but the Government have not said that that is their intention. As there is so much concern about the issue, I wanted to make that correction and to clear up a point that might have been misleading. The current rate is nothing like the hon. Gentleman said.
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Dr. Cable : It is not quite the current rate, but there are substantial continuing penalties. I acknowledge that the tapering of the pension credit is less severe than it was under means-tested systems, but it is still a considerable hill to climb.
That is one of the reasons why some of us have been attracted to the idea of the citizen's pension for older pensioners. That would lift a large group of pensioners out of the means-tested system entirely. My party wants that to apply to the 75-plus age group; other organisations have adopted different formulae. That would enable us to say to pensioners that at least for the latter years of their lives they did not need to worry about the state pension. They would have to make provision for a specific number of years—from retirement to 75—rather than in an open-ended way. That would be a much more effective system for creating incentives.
I want to return to the central criticism.
Mr. Plaskitt : Does not the hon. Gentleman accept that the marginal tax rates that he is worried about would be higher still if the council tax were replaced by a local income tax?
Dr. Cable : There would be a very small increase in the marginal tax rate for higher paid earners, but the vast majority of pensioners—and 70 per cent. of all taxpayers—would pay less tax. Of all the groups of people who would be affected by a switch from council tax to local income tax, I think that the pensioners would be the least concerned.
Although Labour Members are keen to intervene in order to minimise the impact of my argument, their own report accepts it. It is worth putting on the record that there was clear consensus in the Treasury Committee:
"We recommend a detailed study of how the new system is working, which would considerably clarify the debate on how effective the new Pension Credit is at delivering benefits to those who need help while not penalising those who have attempted to make provision for their own future."
Therefore, the point is generally accepted, although we might have a debate about how serious it is.
On mis-selling, the industry has much to account for. The hon. Member for Bexleyheath and Crayford (Mr. Beard) listed the various scandals that have erupted, and he is right that they must be addressed. The report's recommendations contain considerable discussion of the issue of commission and whether commission-based selling should be discouraged—or proscribed, in the most extreme cases. I have some sympathy with those who are concerned about the phenomenon of commission selling, because in its more aggressive form it provided an incentive to the salesmen at the sharp end to engage in unscrupulous practices.
However, we need to be careful here, because many institutions pooled commissions. The classic case of that was Equitable Life. Its salesmen were not on commission; they were salaried. That was one of the reasons why people enjoyed doing business with them. They did not feel under pressure from individual salesmen. The errors—or worse—were made higher up the decision-making chain.
Therefore, there are problems that are not being dealt with. We now have a potential problem with the mis-selling of debt and the aggressive promotion of credit by
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the banks. As far as I know, bank employees are not individually commissioned, but a branch may well be, so there is a collective commission problem that is not being addressed.
Mr. Drew : The hon. Gentleman will have heard my remarks about mutualisation. Does that not highlight the need for effective company governance, alongside real accountability, so that people can get elected to the boards of companies—whether or not they are mutuals or plcs—thereby ensuring a changeover of personnel, which will enable us to tell what is going on?
Dr. Cable : I agree. One of the great strengths of the mutual movement was that it provided greater engagement, although because of the problems in some companies—notably, Equitable Life—that has become a little tarnished. However, the hon. Gentleman is right. There is an issue about engagement with companies and corporate governance.
On mis-selling, there is a phenomenon that I do not think the report picks up. Often, we are not dealing with cases of individual mis-selling, but generic mis-selling. In the 1980s, there was an obsession with equity products in the industry in general. The financial press made an assumption that high returns could be achieved from investing in equities and they actively promoted that idea. There was also misrepresentation of the long-term historical record. It was said that equities generally gave a better yield than non-risk products, but the differential was not spectacular and was certainly not justified in the aggressive promotion.
There is a parallel today. We have passed the point at which people are aggressively sold with-profits equity products, but the same phenomenon is apparent in other markets. The classic example is property. There are advertisements on the London Underground saying that people can make a fortune by investing in property. A circular letter from a company called Challenor Investments has been going around my constituency in the past few weeks inviting everybody in the area to phone a number—there is no address on the letter—and to go to a secret destination in Twickenham where they can be briefed on how to make a fortune from property investment at no cost.
Everything about that was wrong. The company's address was not given on the letter, the costs were not explained, no reference was made to the losses that people can make in the property market, and people were told that they could make their fortune. The letter said that making money is easier than working. I do not know how many people fell for that, but there will be people in my constituency, and others, who fall for the idea that there is an easy, riskless way to make money by investing in property and they will be badly hurt. I am not taking a view on the property market and I am not an expert, but bodies such as the International Monetary Fund think that it is 30 per cent. overvalued and others are even more pessimistic. There are risks associated with such things that the property-based investment industry is disguising collectively from potential investors.
Exactly the same thing is happening in the marketing of debt, although that is not the subject of the report, and I am less sanguine about it than the hon. Member
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for Warwick and Leamington. We are worrying a great deal about the regulation of long-term savings products and putting in place all kinds of regulatory devices to prevent mis-selling, but debt products are being aggressively sold unsolicited without health warnings and are potentially causing much damage. Perhaps it is true, as the hon. Gentleman says, that the overall balance of £1 trillion is not a fundamental problem, but for many families on the margin, faced with unstable incomes and the possible deterioration of economic conditions, it could be fatal. Many of the people who buy such products are not aware of the warnings and the products are actively being mis-sold.
In terms of the ways forward, there are four issues in the report about which I would like to say a few words. First, the report captures the gradual shift in emphasis from process regulation to product regulation—in a sense the Sandler concept of defined, regulated products. When I was a member of the Treasury Committee about five years ago, in the run-up to the Financial Services and Markets Act 2000, there was extensive discussion about whether financial regulation of the retail market should be based on process or products. Many consumer groups said, "No, we must have product regulation, rather than an over-emphasis on process regulation." They were ignored, but I think that they have now been proved right. The emphasis on process regulation by the FSA has produced a box-ticking culture that has got the emphasis seriously wrong.
Mr. Beard : The argument against regulating products is that it would stifle innovation and, to a degree, competitiveness, and there is some justification for it. I was talking about having the Sandler products as a standard and base for the industry, but leaving the industry free to innovate beyond that with products that are more risky that could be marketed to people who are better able to understand them.
Dr. Cable : It is a question of balance, and I share the hon. Gentleman's view. I am not arguing for going from one extreme to the other. However, there was a certain insouciance about the problems of product mis-selling at that time, which we have now recognised to be misplaced.
The remedy suggested by the report is the summary box, which seems a sensible idea. It was not entirely clear whether the box would be standardised. One of the issues that emerged in the case of the information box and credit cards was that the companies accepted the principle of a summary box, but they were not standardised and as a result many of the old problems persisted. Unless they are standardised, there is no basis for making comparisons. I hope that that will be made absolutely clear.
Secondly, in terms of simple, long-term Sandler products, some good, useful thinking has clearly gone on. I commend the initiatives that are being taken. I want to add several other points about things that we should perhaps be thinking of. Other mechanisms are available for simple, cheap, reliable products on the market. One could be to make more use of National Savings as an institution to market its products, possibly using outlets such as post offices.
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One of the concepts that my colleagues and I have been promoting in the context of our wider pension policy is that, if there were a generous state pension for older pensioners, there would still be a need for younger pensioners to provide additional savings. A 10-year annuity provided by a institution such as National Savings—totally reliable and low cost—would help to fill that gap.
There are other forms of long-term savings, such as the bonds marketed by friendly societies that, for a variety of reasons, the Treasury has never responded warmly to. I remember long discussions in Finance Bill Committee sittings about the friendly society products and whether they should be regarded on the same basis as other savings products. As far as I am aware, the Treasury has been pretty unrelenting in its attitude.
The third issue is about financial advisers and independent financial advice. In the context of mis-selling scandals, it is often the IFAs who have been fingered as the culprits. There undoubtedly have been some unscrupulous IFAs who have taken advantage of people, but I think that in a way the blame has often been unfairly laid at their door. We need to think a little about how independent financial advisers can be helped to play a more professional role.
The problem often is that IFAs have little training. I was appalled to learn, when discussing the matter with their association, just how few have any qualifications or training. One way—this is just a suggestion, not a party point—may be to consider what we might call statutory self-regulation, to make an analogy with the medical profession. That may not be a happy analogy on the day that the Shipman study has emerged. None the less, we should consider the principle by which someone offers their services in the market as a recognised provider but belongs to a profession that sets its own rules and training standards, provides insurance to consumers and, in that way, provides objective standards without all the red tape associated with highly prescriptive rules dictated, in this case, by the FSA, for example.
Mr. McFall : Only the other day, I received a letter from the Association of Independent Financial Advisers. The Select Committee focused on a code of ethics, asking the association to accede to that. In its latest letter to me on 3 December, talking about the codes of ethics for professional bodies, the association stated:
"The existence of these codes has meant that we have not developed any code of our own to date. There is a case for arguing that they sit better with professional bodies."
In other words, it does not see itself as a professional body. There is an educational element to ensure that it sees itself as a professional body and joins others.
Dr. Cable : I agree with the line of argument, and perhaps that is what we should be trying to encourage. We have a system under which not only doctors but professionals such as osteopaths are governed in such a way, but trades on which we are inclined, rather snobbishly, to look down, are not. One could argue that plumbers as well as financial advisers should be
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governed by a regime that improves standards by allowing the professionals to set their own training standards without detailed interference from the state—that way, we would probably get the right balance.
My final point concerns information services and financial information, which I discussed at some length with the Economic Secretary to the Treasury in an Adjournment debate two years ago. At that time, the Treasury was considering proposals to roll out a more substantial network of citizens' advice institutions. That struck me as a useful idea. The Chancellor mentioned it in his pre-Budget report, but I have not seen any details as to how it will happen. It will be useful to know that. The essential point is that, at the moment, it is possible to get financial advice through the CAB network only if one is in difficult financial circumstances, close to bankruptcy. What people often need is the financial equivalent of the health check—an assessment of the decisions that one should be making about new products relating to savings and debts—that one gets on the first visit to a GP if one has a medical problem. That does not exist.
I know that citizens advice bureaux are anxious to do that and so, in principle, are the Government. However, nothing has happened. I suspect that that is because nobody has come to a conclusion about who would be responsible for funding it. It is linked to what the hon. Member for Warwick and Leamington said about financial education being something that the industry should shoulder. Anything that restores confidence in financial services products at very low cost—£20 million or £30 million for a proper national network, which is not much in relation to the turnover of the industry—will be in the industry's interests. It should not be a publicly financed activity; the Government should act as a catalyst. I am surprised and disappointed that the industry has been so slow to move. Perhaps the Minister can explain what is happening.
3.47 pm
Mr. Richard Spring (West Suffolk) (Con): I am grateful for the opportunity to speak on this important issue, and I congratulate the right hon. Member for Dumbarton (Mr. McFall), as Chairman, and his Committee, on their assiduity in producing the report. It has involved a lot of work and it is an extremely valuable contribution to the debate on the long-term savings market.
The Opposition recognise that there are problems in the long-term savings industry. Indeed, before I became a Member of Parliament twelve and a half years ago, I spent my professional career in the City of London, running the divisions of large financial services organisations that dealt with equities, so I have experience of such matters. I realise that the problems have grown over the past 20 years and have come to a head in the past few years. It is hugely important that we try to resolve them, for investor and consumer protection. As the Select Committee points out, it is essential that we get long-term savings right—they give savers the benefits of independence and security, and provide an important source of capital to fund investment and economic growth.
As the report states, there are concerns that, as a nation, we are saving too little. The savings ratio has already been rehearsed. I would simply point out that,
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at 6.1 per cent., it is well below the past 10 years' average of 8.9 per cent. The household savings ratio has not been higher than 6.7 per cent. in the past five years. It was certainly materially higher than that in the previous six years.
I take issue slightly with the hon. Member for Warwick and Leamington (Mr. Plaskitt). One cannot draw exact parallels. For example, the rising housing market has not affected the savings ratio in the same way in other European countries. The issues are complex and I suspect that the underperformance of the stock market has had some impact. The tremendous skewing of investors' appetites into property has certainly had an impact on saving. However, I do not believe that the relationship is as exact as that; there are other more complicated reasons for the change. We have only to look at the whole growth of buy-to-rent property as a way in which people seek to preserve their capital in the longer run, in the absence of being able to secure for themselves a pension. There is anxiety about what the saving situation for individuals will be, especially with the pressures on pensions in the private sector.
It is worth my pointing out that there are rising levels of borrowing. In July, household debt reached £1 trillion. In the last quarter, personal bankruptcies reached a record high. The number of individuals who were declared bankrupt increased to more than 9,000, which was an increase of nearly one third on the same period in 2003. All hon. Members will know the position from talking to individuals in their citizens advice bureaux. Time and again, when I have asked about the key problem of the moment, debt and being trapped in debt was the live issue. In the past year, the number of people asking citizens advice bureaux for help with debt has increased by 35,000 to an astonishing 706,000. That is the reverse side of the coin linked in with a decline in savings and I am willing to accept that there are several complicated reasons for that.
The figures do not correlate directly with the issues facing the long-term savings market. However, they are part of the same picture where individuals are discouraged for whatever reason from saving and easily find themselves building up debt. As part of the answer, the Conservative party has proposed a lifetime savings account. There are variants of that, but we all recognise the need to look into the matter. It would allow people who draw on their savings to put back the money later. It would enable people to save for the long term, without requiring them to pledge not to draw on such savings before they reach retirement. They could also be topped up by the Government. The Government must take such an idea seriously. In addition, we have set up a commission, chaired by Lord Griffiths of Fforestfach, to investigate all aspects of household debt and we will examine its findings in due course.
More specifically, in the area of long-term savings, there have been several instances when consumers have lost out with endowment mortgages, with-profits funds, split-capital investment trusts and Equitable Life. All hon. Members will recognise that the situation surrounding Equitable Life has had a huge impact on the overall confidence in the industry by consumers. Since the Penrose report was published in March, the parliamentary ombudsman has agreed to reopen the investigation into the regulation of Equitable Life and the Government are to give her the jurisdiction to investigate the Government Actuary's Department.
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However, I fear that such moves are coming rather late. It has been asserted that the Government sought to persuade the ombudsman not to reopen her inquiry. Apparently, they tried to deny that the ombudsman could investigate the GAD without primary legislation and, most recently, they have refused to bring forward legislation to remove the possible unlimited liability that hangs over policy holders and annuitants in the event that Equitable were to become insolvent. That is despite the promise made in a Treasury consultation document that
"Treasury Ministers do not believe that it would necessarily be just that members of an unlimited liability insurer should be exposed to the risk that calls could be made against them. The Treasury therefore proposes to bring forward, when Parliamentary time allows, legislation which confers a discretion on the Financial Services Authority . . . to give a direction in certain circumstances which extinguishes the liability of contributories to have calls made on them and the liability to meet any calls which have been made."
Given the publicity surrounding Equitable Life and the negative consequences that have flowed from it, I do not believe that that helps in restoring confidence in long-term savings.
The losses suffered by consumers in events such as the Equitable Life affair have served to reduce confidence. The Committee examined three general reasons for the decline in confidence. First, it noted the underperformance of the stock market. That underperformance is partly explained by the removal of the dividend tax credit, which has cost pension funds £5 billion a year. I have had many conversations with insurance companies; they feel that in the current atmosphere it has been much more difficult for them to put money into the stock market.
Mr. Beard : The value of the stock market has fallen by about £150 billion and the tax to which the hon. Gentleman refers is £5 billion a year, which amounts to only £35 billion over five years. Which does he think has had the greater influence on savings: the £160 billion fall in the value of stocks or the £35 billion in tax?
Mr. Spring : I suggest to the hon. Gentleman that the two are inextricably linked. Of course £5 billion a year, on the margin, multiplied over a period of time, has had an impact at a time when there have been other pressures on the industry. That has been absolutely inevitable. I have been in this area of professional life and seen what an impact taxation changes, for example, can make. The tax that I mentioned has had an effect of some significance, and that is the view of the insurance companies themselves.
Mr. Timms : How does the hon. Gentleman account for the fact that the values of the stock markets in France and Germany have fallen a lot further than the UK stock market?
Mr. Spring : I would not like to involve myself in exaggerated gloating, but I suggest that stock markets have been weak in many parts of the world. The underperformance of the economies on the continent, and their high levels of unemployment—we know what has happened to the Maastricht criteria—have had an impact as well.
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However, we are dealing with the situation in the United Kingdom. The Minister will certainly agree with one thing: the financial services industry in the United Kingdom occupies a position in this country that is unique in comparison to European countries. Its force and influence cannot be compared to that of such industries in other countries, and I hope that the Minister will acknowledge that.
The FTSE 100 has risen by only 2.1 per cent. since 1 May 1997. The Minister has talked about the performance of stock markets elsewhere, but my understanding is that the equivalent figures are 42.1 per cent. for France and 49.8 per cent. for the United States. The average increase in the stock markets of developed economies comparable to ours over the period was 46 per cent.
In fairness, many witnesses who appeared before the Committee suggested that weak equity markets had simply exposed and exacerbated issues that had their origin elsewhere, and stated that the industry had a poor record of treating its customers fairly. That second reason for the decline in confidence in long-term savings, and how that should be best addressed, has dominated the debate today and they are very reasonable and pertinent points to consider.
The third reason mentioned by the Committee was Government policy on savings, tax and benefits, which was often viewed as confusing and potentially discouraging for savers. For example, the Investment Management Association said that
"the present system of means-tested benefits for pensioners is a real discouragement to long term saving, since it imposes a penal rate of tax on saving by people on low incomes."
The right hon. Member for Dumbarton made exactly that point: there has been a lack of saving at the lower income level; I shall touch on that again in a moment. I agree with that view, as does the Turner commission, which found that
"there are clearly many people for whom means-tested benefits do create a significant disincentive to save individually".
The commission also noted that the number of people covered by means-testing would grow further if current indexation approaches continued indefinitely. There have been projections of a huge increase over the next 40 years or so. Means-testing has not encouraged savings or simplicity, but exacerbated the burden of bureaucracy, which is now an increasing feature of our national life. We need to consider carefully the long-term impact of that on savings in the nation as a whole.
I agree with those witnesses who told the Committee that Government policy on tax was potentially discouraging for savings. As the hon. Member for Twickenham (Dr. Cable) mentioned, the current system of taxation on savings is both unfair and highly complex. We have a plethora of different rates, rules, allowances and restrictions that make it difficult for savers to make informed choices about how best to invest their money. Nevertheless, the Committee concluded that, fundamentally, the industry had a poor record for treating its customers fairly.
I applaud the Committee for suggesting a number of ways for the industry to address its image and to help ensure that it offers customers fair treatment in future.
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We have already touched on summary boxes, which are important for giving customers information, such as guarantees associated with a product, the risk of a product, what the investment is linked to, what the charges are and whether there are penalties for early withdrawal. Transparency is one of the most important elements in dealing with mis-selling.
I should like to make a point to the hon. Member for Bexleyheath and Crayford (Mr. Beard), however. I ran an equities division in the City of London where payment was partially through a pooled commission basis, although I fully accept that we dealt only with institutional clients. There was an incentive effect on those who sought to serve as what were known as account executives, but as long as transparency is evident, there is a major disincentive to mis-selling. However, my main point is that ultimately the market will determine the success or failure of an individual or group of individuals, in terms of their relationships with other institutions. Irrespective of what the basis for commission payment actually is, if people give bad advice or advice that is skewed to a higher commission, it is only a matter of time before the market will take its course.
Mr. McFall : If the hon. Gentleman looks at the report, he will see that we are not against commission per se, but up-front commission. He talked about the market taking over, but with endowment mortgages the whole market was involved in up-front commission, the legacy of which is, by conservative estimates, a £40 billion shortfall. I go along with the hon. Gentleman on transparency, but endowment mortgages provide an example of where the market was not working.
Mr. Spring : I could not agree with the hon. Gentleman more, and the ombudsman will confirm that he has been hard pressed to cope with the demands. However, I was simply making the point to the hon. Member for Bexleyheath and Crayford that there is nothing necessarily wrong with some form of commission payment.
Mr. Beard : I did not suggest for a moment that commissions were generally wrong, but in the case in question the commission comes up-front. Thereafter the adviser can wash his hands of the client. Moreover, most clients consult a financial adviser on one instance, such as when they buy a house, a car or a pension. Such clients are unlikely to buy another pension in two or three years' time. The market therefore does not work as clearly as the hon. Gentleman says.
Mr. Spring : We may be talking slightly at cross-purposes. I was explaining about my own experience, in the context of equity investments. The hon. Gentleman is entirely correct that there will be one-off purchases, such as of a pension or house, that involve a different structure, but that was not quite what I was talking about. If I misunderstood his overall conceptual rejection of commissions, I apologise to him for so doing.
The Government state that they are keen to see the results of the work that the industry and the regulators have agreed to undertake. In addition, the Committee suggests the development of a single system of signalling
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the inherent risk level of a savings product. Again, the industry and the regulator have agreed to work together on that, which is hugely important. I hope that the matter will be taken forward.
On regulation and bureaucracy, the difficultly with the culture of risk aversion that now obsesses our society at every level—it has become damaging and undermining—is that if one purchases a financial services product and it carries with it, for example, 25 pages of health warning, the net effect is that the individual who is acquiring the product will simply not read the information. That is why the simplification, which has been talked about—the Sandler-type products—is extremely important. A more general point is that burdensome over-regulation, which has arisen in this country over many years, is now becoming rather threatening to the financial services industry. Therefore, we must find a balance.
In the absence of the Treasury producing a considered report on the FSA, may I just tell the Minister that I am writing one myself? I hope that he will find it of interest and it should be available in the next few weeks. I hope that it will make a genuine and sensible contribution to the question of how we regulate the financial services industry in a way that keeps it competitive, yet, given the sort of difficulties that there have been in the past few years, offers investor protection.
We have touched on the issue of remuneration and we have discussed it before. Again, it is a matter that needs transparency. The one thing that I would say—I think that the hon. Member for Stroud (Mr. Drew), who is no longer present, alluded to this—is that shareholder power is an important and growing phenomenon in taming excesses in executive pay that have no linkage to profitability. I am glad to see that that is happening and I hope that it becomes a much greater feature of our national life. Greater shareholder action should be encouraged.
On independent financial advice, the Treasury Committee recommends a move away from commission-based payments. I understand that that has just been debated and I hope that a balance can be achieved. It is certainly my impression, from talking to the Association of Independent Financial Advisors, that it wants to have a regulatory environment around it, because given what has gone on in the past, it feels that it presents it with some sort of Good Housekeeping seal of approval. I understand that as well.
I accept that the incorporation of a curriculum subject such as financial education would be difficult and burdensome, but I think that we need to try to find ways to educate people on making critical lifetime choices as far as their individual financial viability and protection is concerned. We want Government to provide a framework where businesses and the marketplace are encouraged to have procedures in place and to make education available, to enable free choice and good judgment. That is critical. That is a big carrot to chew on and it brings us back to the point that we need to find a balance between investor protection and letting people know that there has to be risk in making judgments in life. If we go so far down the route of risk aversion that it begins to undermine innovation and risk-taking of an entrepreneurial nature, it will ultimately have a serious impact on the economy's performance.
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It is good to see that the Treasury Committee found support from both industry and consumer bodies for the FSA's efforts to co-ordinate a programme aimed at improving financial literacy. I hope that such a programme can be made to work.
Mr. Plaskitt : Will the hon. Gentleman give way?
Mr. Spring : I am just finishing.
I once again applaud the members of the Committee for trying to grapple with this difficult subject. I cannot but think that the story is not yet over.
4.9 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms) : I am grateful to the Treasury Committee for the opportunity to contribute to this welcome and timely debate. On behalf of the Government, I also want to express thanks to the Committee for its work in examining the issue of restoring confidence in long-term savings. In the little more than two months for which I have been in my current role, I have been struck forcefully by the Committee's profound influence in the financial services market, which goes far beyond the influence that it enjoyed when I was a member of it before 1997. It has made an impressive contribution to the debate on this issue.
The Government share the Committee's belief that the issue of confidence in long-term savings needs to be resolved for the benefit of us all and that restoring confidence will require concerted effort by us all. That includes the Government and the industry—I was heartened by the comments of my right hon. Friend the Member for Dumbarton (Mr. McFall) about the progress that the industry has made since the report was published—and it also includes regulators, consumer bodies and trade associations.
The personal investment market has not always produced the best outcomes for consumers. Competition among providers has sometimes focused as much on winning access to customers as on giving them good quality at the best price. Misdirected competition has driven further product proliferation, complexity and confusion, making consumer choices even more difficult. My hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard) was right to draw attention to Ron Sandler's conclusion about the perverse effects of the way in which competition in the market has developed over the past few years. Consumers need not only to have the information to make well-informed financial decisions, but to be confident that they will be treated fairly when they engage with the industry.
Our vision is of a simpler, more transparent market, in which trusted and trustworthy providers sell simple, good value products to well-informed customers. We have been working in that direction, and there is a range of measures to give savers confidence in the products that they are offered and to make it easier for them to save. Much has been done to build the right environment, and my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt) was right to draw attention to the importance of the stability-orientated macro-economic framework that we have in place. It is conducive to long-term planning, which
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people need to be able to make the right decisions. They also need high levels of employment, because that gives them the means to save.
We have streamlined the regulatory framework, creating a single regulator and accessible redress mechanism—the financial ombudsman service—to improve market confidence and protect consumers. Last week, we announced further changes when we set out the conclusions of the two-year review of the working of the Financial Services and Markets Act 2000. I hope that the hon. Member for West Suffolk (Mr. Spring) saw the report, because I am sure that he would want to take account of it before concluding his eagerly awaited report on financial services regulation; I am certainly looking forward to seeing it, as I am sure the whole House is.
Alongside that work, we have been developing the infrastructure to allow individuals to make decisions that best meet their interests. We have introduced basic bank accounts over the past couple of years to help tackle financial exclusion. Last week, in the pre-Budget report, we announced that we had agreed with the banks on the goal of halving the large number of adults in households with no bank account.
We have also been setting out and taking forward policies to tackle over-indebtedness, unfair lending practices and loan sharks. Those measures include the £120 million financial inclusion fund, which we announced in the pre-Budget report last week. I should tell the hon. Member for Twickenham (Dr. Cable) that a chunk of that money will, as we have made clear, be used to fund an extension of free face-to-face debt advice.
The hon. Gentleman made an interesting point about a health check, and he is right that there has been some discussion about that. The generic advice working group in the FSA-led financial capabilities steering group is developing an online financial health check tool, which it will be piloting. The initiative was developed jointly by the FSA and the BBC. That will be a first step in the direction that he described.
Mr. Plaskitt : I welcome all the measures that my hon. Friend has mentioned, but would he, like me, welcome the early introduction of the consumer credit Bill?
Mr. Timms : My hon. Friend knows that the announcement in the Queen's Speech was widely welcomed, and I certainly look forward to the Bill's introduction.
Another strand of the work is about improving pensions information through pensions forecasts. Many people do not know what situation their pension savings will leave them in when they retire. Pensions forecasts work by piloting different forms of information and advice from employers. As we announced last week in the review of the Financial Services and Markets Act 2000, we will be freeing from regulation advice provided through employers in order to make it easier.
We have established the pension protection fund, setting up a new proactive regulator to improve protection for members of occupational pension schemes, and we have been developing the stakeholder
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suite of simple, low-cost, risk-controlled saving and investment products. The hon. Member for West Suffolk, my hon. Friend the Member for Eccles (Ian Stewart) and I were all in Committee this morning when we agreed to key planks in the regulatory underpinning for the Sandler stakeholder suite, and I welcome the support of the hon. Member for West Suffolk for that principle.
We have also been working on incentives. We have introduced individual savings accounts, which have proved extremely popular, and stakeholder pensions. We have legislated in order radically to simplify the way in which pensions are taxed—the arrangements come in from April 2006—and introduced the pension credit in order to tackle pensioner poverty. I hope that every hon. Member acknowledges the dramatic impact that the pension credit has had in relieving the deep problems of pensioner poverty that have existed in the past and in rewarding pensioners for having built up savings during their working lives.
It is important that people look at the present position with regard to the pension credit, because many people say that it makes it difficult to know whether they should save. That is not true. As the Financial Services Authority said, the position is very clear: for most people, for most of the time, it is certainly worth saving for retirement. Some of the comments made about this issue are self-fulfilling, as they discourage saving when it is actually most certainly in people's interests to save. The introduction of the pension credit has removed well over 1 million people from facing a 100 per cent. rate of withdrawal—those who were formerly below the minimum income guarantee level.
We have reformed capital limits by announcing a doubling of the threshold above which savings reduce eligibility to income-related working age benefits, and we have introduced the child trust fund. We have also been piloting the matching of savings of low-income savers through the savings gateway, with further progress announced in the PBR last week. Incidentally, I wish to correct a rather misleading point made by the hon. Member for Twickenham. I have just written to the Association of Friendly Societies, inviting its participation in discussions about how it might be involved in the next wave of savings gateway pilots. We certainly welcome its contribution.
We had an interesting discussion about the savings ratio, and I welcome the expert assessment provided by my hon. Friend the Member for Warwick and Leamington. Indeed, I agree with some of the points made by the hon. Member for Twickenham on that issue. The hon. Member for West Suffolk also touched on the subject, perhaps slightly less helpfully.
It is important to recognise that household wealth has increased by 50 per cent. in real terms since 1997. It is true that the debt has increased, but household net assets have increased considerably more—by up to £6 trillion, compared with the £1 trillion of household debt. Indeed, current interest rates mean that household interest payments as a proportion of household expenditure are very much lower today than they were in the early 1990s.
Mr. Spring : I am sorry that the Minister believes that I was unhelpful in spreading a little light on the matter.
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As he is busy on the statistics, will he confirm that about half the economic growth that is currently being enjoyed in this country as a result of consumer spending is due to equity withdrawal? Is that correct?
Mr. Timms : I do not have that statistic to hand, but I am happy to drop the hon. Gentleman a line to comment on his point.
I very much welcome the recognition by the financial services industry that it will command customers' confidence only if it treats its customers well by putting right mis-selling when it occurs and by ensuring that customers in closed funds are well informed and receive fair returns—a point that was made earlier. The industry needs to align its interests much more closely with those of its consumers, and consumers need to be able to see trusted providers offering clearly labelled, easy-to-understand products, as my hon. Friends the Members for Bexleyheath and Crayford and for Warwick and Leamington have said. The industry also needs to adopt business strategies that enhance shareholder value by providing services and products that meet its customers' needs.
The financial services industry should be accessible to everyone who has the capacity to save, and initiatives by the FSA to remove the polarisation requirement from the market and to introduce a menu document for firms to provide consumers with a clear indication of cost and the basic advice process will encourage that accessibility.
We have introduced initiatives such as the stakeholder suite and informed choice, which are designed to address the information asymmetries inherent in the market with financial inclusion initiatives. We also want to broaden access. The child trust fund will provide every child with financial assets, encouraging every child from their earliest years to form relationships with the financial services industry. The impact could, over time, be very profound and beneficial.
The FSA continues to develop its policy on the disclosure of product design and charges. Its work on financial capability will be very important. I serve on the financial capability working group with my hon. Friend the Minister for Pensions. That work will be critical to helping consumers engage positively with the financial services market.
My right hon. Friend the Member for Dumbarton—I believe that he was quoting Lord Penrose at the time—asked this well-formed question: can with-profits operate without mystery? Welcome steps have been taken towards improving consumer information in that area. The principles and practices of financial management will be followed by a consumer-friendly and more accessible version, and I share the Committee's view that the FSA needs to ensure that policyholders receive the information that they need to reach sensible decisions about those policies.
Mr. McFall : The Minister mentioned information being given to consumers. Only today, I received a letter from the Prudential on the mis-selling of endowment
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mortgages. It has implemented the colour coding on reprojection letters, which the Committee recommended. It believes that the change in style should make it easier for consumers to understand them. That is a positive measure.
Mr. Timms : I welcome that approach, which is a very good example of the way in which the Committee is profoundly influencing the industry for the benefit of consumers and the industry itself.
The hon. Member for West Suffolk made some comments about the Equitable Life matter, on which I wish to comment. I think that he was reflecting on some rather misleading comments that have appeared in the press. He said that we have not acted on the possibility of unlimited liability. The Parliamentary Commissioner for Administration—the ombudsman—is independent of the Government, so the timing of her investigation is a matter for her. We have consulted on legislation on unlimited liability that would help policyholders if that should become necessary. Our position has always been that we will not legislate unless it is necessary; if it turns out to be necessary, we have already consulted on the legislation required to do the job. I have written to the company on that point, given the rather misleading press comments that have appeared, and I remain in contact with it.
There were some comments and exchanges about commission-based selling. I welcome and support the FSA's recent work on commission disclosure. The consumer testing that it carried out provided evidence that the disclosure of charges under its menu proposals was far more effective than the current regime.
The hon. Member for Twickenham talked about training for independent financial advisers. They have to have the financial planning certificate, level 3, and there is an ongoing requirement that they update their competencies, but the Financial Services Skills Council will conduct a review next year that will specifically consider whether the qualifications for financial advisers, and the investment qualifications, are appropriate, and whether more needs to be done.
I welcome the industry's constructive response to the Committee's report, about which we have heard today, and I look forward to working with the industry, the Committee and the FSA to develop effective measures further to restore levels of confidence in the industry and engagement among consumers. Those measures include the forum proposed by the Committee, on which my right hon. Friend was able to give some encouraging news of progress.
I agree with the Committee's recommendation for a forum that focuses on how the industry can better serve its customers, as it would send a strong signal to consumers that the industry wants to tackle those problems. I agree also that it should be industry led, so that the industry is talking directly with consumers and their representatives, and that it will demonstrate a capability for collective action to address some of the problems to which the debate has drawn attention.
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The Committee has made an important contribution to examining the issue of confidence in long-term savings. I share its view that the restoration of that confidence needs to be tackled effectively for the benefit of our whole economy and everyone in society. All the parties involved need to play their part. We in Government remain committed to fulfilling our role in achieving that important objective, and I am pleased
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that we have had this opportunity to air these widespread concerns—something that is of great importance to all of us and our constituents.
Mr. Deputy Speaker : I congratulate the Chamber on a well informed, constructive debate. It has been a pleasure to be in the Chair.
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