Select Committee on Treasury Written Evidence


Memorandum submitted by Children's Mutual

1.  EXECUTIVE SUMMARY

Positive Results (so far)

  1.1  We estimate that more than 1.1 million children now have open, active, long term savings accounts, owing purely to the introduction of the CTF.

  1.2  Habits are changing positively: compared to before the introduction of the CTF our research and knowledge of the market suggest that the savings rate[1] has increased by more than 50%. The amount saved monthly has increased from the pre-CTF position by 50%. In addition ad-hoc payments are being received by cheque and bank credit. We have received one application with 30 cheques attached to it!

  1.3  People like the easy application process (ie over the phone or via internet) for additional saving after the initial opening of the account.

  1.4  Awareness levels of the CTF amongst parents with young children are high.

  1.5  We believe the CTF could be a major catalyst for improved financial education.

Concerns

  1.6  We have recommended to Government that a review of the "small print" that consumers receive from providers takes place. Evidence suggests they are overwhelmed by it which in turn delays the opening of accounts as families are unclear about what to do.

  1.7  We have recommended Government publications make it clearer to consumers that the stakeholder product has key customer protections built in (for example the price cap) to the point that it is the preferred choice as witnessed by the allocated accounts process.

  1.8  We have recommended providers that apply to accept allocated accounts confirm to HMRC or FSA their readiness to accept such accounts in order to ensure that customers do not suffer detriment.

  1.9  We have recommended that the procedures for describing and opening cash CTF accounts be reviewed.

2.  INTRODUCTION

  2.1  The Children's Mutual is the country's only specialist dedicated solely to long-term savings for children and as such we have extensive and unparalleled knowledge of this subject. Prior to the introduction of the CTF the families of more than 200,000 children had started to save regularly with us for them. The Children's Mutual is ensuring that the CTF is inclusive and provides the only ethical and Shariah compliant stakeholder CTF's.

3.  KEY POINTS OF THE CTF

  3.1  Every child born on or after 1 September 2002 will have a much needed "financial springboard" into adulthood.

  3.2  By the next general election we estimate that something approaching six million children will have CTF accounts. That means nearly 12 million parents and possibly 20 million grandparents could be involved and keen to take an interest in the CTF. This provides the opportunity to increase financial education across a wide-ranging section of the public.

  3.3  It is important therefore to consider how the developments of such a far-reaching policy will affect the country's savings habits and help address the savings gap.

4.  FAMILY AWARENESS AND RESPONSE TO THE CTF

  4.1  As far as we can ascertain families are positive about the idea of the CTF and they display positive behaviours as outlined in the Executive Summary.

  4.2  We believe that those families who are in receipt of vouchers but have not yet opened an account fall into two groups. The first group is "very busy parents" who simply have not got round to opening an account yet and we are sending reminders we hope will spur this category into action. We welcome and are fully supportive of the Government's reminder and advertising campaign. There are early signs that activity is increasing.

  4.3  We believe the other main reason for not having opened the CTF account is due to parents being confused by the overwhelming amount of paperwork they have to be sent by providers. We attach feedback from our consumer/customer focus groups and it is clear to us that consumers are baffled and confused by the amount of "small print" that regulations stipulate they must receive. This will be exacerbated by the introduction of extra wording to satisfy EU "simplified prospectus" requirements and the inclusion of a new item to be called a "Quick Guide", if it does not replace some of the existing information.

  4.4  Our view is that with a product like the CTF, where an account will (compulsorily) be opened and can be transferred without penalty, the potential consumer detriment is extremely low and some of the information could be given post-choice. We have recommended to Government and the FSA that, through working together, a solution which recognises the unique qualities of the CTF is found so that saving is made simple and the protection built into the CTF stakeholder account is used in the way it was developed—to act as consumer protection from the start. It is interesting to compare opening a CTF account with other everyday financial transactions, for example, taking out an unsecured loan where the process for consumers appears to us to be much simpler. We think it is also an accepted fact that much more of the small print on general (eg motor) insurance is issued post-sale.

5.  STAKEHOLDER (THE PREFERRED HMRC ALLOCATED OPTION WHERE CHARGES ARE CAPPED) AND NON-STAKEHOLDER ACCOUNTS (MOST ARE CASH ACCOUNTS WITH NO PRICE CAP)

  5.1  We are encouraged that approximately 75% of CTF accounts now open are stakeholder accounts (shares based) as one of the objectives of the CTF policy is to encourage people to benefit from the long term growth potential of equities and lifestyling. However we are very disappointed that 25% of CTF accounts appear to be in cash and fear that the bulk of these will have been deposited there unwittingly by less financially informed consumers who are likely to be the less well-off. It is misleading not to make people aware of the inflation/value erosion risks of leaving CTF monies in cash for 18 years. This could have the effect of a child from a less well-off family ending up with less in their CTF account at 18 than a child from a better-off family even where the level of saving is identical.

  5.2  The objective of benefiting from the growth potential of shares should be for all, particularly those who have not been fortunate enough to have opportunities to save before.

  5.3  We have recommended that the FSA review sales procedures for non-stakeholder cash accounts to ensure that consumers are made aware of the inflation risks, charges and relative limits to its growth potential and that Government literature on the CTF makes it clear that Stakeholder is the Government's preferred choice and states the reasons why that is the case.

6.  FINANCIAL EDUCATION

  6.1  The CTF is a key catalyst for providing more/improved financial education both for parents and young people.

  6.2  We fully support this objective and are delighted that Government Departments have both commissioned research into the market and invited presentations on potential delivery of financial education. Whatever route is taken on financial education, we urge that focus is given to financial capability and not just to the workings of the CTF product itself. For example children could be asked to consider and learn from the following (not exhaustive):

    —  "why have a Child Trust Fund?";

    —  "why do you think Government introduced the CTF?";

    —  "what financial challenges do you think might face young people when they reach 18?"; and

    —  "how best can parents and families help?".

  6.3  The CTF is an excellent peg to extend financial education not only to children but equally importantly to their parents and other members of the family and their friends. We believe it is an excellent conduit for those over the age of 18 since information sent to families on the CTF could also include the importance of savings throughout people's lives.

7.  ALLOCATED ACCOUNTS (AA'S)

  7.1  If a family does not open an account within a year of the voucher being issued, the voucher expires and HMRC will allocate accounts to approved providers which have applied to accept such AA's on a rotation basis. We fully support this process as it is important that children do not miss out owing to a lack of engagement on the part of their parents/guardians.

  7.2  We think that when accounts start to be allocated demand for help and support, particularly over the telephone, will increase markedly as families realise they now have an open account for their child. Most providers will be able to look after the extra thousands of accounts and give their consumers the same level of customer support as all their other customers. Where a provider might only have several hundred CTF accounts and are then allocated thousands, we are concerned they might not have the facilities to process and look after these. We therefore believe an extra level of audit by HMRC or FSA be carried out. There are not a large number of providers involved and the process would not be that lengthy to complete. This would ensure consumer support where it is most needed, ie to help manage and ensure the success of a child's CTF investment.

8.  POLICY DEVELOPMENTS

8.1  Age seven and Secondary School Age Top-up Payments by Government

  We fully support these payments and have recently responded to Government consultation. We would like the Government to confirm these payments at the earliest opportunity so that families are able to plan their savings with greater certainty.

8.2  Looked After Children and The Official Solicitor

  We applaud the Welsh Assembly for approving top-up payments into the accounts of looked-after children. We hope that those responsible for other looked-after children in the UK will follow suit.

9.  CONCLUSION

  We believe that having a "financial headstart" in life is more important for youngsters than ever before. The CTF is proving to be the catalyst that will help ensure all children in future have the chance to benefit in this way.

  The recommendations we have made will help to develop the policy further and remove any concerns that post-launch experience suggests exist.

Child Trust Fund Consumer Feedback

  "More than half of it you're not going to read, from the centre pages, key features and the rest."

  "It wasn't `til I started reading it that I realised oh it's from a company, The Children's Mutual."

  "The whole thing is too official; you almost need a solicitor with you to go through the last few pages. Other pamphlets I've seen aren't so heavy on that, there's too much."

  "I read right up to the staples, thinking this is good actually, got to the middle and thought now I need a cup of tea."

  Why reference Non-Stakeholder in this Stakeholder product brochure? Raises concern at making decision without consulting the equivalent literature.

  Table is product and not benefits led.

  Why isn't advice offered? What is advice?

  You may be charged for advice—no thanks.

  Absolutely no issues with understanding the inherent risk in the Baby Bond product, one diligent respondent counted 11 separate share value warnings

    —  Greater balance could be provided, parents wanted to see graphical evidence that shares outperform deposits—this assertion is, even now, believed, and central to the selection of stakeholder amongst openers [researcher's conclusion]

November 2005






1   The number of people committing to regular monthly savings for their children. Back


 
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