Select Committee on Treasury Written Evidence


Memorandum submitted by the Building Societies Association

SUMMARY

  Building societies are major providers of the Child Trust Fund. 81% (38 out of 47) of the building societies that are permitted by the FSA to offer CTFs do so.

  11 out of 14 of the providers of cash CTFs are building societies.

  Around 25% of parents that have so far used their CTF vouchers have opted for cash products.

  Where providers offer a choice between stakeholder and cash CTFs, over 70% of parents are opting for cash.

  CTF providers and distributors should be allowed to offer cash CTFs without having to offer a stakeholder CTF as well. This would increase consumer choice.

  Where parents fail to act within 12 months and the Government opens a CTF account on their behalf, it should be possible for this to be a cash CTF. Currently Government-allocated accounts have to be stakeholder products.

INTRODUCTION

  1.  The Building Societies Association is the trade association for the UK's building societies. There are 63 building societies in the UK with total assets of over £260 billion. About 15 million adults have building society saving accounts and over 2.5 million adults are currently buying their own homes with the help of building society loans.

  2.  Building societies are among the leading providers of the Child Trust Fund (CTF). Currently 38 out of 63 building societies offer a CTF. Of these, 11 offer their own cash CTF.

  3.  In our previous submission to the Committee about the Child Trust Fund, in November 2003, the BSA raised concern about the in-built bias in favour of stakeholder CTF products. Having now had 10 months' experience of the operation of the CTF scheme in practice, the concerns we had then have been confirmed and, if anything, heightened.

THE REQUIREMENT FOR ALL CTF PROVIDERS AND DISTRIBUTORS TO OFFER A STAKEHOLDER PRODUCT

  4.  There are two strands to the BSA's concern. The first is the requirement that all providers and distributors of the CTF must offer the stakeholder product. This means that some building societies are not able to offer a CTF at all, since they are not authorised by the Financial Services Authority to conduct regulated investment business, and the stakeholder product is a regulated investment under the Financial Services and Markets Act 2000. Sixteen societies are currently in this position and it means they cannot even "introduce" customers to the stakeholder CTFs of third parties, without applying to change the nature of their FSA authorisation.

  5.  It also means that building societies are required to offer products which most of their members do not want. The BSA has been collecting data on behalf of all providers of the cash CTF. This shows that over 70% of parents, when offered a choice between a stakeholder CTF and a cash CTF, opt for the cash product. (The latest data is set out in the appendix, attached.)

  6.  The BSA believes there should be choice in all savings products to reflect the differing risk appetite of consumers. Whilst a stakeholder CTF investing in the stock market is right for some parents, other parents want the safety and certainty of cash CTFs. This may be because they are familiar and comfortable with cash products, preferring this option, rather than risking capital loss with equity investments, products with which many building society members have little or no experience.

  7.  More building societies would like to offer the cash CTF than currently do so. The requirement to offer a stakeholder product is one of the main barriers to this. So too, is the administrative burden associated with the provision of CTFs and, in particular, requirements to provide fortnightly returns to HM Revenue and Customs and to produce annual statements on the child's birthday (rather than the calendar or tax year).

GOVERNMENT-ALLOCATED ACCOUNTS

  8.  The second area of BSA concern is that only stakeholder CTFs qualify as Government-allocated accounts. Allocated accounts are to be opened by the Government automatically where parents fail to open a CTF within 12 months of receiving their child's CTF voucher. As noted above, where parents are given a choice more than 70% opt for cash CTFs. Accordingly, it is likely that a large proportion of those parents that are to be allocated a stakeholder account by the Government would, if they could be persuaded to express an opinion, prefer to have a cash CTF for their child. Many of those who fail to use their vouchers and are allocated stakeholder CTF accounts are likely to be financially-unsophisticated and particularly unfamiliar with equity investment.

  9.  To help address this problem, the BSA proposes that the Government should drop the requirement that all allocated accounts must be stakeholder CTFs. By allowing non-stakeholder CTFs to be allocated by the Government, the chances of parents being allocated an account that they are not happy with—or which are ill-suited to their needs will be reduced.


 
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Prepared 23 January 2006