Memorandum submitted by the Building Societies
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
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.
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
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.
CTF PROVIDERS AND
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).
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 withor
which are ill-suited to their needs will be reduced.