Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 120-132)

MR MICK MCATEER, MS TERESA PERCHARD, MR MIKE BARRY AND MS CLAIRE WHYLEY

24 JANUARY 2006

  Q120  Mr Love: The Consumer Credit Counselling Service, the Finance and Leasing Association and the CAB and Money Advice, were getting together to try and find the resources to do this network. How is it getting on?

  Mr McAteer: I am a trustee of that network, what is called the Consumer Debt Advice Gateway Trust, and we are certainly trying to work on developing a single telephone helpline for providing debt advice where people will ring up a single number and then they will be directed to whichever participating organisation has the capacity to provide—.

  Q121  Chairman: Could you send us information on that.

  Mr McAteer: Yes, absolutely.[11]

  Q122 Peter Viggers: The Citizens Advice Bureau has been immensely helpful to a number of my constituents. I am grateful for that. Can I ask about savings on those below average incomes? Can people on low incomes afford to save and what are the products that are most suitable for their savings?

  Mr McAteer: I think we have done a fairly big programme of research to try and understand why people do not save for the future, and so on, and our research tells us that the main reasons why people are not saving are basic unaffordability compounded by the record levels of personal debt and the housing market, and so on. We think that the retail sector is cost based and does not allow us to reach those parts of the market that should be saving, so there are economic inefficiencies built into the system. There is a lack of incentive due to the lower long-term investment returns when you can get 4.5% from a safe cash ISA account and you only get 4% from a risky stock market account after charges, and so on. What is important as well is the lack of confidence and trust in the providers. Our surveys tell us only 31% of people trust the financial industry to run their pension schemes, and they seem to have lost trust in stock market based products, and so on, and other riskier products, so I think there is a combination of factors, there is a confluence of events which has undermined the willingness of people to save for the future. It is not just a single affordability issue but a confluence of things.

  Ms Whyley: I think it is important to recognise in the context of financial exclusion or inclusion that saving means lots of different things, and I think saving for the future simply is not on the radar of people who are financially excluded and on very low incomes, and that is probably quite appropriate. I think the sort of saving that they are looking to do is the day to day saving so that they can smooth their income a bit and, if they are able, putting a little bit more aside for the rainy day, the new pair of shoes, something that comes up unexpectedly. There clearly is an affordability issue, but I think any of us, however much we earn, would say we cannot afford to save as much as we like, so I think it is important to unpick that. Where the right interventions have taken place, it can be as possible for some people who are currently financially excluded or on low incomes to save small amounts of money. The credit union initiatives, for example: people have discovered that actually, even if it is only a pound a week or couple of pounds a week, they can afford to do that. I think one of the big barriers is the lack of appropriate products where you can save one pound a week or two pounds a week or something like that, and I think, although there is evidence about the right incentives for encouraging people to save, we are perhaps not building on them as much as we could. Clearly the credit union model, where a pound saved is worth three pounds credit, actually make a big difference when people are weighing up what to use that pound for. Things like tax incentives, I think, are just so opaque and they are not particularly progressive in the benefits that they offer for people on the lowest incomes. The other point I would add is that in terms of freeing up money for people to save, if we could crack some of the other problems of financial exclusion, which means people taking this extra £800 a year of cost, we are looking at a much greater potential to save and I think we need to see those things in parallel.

  Q123  Peter Viggers: And matched savings schemes like the Gateway scheme?

  Ms Whyley: Yes, because they are simple, they are easy to communicate, but there is a real tangible benefit that they offer to saving rather than spending, and I think that is all we need. It is a very simple model but it actually works. I am not sure why there is any need to go any more complicated than that.

  Q124  Peter Viggers: Now some trenchant criticism of the FSA and specifically to Mick McAteer. The savings industry has stated that sometimes regulation of product sales, whilst designed to help the consumer, can actually have an adverse impact on access to financial services, particularly for the low paid. How sound is that analysis? You have given us written representation, but if you can briefly respond?

  Mr McAteer: I think regulation can have two impacts when it comes in for encouraging saving for the long term. If it is done properly it can promote confidence in the system and encourage people to save. We have seen Equitable Life and other scandals where we think the regulation has failed to bring confidence, and that has had a detrimental effect on individual confidence to save for the future, but regulation can have another impact on long-term savings. It can distort the market. We think it is very unfortunate that the FSA seems to have what I can only describe as walked into an elephant trap set by the industry in terms of regulation. When you actually look at the cost of regulation, for example the Pensions Commission Report, the Pension Commissions Report sets out quite clearly how much money the industry spends on marketing and administration and compares that with the cost of regulation, and if you look at the Commission's figures, a small proportion of the cost of distributing products is actually down to regulation. The vast bulk of the industry's costs is in the marketing and prospecting for new business and providing incentives to sales consultants and staff and so on; so we do not accept that the cost of regulation per se is preventing industry from selling to the Government's target market, we think the industry simply cannot serve the Government's target market because the economics of access do not allow it. Our economic monitoring shows us that the industry would need to be charged about 3% a year to distribute their annual management charges to sell to the Government's target market, so I think this idea of relaxing rules and regulations preventing the industry from selling to the Government's target market is a smokescreen.

  Q125  Peter Viggers: Very good. The basic advice regime for the sale of stakeholder investment products in April 2005—do you believe that will make a contribution?

  Mr McAteer: I do not think it is going to make any difference at all, because the economics of the business means that the industry cannot serve the lower to middle income consumers, so changing the regulatory regime is not going to change that fundamental economic barrier.

  Q126  Peter Viggers: You have made representations to us about RU64. We will not need you to repeat that again. We have to be quite brief. I just want to put on the record that you have included a submission in which you make strong representations and I invite you just to say a sentence in conclusion in order to include it in the record?

  Mr McAteer: You want me to say a few words.

  Q127  Peter Viggers: Just a sentence or two.

  Mr McAteer: We think the FSA is about to make one of gravest regulatory errors since the abolition of the maximum commission agreement. Abolishing this very important rule will do two things. It will kill off stakeholder pensions, because even the FSA itself admits that once it removes this RU64 rule then prices are likely to rise.

  Chairman: I think, as a result of your points, I will write to the FSA and ask for their views.[12]

Q128 Peter Viggers: Thank you. As long as that is on the record. I want to go to something that I have made scores of tear-stained speeches about, which is means-testing. We know that many people who might contemplate larger scale savings are absolute mugs unless they can save a very substantial amount of money to get out of the means-testing   Not printed.trap, but the advice that has been given to us is that means-testing does not really make much difference because people do not understand about means-testing anyway and have no intention of saving in the first place. Is there any evidence that means-testing deters some consumers on below average incomes from making long-term provision for their retirement?

  Mr McAteer: I think it depends if they understand the system. We did some focused work with a focused group of people who are not saving and we tried to understand what impact means-testing was having, and, if we concluded that if means-testing was having an impact on savings behaviour, then two conditions had to be met. People had to be thinking about saving and they had to understand the impact that means-testing would have on their savings. None of the conditions were met because they were not even thinking about saving in the first place and they did not understand the system. We think it still has an effect, and it makes it harder for advisers to provide advice to people on the margins, but it is not because consumers are exercising the means-testing. They may think it is a problem, but once you actually tell them about it—that is the irony.

  Q129  Peter Viggers: It is deeply sad that many people who do not save at all are better off than people who do?

  Ms Perchard: The issue we have highlighted in our evidence relating to this is the treatment of savings in the benefit system. We see people when they are confronting the fact that it is assumed that any of their saving above a certain amount, like £6,000, is earning a rate of return you could not possibly get anywhere on the high street, and that is penalising them totally unfairly for the amount of savings they have, and, at the very least, the interest rate assumed on tariff incomes should be in line with what is reasonably likely to be available in the market, not twice the Bank of England rate.

  Mr Newmark: I gather it is 10.4%, which is absurd.

  Chairman: Put that in your submission, please.[13]

  Q130 Mr Mudie: Coming to equity release, it would be good if you could provide the Committee with some details of ways that equity release could alleviate or help financial inclusion amongst the elderly without the high costs the private sector are putting on it. There are various schemes going about—I believe you are collating them. It would be good if we could have them as examples to put to the Treasury.

  Mr McAteer: I should say, we are in the process of writing that report at the moment. The evidence needs to be collated and analysed, and so it will not be ready next week. It may be some time before we actually have it.

  Chairman: It might be helpful to us.

  Mr Mudie: It would be very good if you could so we could include it in the evidence.[14]

  Chairman: For the record, the Financial Inclusion Fund, concerns have been expressed in submissions that there is a speed at which the fund has been allocated and also the short-term nature of the funding. There are no plans to ensure the services are delivered at the end of the initiative. I presume you all share those concerns?

  Mr McAteer: Absolutely.

  Q131  Chairman: Is there a danger that the fund may be allocated in geographical areas and that the provision of credit union and advice services is already above average rather than seeking to fill the gap where there is no provision?

  Ms Perchard: This is anecdotal, but certainly some of our managers would feel that in densely populated urban areas, whilst they may be stretched, the distribution of the fund for money advice is likely to favour densely populated urban areas and it will be quite difficult to provide services in rural areas out of the fund. We have, nevertheless, made a national bid for service provision in rural areas which do not show up on the map for financial inclusion because there are not sufficient people living in those areas to create a darker shaded area, but that does not mean there is an absence of financial exclusion.

  Ms Whyley: I am on the DTI board for administering part of that fund, the money advice fund, and obviously in discussions with DWP about the growth fund. There are efforts to ensure that the funding is going to areas where there is not existing provision. We are trying to take some account of existing provision. The difficulty is that the organisations that are going to be best able to make the most business-like bids are the ones that are already in existence, and I think that does create a disadvantage.

  Q132  Chairman: We do not have enough information on the intelligence of financial inclusion. That is the point. SAFE has told us that the Financial Inclusion Fund does not appear to fit into a wider Government funding strategy or link to funding streams such as the Phoenix Fund. Is that a concern that you have? Lastly, what they said is that as different portions of the fund come on line at different times and are administered by different government departments, the fund does not support joined-up provision of services. The issue of joined-up provision is one that you are looking at?

  Ms Perchard: Yes, and particularly partnership working between credit unions that will receive the growth fund from the DWP and advice agencies that will receive the DTI funds because the decisions are at different times. That is the challenge.

  Chairman: This is the first of our evidence sessions in this inquiry and a huge amount has come up this morning. What you have provided to us has been very helpful to us. If you can supplement that with written evidence to us that would be helpful for us as a committee to look at the priority areas. Thank you very much for your time.





11   Not printed. Back

12   See Ev 311 Back

13   Ev 258 Back

14   Not printed. Back


 
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