Examination of Witnesses (Questions 405-419)
MR CLIVE
COWDERY AND
MR PATRICK
SOUTH
14 MARCH 2006
Q405 Chairman: Good morning and welcome
to the second part of this inquiry into financial inclusion. Would
you introduce yourself for the shorthand writer, please.
Mr Cowdery: I am Clive Cowdery;
I am Chairman of the Resolution Foundation.
Mr South: I am Patrick South,
Director of External Affairs at the Foundation.
Q406 Chairman: Tell us about the
aims and objectives of your organisation, about yourselves.
Mr Cowdery: The Foundation was
put together towards the end of last summer specifically to seek
to address the way in which people on lower earnings are able
to access the financial services system. We have noted, as involved
professionals in the financial services industry, that as the
last 20 years have gone on, changes in the structure of the way
in which financial products are sold in the United Kingdom have
led to an increasingly large group of people being unable to get
any kind of financial advice about their financial affairs. The
reason for that is that, over the last 20 years, financial advice
has become bundled with a product sale and, if one's earnings
are so low that somebody is not targeting you for a product sale,
then you are unlikely to get an opportunity to holistically discuss
your financial affairs. So, the Foundation was put together as
a not for profit, independently funded, non-industry organisation.
Q407 Chairman: And your idea?
Mr Cowdery: Yes, indeed.
Q408 Chairman: And your money?
Mr Cowdery: It is my money, yes.
Q409 Chairman: This is all too good
to be true! When are you going to change the water into wine for
us?
Mr Cowdery: The Foundation decided
to try and bring some of the business skills to which relevant
individuals had access to bear in this single area of social policy;
how people on low earnings are able to access financial advice.
Q410 Chairman: How do you see the
provision of financial advice helping promote financial inclusion?
Mr Cowdery: The financial inclusion
agenda in the last few years has been targeted, quite rightly,
on the most critically exposed in society, those people who are
perhaps on benefits, who are unable to get a bank account and,
without the use of the bank account, are unable to get a job into
which their salary can be paid etc. That has been much of the
Government's agenda in the last seven years and I am certain that
the Committee will have been hearing different reports under this
inquiry of progress in that area. We believe that there is another
group which are also exposed or excluded and that is the group
of people above the level of state benefits. We initially chose
£10,000 and we have tested that number now, and around that
level, it means that less than 20% of your income, either as an
individual or as a household, is coming from state benefits. So,
you are beginning to break free from the state benefits level.
However, you are not yet earning the average earnings of around
£22,060 a year and it is in that slice that you are likely
to be exposed to having no access to advice on a day-to-day basis
as you make your large, critical financial decisions: the house
that you buy, the credit that you use to fund your different purchases,
as you go into your company pension scheme arrangements for example.
We have discovered that that lack of advice is now biting very
badly. Very bad decisions are being made or good decisions are
being deferred on the basis of your earnings and that is therefore,
in our view, a definition of exclusion. A single statistic on
that—and I will try very much this morning not to use too
many statistics—is that around 70% of people in Britain
take up the offer of joining their company pension scheme—that
is across all different earning groups—but that number falls
to 35% if you are in the earnings group I have just described,
earning less than £22,000 per year. So, this is free money
on offer from your employer and only one-in-three people in this
group take up the opportunity of that.
Q411 Chairman: Why is that?
Mr Cowdery: We believe that that
has a lot to do with the fact that they have nobody just to bounce
that conversation off. There is a lot here to do with social access;
there is a lot to do with the ability to have a conversation with
people; it may just be the reaffirming of a decision that looks
right but you need some help to cross the line. Indeed, the research
that we have done in the last six months into what kind of financial
advice people want if they are in this earnings group shows that
most of what they want is a 10 to 15 minute conversation with
someone. It is not an hour or two hour fact-find which holistically
reports on everything they have available to them as an option.
They just want a conversation with what we refer to in focus groups
and other research that we have done in the last six months of
the Foundation's life as a "trusted friend". The lack
of that "trusted friend" to have that conversation with
is actually beginning to bite. People are making poor decisions
and they are making those decisions in a way that costs them as
individuals and of course that goes on to cost the state in later
years in future accruing welfare benefits. The FSA themselves
have calculated that up to £710 a year is being lost by the
individual through making poor product decisions alone. If you
add to that the fact that they may have got sequencing decisions
wrong, they rented far too long when they could have had the option
to buy for example, then you can see tens of thousands of pounds
over the lifetime of an individual that is lost to the individual
and therefore lost to the state because the state is therefore
needing to pick up more and more people as they fall back into
benefits at the end of their working life.
Q412 Chairman: You seem to agree
with the report of the last Treasury Committee in the last Parliament
when they said that the savings industry is a middle-class industry
and people are not being attended to. Do you agree with me that
there are two areas there: there is the financial advice aspect
but there is also the issue of cost and the industry to change
in that regard?
Mr Cowdery: There is a large question
over how the industry serves the wider British population today.
I would certainly agree with the statement that the industry is
being better used by the middle classes than it is by people on
lower earnings. I do not think it is necessarily true that the
industry only targets the middle classes. However, the cost of
capital involved in running a financial institution—
Q413 Chairman: The reason why I say
that is that eight million people were left out as you have indicated
here.
Mr Cowdery: Yes, indeed. Those
people of course are buying products from the industry but they
are buying them poorly; they are buying them in the wrong sequence;
they are not cancelling them in time; they are not switching within
them; they are just not utilising their access to the industry
with as much personal benefit as the middle classes are.
Mr South: I would like to come
in on that point. This was an issue that Which? looked
at in their research and, quite clearly, the main reason why people
do not save more is that they cannot afford to. What we find is
that this group are saving less than the average; they save around
two-thirds of the national average. That Which? research
showed that around 50% of people would like to save more and that
actually around the same proportion would save more if only they
could get the advice to help them with that decision. So, it comes
back to the central point here which we are trying to make, that
advice can make a difference here.
Q414 Chairman: Do you agree that
consumers are often urged to seek advice in subjects such as endowment
shortfalls or whether to opt out of the state second pension with
little consideration given as to where they should go to obtain
that advice?
Mr Cowdery: Yes. I believe that
they are often urged, in much the same way as has become normal
in a litigious society such as the United States, to put health
warnings on everything and thus be able to take no further responsibility
for whether anyone has listened to or heeded those health warnings.
I believe that it is quite easy for any organisation, whether
of a government or industrial nature, simply to feel they have
done enough by reminding people that they should do something
but, if there is no execution capability, there is no one for
them to go and seek that advice from, then it is a bit of a hollow
direction that you have given someone.
Q415 Mr Gauke: I would like to ask
about one of the regulatory issues in this area and, in particular,
the point about generic financial advice because I think that
a lot of what you are getting at is the need for someone to be
available to provide generic financial advice which currently
falls outside the scope of the FSA and I know from my previous
life as well that that can be quite difficult because, where do
you draw the line and one tends to run into the other. How do
you feel about the definition, if you like, of generic financial
advice? Is it something that people can rely upon? Could we do
more to make that clearer, whether that be at a statutory instrument
level or whether FSA guidance could help in this area?
Q416 Mr Cowdery: I think that the
FSA has gone quite far to carving out a definition of basic or
generic advice which falls short of selecting an individual product
provider and therefore falls short of your ability to influence
whether that individual might earn the advice giver any money
and therefore, by removing that profit distorter, if you will,
leaves the advice as relatively free and untainted by bias. I
think the definition the FSA use today is probably quite close
to what would be eventually needed if some new advice capability
was available in the UK allowing somebody, over a 15 to 25 minute
conversation, just to work out what they are going to do next.
In other words, to allow somebody to select between whether to
put £500 into an ISA or into a stakeholder pension, and to
be quite directional in the advice you gave that individual because
you earn nothing from which of those product categories that they
choose, seems to me should fall under the definition of generic
and therefore non-regulated advice. If you went further and suggested
that Company ABC is the right company that that £500 should
be invested in, then I suggest that you have crossed the line.
Q417 Mr Gauke: One of the points
that the Financial Services Consumer Panel have made to us is
this point about the transition. Once you start that conversation,
how do you stop? Do you see this as a difficulty and is there
anything that can be done on that?
Mr Cowdery: Yes, I do think it
is a difficulty and I think it is a difficulty that will need
to be built into the design of any new financial resource or capability
that the Government or industry commits to in this area and it
will need to be picked up in two areas. First of all, I think
it means that volunteer versus paid staff is a very critical early
decision in the design of such a national capability and, certainly
as we work with partners such as the Citizens Advice Bureaux and
others in seeking to bring together a model that builds on the
existing landscape, we are beginning to tend towards the idea
that paid professionals need to be brought in to give this advice
who are used to where they would draw the line, rather than well
meaning volunteers who might many times cross it. The second thing
to examine is whether or not, because the advice has no link to
an individual piece of earnings for the organisation, we believe
it should be a not-for-profit organisation that delivers it. Then
there is the concept of an indemnity signed by the individual
that says, if you want me to go quite far and to take you quite
directionally down a road, then you need to tell me that you are
taking responsibility, that you absorb that advice and that you
cannot sue me for it.
Q418 Mr Gauke: You said there that
it will need to be professionals rather than volunteers; what
sort of quality assurance framework would you have for this network?
Mr Cowdery: I need to make clear,
because I did not in my opening arguments to the Chairman's question,
that the Resolution Foundation does not plan to be the national
organisation that dispenses this advice. So, in the formation
of a new national asset, in partnership between government and
industry, there would need to be an understanding of where in
the government supervisory and oversight architecture such an
entity comes. For example, if one looks at the Department for
Constitutional Affairs which today has various different advice
elements reporting into it and has responsibility for standard
setting in many areas of UK advice; if one were to see a new such
entity effectively report in via that Department, then you would
expect to see some standard setting that would take responsibility
for ensuring that the scripts used by individuals, that the way
in which it chose to portray the availability of state benefits,
the way it chose to portray the availability of tax planning—and
let us not see a government-owned or government-funded assessment
that helps people avoid or evade taxes in planning their financial
ideas—and indeed in the way it seeks to portray the industry,
is broadly supportive of the existing market economy that we have
today and just does not seem to ask people to rebel against it.
So, some standard setting around how that advice is given would
be essential.
Q419 Mr Gauke: And for the individuals
providing this generic advice, would you envisage some sort of
training in competence regime that applies in the same way that
FSA investment advisers have?
Mr Cowdery: Yes, indeed. I think
that in the same way in which banks and insurance companies need
to ensure that their staff are qualified to provide the context
against which a product sale is made for example, that kind of
basic level of understanding of the staff who are available in
the large number of branch networks in retail banks for example,
would need to be part of the training of these individuals. One
of the critical and, from my perspective, most surprising facts
we have discovered in the research we concluded in the last six
months has been how many people do not want to meet such an adviser:
70% of people expressed a preference or absolute comfort in having
that conversation on the telephone. Why that is so important is
because somewhere at the end of this road lies a very big bill
that requires a funding conversation and, if we can keep that
bill as low as possible . . . We are not seeking to build a network
of face-to-face advisers in the United Kingdom that require expensive
oversight. You cannot listen in on a conversation like that in
the way you can listen in and supervise a telephone call—back
to your point on supervision. So, the concept of a telephone based
service is one on which we are, in the next eight weeks, doing
much more business planning before bringing it back to all the
various stakeholders that would be necessary to come to a decision
about what scale of proportionate response to this advice gap
is needed and, if we can find a telephone based, plus perhaps
some face-to-face advice as well, working together with people
such as the Citizens Advice Bureaux who already have an infrastructure—there
are a large number of bureaux as we know around the country not
all fully manned and not all open all the time but there is a
physical infrastructure—so that, if you had a number of
advisers who were on loan effectively, they are in the X, Y, Z
branch every Thursday afternoon, and a single telephone unit that
is answering the calls for those who are happy to deal on the
phone and in setting up appointments for those who are not—and
remember that it is only 30% who would prefer face to face advice—then
we think we could get a lot of reach using the existing infrastructure
for a relatively low spend by government or industry and, by "low
spend", I mean in tens of millions a year rather than hundreds
of millions a year.
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