House of Commons - Treasury

Select Committee on Treasury Twelfth Report

5 Access to financial advice

119. While over-indebtedness currently only affects a small proportion of the population, it can have devastating consequences for those individuals and families involved. Rising consumer debt had led to increased demand for debt advice to help people resolve their problems. Citizens Advice told us that the number of debt enquiries they received had risen markedly and that their services were "increasingly over-subscribed with evidence of significant unmet need", reflected in the fact that "waiting times for specialist appointments now often run to several weeks".[221] Professor Mervyn King, the Governor of the Bank of England, speaking on the occasion of the publication of the May 2006 Inflation Report, while noting that debt problems were currently not a major factor determining the path of overall consumer spending, said that "all the statistics on households that have got into trouble with debt are rising and rising quite sharply" and that "the number of calls to the National Debt helpline has risen quite sharply".[222] Ms Fiona Price of the DTI told us:

Levels of borrowing are certainly quite high and it is certainly true that the number of calls to debt advice agencies is increasing. It is not clear that the reason for the increase in numbers is that people are suffering a significant greater problem. Other possibilities are that people are being encouraged to seek advice earlier which is something we very much want them to do.[223]

120. As part of the Financial Inclusion Fund, the Government has allocated:

£45 million to be administered by the DTI to support an increase in provision of face-to-face money advice. The funding will be split over a two year period—£15 million in 2006-07 and £30 million in 2007-08.
A further £6 million will be used by the Legal Services Commission to pilot mechanisms of money advice outreach aimed at those who do not normally present themselves to debt advisers.[224]

121. This additional money was welcomed by Citizens Advice as "a very positive initiative".[225] Citizens Advice told us that the money they had secured from the fund represented "help for over 88,000 people who need money advice, delivered by 370 new money advice caseworkers" and that the additional funding "allows Citizens Advice, with its partners, to increase its capacity throughout England and Wales to meet demand, especially in areas of particular social deprivation and financial exclusion".[226] The DTI informed us that, in total, 14 projects had received money from the fund and that this was expected to increase the number of debt advisers by up to 500.[227]

122. However, concern was expressed by a number of witnesses about the sustainability of the increase in the number of debt advisers and about whether extra provision might go to areas that were already well-served, rather than being used to fill gaps in existing provision. Citizens Advice called for "greater certainty about funding beyond 2007-08" and believed that, "as things stand, there seems to be a real risk that the potential for a step change in provision will not be fully achieved, and abruptly reversed, without a clear and early indication of long-term funding".[228] Professor Kempson also expressed concerns regarding

the speed with which the Fund is being allocated and the short-term nature of the funding, with no plans for ensuring that services survive beyond the end of the initiative. Large numbers of new money advisers will need to be recruited and trained in a very short period of time (or existing services will have their staff depleted) and may face redundancy as soon as they have developed their expertise. This would certainly be poor value for money.[229]

In response to concerns about the provision of long-term funding, the DTI stated that it had to "work within the government spending cycle" and that "future funding will be looked at as part of the Comprehensive Spending Review".[230]

123. We commend the work of the Consumer Credit Counselling Service, Money Advice Trust, AdviceUK and Citizens Advice Bureaux in providing debt advice. We welcome the additional £45 million of funding up to 2007-08 for debt advice allocated as part of the Financial Inclusion Fund, which will allow the recruitment of over 450 debt advisers and provide help for over 100,000 people. However, the short-term nature of the funding offered so far places those debt advisers at risk of redundancy almost as soon as they have developed their expertise. We understand the constraints placed upon long-term commitments by the nature of the spending cycle. However, the Government could go a considerable way to assuaging concerns about funding by demonstrating its belief in the fundamental importance of, and necessity for, debt advice and by committing to assuming a leadership role in securing funding from its own resources and from the financial services industry to ensure that the necessary increase in debt advice is sustained.

Generic financial advice

THE CURRENT GAP

124. Complex financial services products and concepts, combined with inadequate financial capability, increase the need for consumers to be able to access some form of advice when making financial decisions or purchasing financial services. Consumers lacking effective access to financial advice are clearly at a disadvantage in a market generally characterised by severe inequalities of information available to consumers and product providers. We received evidence of a significant "advice gap" in the market, where consumers found it difficult to obtain access to financial advice. The Resolution Foundation, a research and policy organisation focusing on how people's advice needs can be met by either the public or private sectors, told us:

There are around 8 million people in the UK today who pay basic rate tax on incomes between £10,000 and £22,000 … Basic rate taxpayers with this level of income largely fall outside of the catchment criteria for financial advice in the UK. Most free advice services cater to the remedial needs … of those already in serious debt. Meanwhile, the financial services industry offers advice only when bundled with a product sale. At these income levels, such sales are just not attractive to most product providers who focus on the most profitable customers—i.e those on higher incomes"[231]

125. Professor Kempson noted research that Bristol University had undertaken for the DWP, which found that IFAs did not, on the whole, see many people on low incomes.[232] The Financial Services Consumer Panel agreed that "there was a need for the provision of advice about generic financial needs which is completely separate from the sales process", and the Panel observed that this need was increasing as individuals were being given more responsibility for financial planning. The Panel noted that "consumers are frequently urged to seek advice. But this is, in some cases a hollow suggestion because for many there is nowhere obvious to turn."[233] Which? drew attention to several trends that they felt would increase the need for advice, including growing debt, financial planning and pension risks being transferred to the individual, emergency advice to deal with mis-selling scandals, a complex State benefit system and more complex financial products.[234] In our Report into the design and regulation of a National Pension Saving Scheme, we recommended "that the Government give consideration at an early stage in implementation of an NPSS or any comparable measure to the design and availability of generic advice to those considering participation in the scheme as well as to scheme members".[235]

126. The Resolution Foundation has completed research into the potential benefits to individuals, the State and the financial services industry that could result from improved access to generic financial advice.[236] A report arising from the Foundation's research found that, for young people, receiving and acting on financial advice could increase annual retirement income by up to £1,500 and reduce the numbers of people experiencing financial stress. The Foundation also concluded that delivering financial advice would support public policy objectives such as improved financial capability, pension reform and tackling debt and that if people acted on the advice it could deliver annual savings in expenditure on the Pension Credit could reach £50-100 million each year.[237]

127. A key facet of promoting financial inclusion lies in ensuring that consumers have access to appropriate financial advice. We note evidence suggesting that 8 million consumers who earn between £10,000 and £22,000 find it difficult to access generic financial advice, separate from the sales process. It is clear that improving access to financial advice would have benefits for individuals, the Government and the financial services industry. All too often in pronouncements from Government and regulators, consumers are told to seek advice, but with little consideration as to where they should turn. The implementation of a National Pension Savings Scheme and moves to make individuals more responsible for their retirement planning will increase the need for many consumers to access generic advice and support in order to plan for their retirement.

POSSIBLE DELIVERY MECHANISMS

128. A considerable amount of work has been done on possible delivery mechanisms for generic advice. The Resolution Foundation has sought to develop proposals for delivering a national financial advice resource targeted at consumers currently excluded from accessing financial advice. Mr Clive Cowdery, Chairman of the Foundation, referred to potential delivery models such as the "National Debt Helpline … a high quality organisation working off the telephone" and NHS Direct, which "in a brief conversation, is able to work out what your next step should be and make a referral". He argued that a new generic financial advice service should aspire to help all "who may come forward with a question and that probably means the best way to be national is to be on the telephone from day one".[238] For those who expressed a preference for a face-to-face conversation, he thought that there was the possibility of involving existing infrastructure such as the Citizens Advice Bureaux.[239]

129. Research published by the Resolution Foundation has identified four potential service delivery models for generic financial advice:

Model 1: Advice Net: A comprehensive web-based service, including information, interactive tools and access to self-help packs. It would be backed by a telephone helpline to assist people in navigating the web-site, respond to requests for information and help with referrals, although it would not offer advice as such. Annual operating costs would be around £10-15 million, with set-up costs of £6-8 million.
Model 2: Advice Line: The core service would be delivered via a telephone advice line. Estimated annual running costs would be in the region of £25-35 million.
Model 3: Advice hubs: Similar to model 2, but augmented by a limited amount of face-to-face advice. Working in partnership with local services could deliver suitable locations for scheduled advice sessions without new premises having to be found. Depending on the number of people served set-up costs would be £15-30 million, with annual running costs of £35-65 million.
Model 4: National advice: This would offer an all-encompassing service providing web-based information, a telephone advice line and a comprehensive network of face-to-face advisers operating from 350 to 400 locations across the United Kingdom. Under this model, local centres could offer scheduled meetings as well as drop-in clinics and seminars. Partnerships could be established to deliver these sessions from a range of locations. This model would need considerably more face-to-face advisers and the cost, at £90-110 million per annum with £30-40 million in set-up costs, would be significantly higher.[240]

130. We looked at some current examples of Government and privately-funded services offering advice and how those advice services were coordinated:

The Community Legal Service was set up to help people find the right legal advice. It provides legal information through its web-site, including comprehensive links to other web-sites for advice about specific topics. It offers a telephone helpline and a directory of local organisations that can provide face-to-face legal advice including Citizens Advice Bureaux, law centres, independent advice centres and thousands of high-street solicitors. All these services meet quality standards set by the Legal Services Commission. Many of the organisations offer some or all of their services for free, but those who cannot afford to pay for advice may be eligible for financial support through the Community Legal Service Fund (legal aid).[241]
Consumer Direct was established by the DTI to "provide clear, practical advice for consumers who want to: sort out problems with suppliers of goods and services; know their rights as consumers; report scams and find out how to avoid them; receive advice on how to seek out reputable traders".[242] Annual expenditure on Consumer Direct was projected to be £11 million in 2004-05, £16 million in 2005-06 and £19 million in 2006-07 and 2007-08.[243]
NHS Direct provides advice and information about health and the NHS so that people are better able to care for themselves and their families. The service aims to provide clinical advice to support self-care and appropriate self-referral to NHS services, as well as access to more general advice and information. It is projected to cost around £165 million in 2006-07.[244]
National Debtline is a national telephone helpline for people with debt problems in England, Scotland and Wales. It advised around 100,000 people in 2005, although it is in the process of expansion with an aim to double its reach. National Debtline is part of the Money Advice Trust which receives donations from the Government (through the DTI) and private sector financial institutions. For National Debtline, around 40% of the costs are covered by Government with the remaining 60% from private sector sources. Predicted expenditure in 2006 is around £3.9 million, although a proportion of this expenditure related to recruitment and training of new money advisors.[245]

131. Mr McAteer argued that there was no point in re-creating providers because

there is already a huge infrastructure of providers out there like advice centres and specialist charities but … the delivery and funding of that advice is too fragmented at the moment … It would be better done if it was branded under a single entity [such as] National Financial Advice in the same way as the Community Legal Service is branded for delivery of access to free legal advice, but the important point is [that] it needs to be properly resourced.[246]

132. The ABI agreed that "current developments in the generic financial advice area represent a piecemeal and fragmented approach that risks confusing consumers. There is a strong case for bringing the current plethora of generic information and advice together to make it easier to access, although developing such a resource will need the clear support of all the regulatory authorities."[247] The Economic Secretary to the Treasury told us that the Treasury had actively encouraged the Financial Inclusion Taskforce to examine various ideas for the delivery of generic advice:

While one part of my responsibility for the spending review will be about financial inclusion, there is a separate … overlapping responsibility which is how we take forward more generally in Government the financial capability agenda and work with the FSA to make sure that in our discussions with DfES on the curricula or with the Child Trust Fund or with Sure start or with the Social Fund we take more forward some of these financial capability issues. It is an important part of my job to make sure that happens in an effective and proper way for the spending review.[248]

133. The FSA has established a working group on Generic advice. That working group published a paper in August 2005 entitled Financial Capability: Developing the role of generic financial advice. This focused on elaborating the definition of generic financial advice, developing quality assurance standard for provision.[249] The FSA has also commissioned a review of delivery of advice services to help understand more about what works best for consumers. The Financial Services Consumer Panel believed that "generic advice is one of the most important aspects of the FSA's work on financial capability. Yet we have been concerned at the painfully slow development of the work on this topic."[250] In May 2006, Mr Tiner admitted to us that progress had been slower than it should have been over the last year or two on generic advice and thought that "we need to address the pace of that".[251] He went on to identify some of the barriers to developing such advice:

there is not a supply chain, there is not a brand, a trusted brand to deal with … [for] forms of everyday [generic] financial advice … For example, how people get advice on whether to opt out of the second state pension or not and that is very difficult because there are so few people providing advice … It is an area that we have been worried about.[252]

134. Mr Tiner noted in May 2006 that the FSA was not in a position to build a network of providers for generic advice and thought that between the Government, the industry, the voluntary sector and the FSA there needed to be "more meaningful and rapid initiatives to fill that gap".[253] More recently, Mr Tiner told us that he was sceptical about the case for a new central point for the provision of generic advice, preferring to build on the capacity of existing mechanisms.[254]

135. Citizens Advice told us that they would like to expand their role from their traditional role of emergency help with debt to a more preventative role. They felt that

provision of free generic financial advice to low and middle income groups would assist consumers to be more confident with their finances. Our vision for the CAB service is to have sufficient resources to deliver a holistic financial service giving financial literacy, financial and debt advice to low and middle income groups, in partnership with others where appropriate … There may be potential for CABx, if properly resourced to develop generic financial advice services for their clients.[255]

Ms Perchard noted that Citizens Advice Bureaux had over 3,000 locations and 16,000 trained volunteers and that over 90% of the population recognised the Citizens Advice brand. She thought that CABs would be keen to do more preventative work on delivering generic financial advice but

they do not want to take it on without the training, the backup specialist support, and in some cases we would need paid advisers to give the competent face-to-face advice … If [CAB] were going to be a delivery channel we would need the investment to bring this in … a lot of our money advice services which deal with debt after the event are on very short-term funding. There is no funding to deliver that kind of [generic financial] advice service. Citizens Advice had been involved in a pilot project working with IFAs on a pro-bono basis to deliver free Generic financial advice to people on low and middle incomes … The pilot has demonstrated beyond doubt that there is a real need for generic financial advice amongst this group that current provision had failed to meet.[256]

She went on to observe that the majority of clients were low-income homeowners with many older and reliant on pension income. The biggest area of enquiry was endowment shortfall, and pension advice came second.[257]

136. The Money Advice Trust echoed Citizens Advice by stating that "in looking at how generic advice might be delivered, it needs to be recognised that the voluntary sector money advice agencies are struggling to cope with demand for debt advice and do not currently have the capacity to move into the provision of generic financial advice without additional funding and resources".[258]

137. Citizens Advice Bureaux and other advice centres will have a valuable role to play in any national network of financial advice centres. We welcome their willingness to expand their role into the provision of generic financial advice, but note that for them to take up additional roles in this area will require additional investment and funding. We recommend that the pilot project of Citizens Advice working with IFAs on a pro bono basis to deliver generic financial advice is expanded. In the short term, this could be accomplished by additional money from the industry, combined with any remaining resources from the Financial Inclusion Fund.

138. With regard to the wider question of the form in which generic financial advice is provided, there are clearly different views on whether the case for an entirely new delivery mechanism has been established. We are not ourselves in a position to come to a definite conclusion on this matter. However, we are concerned that consideration of this issue by the FSA has not been as rapid as we believe the issue warrants. The Economic Secretary recently said that:

too often at present financial planning remains the preserve of the better off—as the Resolution Foundation was highlighted. I believe there is a growing consensus that there is a gap here, needing to be filled—and that we should be aiming for a more comprehensive and preventative approach to advice.

He believed that the Government's ten-year strategy to improve financial capability "must move this debate forward and identify clear options that would allow all players—industry and the voluntary sector in partnership with Government—to make the right contributions to filling the advice gap".[259]

139. We recommend that the Treasury assumes lead responsibility for taking forward discussions on the provision of generic financial advice and brokering an agreement between the FSA, the financial services industry and other interested parties on the way forward in terms of the most appropriate organisational framework to deliver and coordinate a national financial advice network and the issues of funding and charges that we consider next. We further recommend that this network target especially generic financial advice for people on lower incomes.

FUNDING AND CHARGES

140. The Financial Services Consumer Panel believed that "the biggest issue with the provision of generic advice is funding. Thus far, no real solution has been proposed as to how such a scheme will be funded, and without this, the initiative is unlikely to be implemented."[260] Mr Cowdery believed that

it would be sensible for industry bodies and government bodies to begin a debate over whether the size and scope [of the national financial advice resource] looks an appropriate and proportionate response to the problem and, if so, what the funding options are … It does strike me that the more far sighted banks, insurers and credit providers will see that you cannot have a situation going forward in perpetuity in which very large numbers of people … are completely locked out of an understanding of what is available in the financial services system and that some small proportion of what they currently spend on marketing their products to the middle classes … should perhaps be diverted towards providing some contact points for people on lower earnings.[261]

141. Mr Cowdery noted that the industry was already spending tens of millions of pounds on different initiatives to provide advice, but that "unfortunately none of it in sufficient … concentration or joined up together to have any holistic or national impact".[262] He believed that there was a case to be made for 100% of such a national generic financial advice service to be funded solely by Government and that there is a case to be made for such a service being provided and funded 100% by industry. This gave him hope that a compromise could be reached.[263] The NCC believed that "there is a strong case for the financial services industry to be required, at least in part, to subsidise generic advice services as they will, ultimately, benefit from a better informed, more confident customer base".[264]

142. The desirability of developing generic financial advice services is not in doubt. The major issue that needs to be resolved is how such services might be funded. Increased provision of generic advice will lead to benefits not only for the financial services industry, through a better informed and more engaged customer base, but also for the public sector, if consumers increase provision for retirement or reduce their reliance on the State benefit system. We therefore believe that increased provision could be funded through a partnership between the public and private sectors, although the proportion of funding provided would need to be discussed. As a first step, we would expect the Government to take forward discussions with the private sector on possible funding options and, as part of those discussions, to indicate the extent to which Government funding might be available for such services.

143. The NCC believed that "decisions about charging for generic financial advice must be taken in the context of overall funding and delivery of the service. If, in practice, offering a free service would constrain the scope of the service—including the numbers of people served, waiting times, consultation times, or the quality/professionalism of staff—this could seriously undermine its success."[265] They suggested the possibility of a sliding scale of charges as occurs with other charitable services such as Relate, but which would be free to those on the lowest incomes.[266] Mr Cowdery believed that the generic financial advice should be "free at the point of use" because he did not think "any kind of income that could be generated through the sort of charges [the targeted group] can afford to pay would be worth the offsetting loss of confidence in the organisation that would come from the fact that it appears to be charging for its services".[267] He also noted that any charges would dissuade people from using the service.[268] Charges for using any service for generic financial advice would increase the available funding, but would decrease consumer confidence in the network, could be complex to administer and could make consumers more reluctant to seek advice. There are strong arguments for any resources targeted at those groups that are currently excluded remaining free at the point of use. Those consumers who were willing to pay a fee for financial advice could continue to do so through Independent Financial Advisers.

REGULATORY BARRIERS

144. As with any advice relating to financial products and services, the provision of generic financial advice faces potential regulatory barriers. In 2004, as part of the Financial Services and Markets Act (FSMA) two-year review, the Government announced its intention to give exemptions from the FSMA financial promotions regime to advice centres such as Citizens Advice Bureaux giving generic financial advice.[269] Mr Cowdery told us that "the FSA had gone far in carving out a definition of basic or generic advice that falls short of selecting an individual product provider".[270] He explained that

in order to sit on the right side of non-regulated advice, [it] will not recommend where you buy your product, but it will tell you that the type [of product] you are seeking are made available in the following areas …[The service] will not seek to select where they go for their [product purchase].[271]

Norwich Union believed that "Generic Advice needs a clear definition and boundary to ensure it does not fall into the realms and associated liability of regulated advice", arguing that generic advice needs to be simple generic information clearly distinct from advice and the selling process.[272] They felt that the FSA's proposed model for generic advice "bore too much resemblance to the existing regulated process in terms of the attached liability, cost and associated time commitments".[273] The NCC believed that "those offering generic financial advice should be accredited to increase consumer confidence and reflect the important skills necessary to deliver such a service".[274] Mr Cowdery agreed that some standard around how that advice is given would be essential and thought that there might be a standard-setting role for Government.[275] We expect the FSA to accord a high priority to its work on developing a clear definition of generic financial advice and how it differs from product-related advice. In particular, the point at which advice ceases to be generic and becomes part of regulated, sales advice needs further consideration. Particularly careful consideration needs to be given to the extent to which information gathered during the generic advice process can be relied upon by the regulated adviser. We would welcome accredited courses for generic financial advisers, combined with a set of quality assurance standards. These should be developed by the FSA, in partnership with the Financial Services Skills Council.