Memorandum submitted by Which?
INTRODUCTION AND
BACKGROUND
1. Which? campaigns for all consumers. With
around 700,000 members in the UK, we are the largest consumer
organisation in Europe. Entirely independent of government and
industry, we are funded through sales of our consumer magazines
and books.
2. Thank you for the opportunity to submit
evidence to the Treasury Committee inquiry into financial inclusion.
For a number of reasons set out below, we think that tackling
financial exclusion is one of the key public policy challenges
facing the UK. We also argue that, due to major `environmental'
trends under way, financial exclusion is likely to be a growing
problem for policymakers.
3. Moreover, exclusion affects the way the
whole range of consumers' financial needs are met[322]
although we appreciate why the committee has focused on banking
services, affordable credit, access to advice and provision for
the future/ long-term savings as these are probably the most pressing
issues.
4. On final point we would make in the introduction
is that exclusion has generally been associated with consumers
in the lowest income/ socio-economic cohorts. And it is quite
true that the most vulnerable consumers in society are most affected
by financial exclusion and its associated disadvantages. However,
we take the view that exclusion affects a much wider population
of consumers especially the mass market of consumers on lower-medium
incomesthis can be seen especially in the ability of the
retail financial services industry to provide access to decent,
value for money pensions and long-term savings products and objective
financial advice.
5. Which? campaigns to ensure that the needs
of all consumers are met fairly and cost-effectively. The financial
products and services sold by the industry are just means to an
end, ways of meeting those needs. We are agnostic about whether
consumers' needs are met by state, market, or alternative models
although clearly we have to be pragmatic about our recommendations[323].
6. Financial inclusion is a complex and
sensitive subject. Consumers are not homogenous and can be profiled
in many ways according to income, age, region, ethnicity, gender
and so oneach associated with specific aspects of exclusion.
Therefore, when formulating policies to promote financial inclusion
these need to be tailored to meet the needs of different groups.
7. However, in the broadest sense, we have
identified three groups of consumers classified according to how
well the `market' can meet their needs. This classification is
closely correlated with income but perhaps it is more accurate
to think in terms of profitability to the retail financial services
industry. These groups are:
Consumers who are permanently excluded
and whose core financial needs can only be met by state sponsored
or provided solutions
Comparatively wealthy consumers whose
needs and wants can be successfully and profitably met by the
retail financial services industry
The mass market of consumers on lower-medium
incomes who make up the largest group in society and whose core
needs are best met by a combination of state, market and quasi-market
solutions as their circumstances dictate.
8. While the most disadvantaged in society
are worst affected by the consequences of financial exclusion,
we think the mass market group present the most difficult policy
challenge for government. The major trends we have identified
lead us to question the degree to which the retail financial services
industry can meet the needs of the `average' consumer in many
of these core areas. As a result, we argue that radical thinking
is needed to meet the core needs of this group.
9. Therefore, when addressing the financial
inclusion challenge, we argue that the government should be looking
at the issue from the perspective of these two groupspermanently
excluded and mass market consumersnot just tackling the
more obvious exclusion borne by consumers on lowest incomes.
10. The extent to which the retail market
can meet the needs of all consumers very much depends on which
core need (and which product associated with meeting those needs)
is being evaluated. For example, it could be argued that the retail
market has been very successful at meeting the needs of mortgage
consumers.
11. However, the same cannot be said for
pensions or access to generic financial advice and guidance where
the retail market has not been able to provide access to consumers
on lower-medium incomes on terms which both make sense for consumers
and met shareholders expectations of return on capital. This is
why we actively promote alternative models such as collective
pension schemes, and a National Financial Advice Network. And
we are very pleased that the idea of collective pension schemes
in the form of a National Pension Savings Scheme has been recommended
by the Pensions Commission in its second report.
12. We think that similar thinking will
be needed to develop alternative solutions for meeting a wider
range of consumers' core financial needs such as equity release
and income protection products. To this end, Which? will be bringing
out a report this year called Bridging the Gap which will propose
alternative solutions to meet these needs using a combination
of state, third sector and market based initiatives.
13. So far, in contrast to other major countries
such as the USA, France and Canada, the UK government has relied
on a voluntary partnership approach with the financial services
industry to tackle financial exclusion supported by a number of
specific programmes such as the Financial Inclusion Fund and Financial
Inclusion task Force. We do not think that this approach is likely
to address effectively the existing or potential problems associated
with financial exclusion.
14. The individual Government initiatives
and programmes are very welcome of course but we believe a dedicated
and coordinated strategy is needed to ensure that the core needs
of consumers currently affected by exclusion, and those who face
the risk of future exclusion, are met fairly and effectively.
15. In practice, this means that the limits
of market based solutions must be recognised and alternative state
sponsored/ quasi-market solutions promoted by governmentespecially
when it comes to providing access to objective financial advice
and guidance, and core products such as pensions, savings and
loans and, in the future, equity release and insurance products.
16. Moreover, despite the public commitments
(and the efforts of some individual financial institutions), we
do not believe that the retail financial services industry generally
is genuinely committed to tackling financial exclusion. Therefore,
we argue that it is time for government to formally intervene
to ensure that exclusion is challenged. The precise form of intervention
needs to be consulted on but we think interventions such as a
Universal Service Obligation (USO) for basic banking services
or a US style Community Reinvestment Act (CRA) should be consideredalthough
we recognise that these are difficult issues which need to be
evaluated carefully.
17. In addition, we recommend that the government
introduce CRA style disclosure requirements so that policymakers
can gauge the extent of financial exclusion and the behaviour
of individual firms.
18. The role of regulators in tackling public
policy issues such as financial exclusion should also be considered
by government. The FSA does not currently have an explicit public
policy objective to tackle financial exclusion nor does it oversee
USO's. We are currently assessing whether the FSA is the appropriate
institution for overseeing public policy on financial exclusion
and will be publishing our recommendations in a policy report
on financial regulation due to be published in the Spring of this
year.
1. ACCESS TO
BANKING SERVICES
Action taken by the Government and
the banking industry towards reducing the 1.9 million households
in the UK without a bank account
Access to banking services, including
the operation, usefulness and regulation of basic bank accounts,
and access to cash withdrawals.
19. We think there are two key issues relating
to basic banking services:
Access to the important benefits
provided by current account type facilities; and
The impact of changes in the ATM
and bank branch market
Access
In today's world, we argue that access to banking
should be seen as a utility rather than a discretionary, commodity
good. It is becoming as increasingly important as other utility
goods such as energy (electricity and gas) and telecommunications.
Therefore, when market failure occurs (in the sense that consumers
are denied access to basic services) it is valid to consider all
type of intervention to ensure that consumers core needs are met
fairly and efficiently.
20. We will not go into great detail about
the scale of exclusion in the banking sector or the impact that
can have on consumers as this has been covered in great detail
in reports from HM Treasury and others[324].
However, the headline figures are striking. According to the Family
Resources Survey 2003-4, over 13% of individuals in the UK do
not have a current account. As nef points out in its discussion
paper on basic bank accounts[325],
the problem is even greater for those in deprived areas35%
of individuals in deprived areas in the UK lack basic accounts.
The UK fares badly against other European countriesthe
percentage of excluded in most European countries is much lower
than UK levels at around 4-5%.
21. This regional dimension is important.
Mapping the regional distribution of financially excluded groups
suggests that 68% of financially excluded groups live in the 10%
of the most financially excluded postcode districts, with a quarter
living in the 3% of post codes with the highest concentrations
of financial exclusion[326].
22. The knock-on effects for consumers facing
financial exclusion are well documented. Not having access to
current account facilities and direct debits can lead to consumers:
paying higher charges for other financial transactions such as
cheque cashing; denied access to, or paying higher charges for,
other products and services such as telecommunications, and utilities
such as gas or electricity; denied access to loans or being forced
to turn to non-mainstream lenders. Financial exclusion has wider
consequences for society (as pointed out by HMT[327])
through entrenching social exclusion and contributing to child
poverty.
Progress made
23. Therefore, progress made by the banking
industry should be judged against the scale of detriment caused
by financial exclusion. In that case, we do not think that reasonable
progress has been made.
24. The UK government has relied on a voluntary,
partnership approach with the major UK retail banks to tackle
the problem of access to basic banking facilities. The key initiative
in this field has been the basic bank account which offers a simple
transaction account and facilitates use of ATMs and direct debits.
These accounts are accessible free of charge over the counter
at most post offices. UK banks signed up to a commitment to work
with the Government to halve the number of unbanked households
by 2006.
25. Progress has not been encouraging in
our view. While the headline figures quoted by the British Bankers
Association seem to indicate that this voluntary strategy has
been a success, careful analysis suggests otherwise. For example,
there is a significant disparity between the net numbers of basic
bank accounts opened and the increase in the number of post office
accessible accounts[328].
26. In addition, nef reports that, in contrast
to the claims by the BBA that 5.7 million basic bank accounts
had been opened by March 2005, only 1.3 million of the new basic
accounts had been opened since the launch of universal banking
in April 2003[329].
Furthermore, only 2.2 million of these accounts are accessible
through the post office.
27. Overall, we suspect that there is a
significant difference between the headline figures quoted and
the number of accounts that are actually being actively used by
consumers who were previously excluded which suggests that progress
towards the 2006 target needs to be challenged.
28. As well as doubts about the actual penetration
of basic bank accounts among the target market, concerns have
been raised about the attitudes of the banks in promoting basic
bank accounts.
29. To be fair, recent mystery shopping
carried out by the Banking Code Standards Board (BCSB) in 2005
suggests that there have been improvements in the experiences
of consumers trying to open basic bank accounts[330].
67% of people who took part in the exercise would be prepared
to recommend the bank they had opened an account (this is up from
41% in 2003, and 57% in 2004).
30. But there is room for improvement and
a wide variation in the performance of different banks assessed
in the survey. For example:
the BCSB survey found 30% of its
assessors had difficulty in getting literature and in some cases
it was not available at all
26% (over 1 in 4) staff did not recognise
the need for a Basic Bank Account. In one case, the figure was
close to half (47.5%).
only in 38% of cases was literature
displayed in branches, in 62% it was either behind the counter
or not on display at all
in 20% of cases on average assessors
were actively dissuaded from opening a basic bank account. In
the case of one bank, this figure was 40%.
In about 20% of cases, attempts were
made by staff to sell a more complex product than the basic bank
account. In the worst case, this happened on 40% of mystery shops.
Speed of opening an account is crucial
where payment of benefits is concerned. The BCSB states in the
report that unnecessary delays (in one case up to 7 weeks) are
unacceptable and more must be done to help applicants, many of
whom are not financially literate or may not have English as a
first language.
31. The wide variation in performance of
different banks and building societies is confirmed by looking
at the data for the number of basic bank accounts opened. BSCB/
BBA analysis suggests that the number of basic bank accounts being
currently opened by different institutions as a proportion of
ordinary current accounts ranges from 2% to 54%[331].
32. We conclude that the evidence strongly
suggests that the level of commitment from the banking sector
generally (with a few notable exceptions) under these voluntary
arrangements is insufficient to deal with exclusion from basic
banking services.
33. Banks in other major developed economies
face statutory regulation in relation to financial exclusion.
For example, in the USA, the Community Reinvestment Act and Home
Mortgage Disclosure Act require banks to disclose details of consumers
to whom they are currently providing services. Indeed, it is possible
for anyone with access to the internet to see how what proportion
of loans individual branches of banks have made to various groups
of consumers eg. those on different incomes, or different minority
ethnic groups etc. Banks are rated by the banking authorities
and these scores are publicly available. This has led to banks
investing in local communities to ensure a positive score under
the legislation.
34. In France, consumers have a legal right
to a bank account under the 1984 Banking Actif banks refuse
to open an account for consumers s/he can apply to the Bank of
France which nominates a financial institution to provide the
bank account. And in Canada, legislation entitled `Access to Basic
Banking Services Regulations' was introduced in 2003 to ensure
that all Canadians could obtain bank accounts without difficulty.
35. Therefore, we argue that it is time
for government to formally consult on the use of interventions
such as a Universal Service Obligation (USO) for basic banking
services or a Community Reinvestment Act (CRA)although
we recognise that these are difficult issues which need to be
evaluated carefully.
36. In addition, we recommend that the government
introduce disclosure requirements along the lines of the CRA so
that policymakers can gauge the extent of financial exclusion
and the behaviour of individual firms. It is difficult to see
how the required disclosure requirements could be operated effectively
under a voluntary Banking Code.
ATMS and bank branches
37. However, it is not just in relation
to basic bank accounts that we doubt the commitment of the major
retail banks to financial inclusion. We have submitted evidence
previously to the TSC on the impact of the growing number of surcharging
ATMs and the closure of bank branches in deprived urban and rural
areas[332].
With respect to financial exclusion the most worrying aspect is
the potential impact of the growth in surcharging machines.
38. As evidence from the Campaign for Community
Banking Services (CCBS)[333]
submitted to the TSC shows, 40% of the branch network (over 5000
branches) have been closed since 1989. Branch closures have direct
and indirect impacts on local communitiesbranch closures
can lead to reduced access to free ATMs .
39. Although the branch closure programme
was halted by fierce public and political opposition we are concerned
that this pause is about to end, as indicated by the closures
in 2005 by HSBCthe first of the major banks to recommence
branch closure programmes. Analysis by CCBS estimates that approximately
a thousand more communities are at risk of losing their last branch.
40. As we said in our submission to the
Select Committee's Inquiry on Cash Machine charges, the banking
industry had turned to the Post Office as a solution for consumers
to access and manage their accounts. However, we noted that Post
Offices too have been subject to branch closures and that many
of the ATMs installed in and around Post Offices already charged
or were about to charge. We were pleased to see that the intervention
of the Select Committee triggered a positive response on the part
of the Post Office which announced its decision to increase the
number of free ATM machines. However, despite this positive step,
we remain concerned. It is not clear how much progress the Post
Office has made yet towards its targets for introducing free machines,
or what impact the decision to end the contract for the Post Office
Card Account will have on the business case for introducing free
machines. But more importantly in our view any increase in free
Post Office based machines has to be set against the continued
growth in charging machines. Nationwide state that the number
of charging machines increased by 16% between September 2004 and
September 2005 while the number of free machines fell by 0.3%
in the same period. It estimates that if current trends continue
charging ATMs will make up 50% of the total by end-2007[334].
41. The impact of branch closures on ATM
availability is difficult to ascertain without detailed mapping
of the present and future situation regarding free non-branch
ATMs. We would like to see the financial institutions and IADs
providing detailed information on the localities where new surcharging
ATMs will be cited. To provide some impetus for this, we have
undertaken the precursor to such a project.
42. For a sample of 58 of the 800 communities
that the CCBS have identified as branchless, we conducted some
rudimentary non-scientific research to assess access in those
communities of free and charging ATMs. For each community name
supplied to us by the CCBS, we used the `ATM Locator' tool on
the LINK website to map the closest five free and surcharging
machines to the given epicentre. Of the 58 communities assessed:
4 communities (6.9%) had no ATM less
than 2km from the epicentre;
21 (36.2%) had a free ATM within
2km of the epicentre;
13 (22.4%) had a free ATM between
2 and 4km of the epicentre; and
For 24 communities (41.1%), the closest
free ATM was 4km from the epicentre or further.
43. Our findings would suggest that branch
closures are indeed having an impact on consumer's free access
to their own money. In view of the economics of cash machines,
we think these `free ATM black out areas' are likely to increase
significantly over the next few years.
44. As ATMs convert from free to surcharging
machines, groups of people living in affected areas will be ostensibly
forced to use surcharging ATMs for their primary cash access.
While we agree that surcharging ATMs are reasonable as convenience
machines where consumers can exercise clear choice, we are seriously
concerned that matters of financial exclusion and location will
make `convenience' machines used for more than they were designed.
45. This is particularly disturbing in an
era where consumers have salaries, benefits or pensions deposited
directly into their current account (the latter two as a result
of a clear government policy).
46. What is most disappointing is the attitude
of the major banks to the alternative shared branch solution proposed
by CCBS. We do not expect the retail major banks to maintain branch
networks which lead to unacceptable losses for shareholders. Therefore
we have been campaigning for the industry to adopt a cost-neutral
branch sharing model for vulnerable communities.
47. CCBS has undertaken feasibility studies
into this model and it has been shown to work in the USA. Which?
as part of the CCBS attempted to persuade the BBA to undertake
a proper pilot study of the shared branch model. The BBA did undertake
their own version of a pilot study. However, Which? wrote to the
BBA setting out our concerns about the flaws in the way the pilot
study was being established and concluded that the pilot was designed
to fail. Therefore, we were not surprised when the BBA concluded
that as a result of the lessons from its pilot study, the shared
branch model was not viable.
48. We would urge the TSC to revisit the
issue of shared banking[335].
We would be happy to provide the TSC with copies of the communications
setting out Which?s serious reservations regarding the BBA's pilot
study.
49. Therefore we believe that as well as
measures to ensure that banks meet their obligations on basic
bank accounts we recommend that:
banks and building societies should
be required to carry out a proper feasibility study into shared
branch services.
in the certain communities where
even shared branches are clearly not justifiable, the banks and
building societies must commit to ensuring that these communities
are served by free non-branch ATMs;
there should be exemptions for those
individuals who rely on state support to meet basic living costs.
The technology should be developed so that ATM cards belonging
to current accounts receiving (for example) income support, disability
allowance, or pensions are earmarked to be exempt from ATM surcharges.
2. ACCESS TO
AFFORDABLE CREDIT
Measures to enable households excluded
from mainstream credit to have access to affordable credit;
The role of credit unions and community
development finance institutions;
The provision of interest-free loans
from the Social Fund.
50. It is important to stress that credit
is not a bad thing per semanaged well, access to
fair and affordable credit provides useful benefits to consumers.
However, there are major issues to be addressed in the market.
We think the three key issues relating to provision of credit
which policymakers need to address are as follows:
Access to fair and affordable credit
Unfair and irresponsible practices
in the lending sector
Access to objective advice to cope
with debt related problems as a result of the fall-out from the
explosion in personal debt
51. According to the NCC, in 2002 7.8 million
consumers were denied access to mainstream credit[336]
and had to turn to the sub-prime providers such as home credit
lenders who in some cases charge in excess of 300% APR.
52. In addition, organisations such as CABx
and the Consumer Credit Counselling Service report an increase
in the number of clients reporting with debt problems.
53. We believe that tackling debt-related
exclusion issues will become an increasingly important challenge
for government because of the growth of risk based pricing by
the financial services industry and the level of consumer debt
in the UK.
54. Therefore, coordinated action is needed
to meet three objectives of providing access to alternative sources
of credit; ensuring the lending industry behaves fairly and responsibly;
and providing access to financial advice.
Alternative sources of credit
55. We are encouraged by the initiatives
undertaken so far by the government to promote and develop alternative
sources of credit for those consumers the mainstream industry
cannot serve fairly and cost-effectively. We are very supportive
of the role of credit unions in meeting the savings and credit
needs of communities. We think the role of credit unions could
be expanded to meet other needs eg providing access to general
financial advice. We see credit unions as providing one of the
access points in a National Financial Advice Network.
56. However, despite the obvious potential
credit unions have for promoting financial inclusion, the sector
faces a major hurdle in that individual credit unions need to
build up substantial savings before they can lend out to borrowers.
Furthermore, credit unions as mutual organisations cannot be expected
to take undue risks with members' savings.
57. The decision to relax the interest rate
cap on credit union loans should help credit unions offer more
competitive savings and therefore increase the available loan
capital and allow better management of risks. But this is not
enough in our view. As part of our Bridging the Gap work, we are
evaluating whether better use could be made of `quasi-market'
sources to provide credit unions with access to low risk sources
of loan funds. In addition, we are investigating what role the
government could play in underwriting loans for consumers who
do not have savings built up within a credit unionallowing
credit unions to administer the actual loans. We see merit in
the idea of allowing independent organisations such as CABx or
CCCS recommending clients who have a need for emergency funds
to credit unions for this type of loan. However, this clearly
needs to be evaluated further and we will be producing more detailed
models as part of our Bridging the Gap report.
Ensuring the lending industry behaves fairly and
responsibly
58. We are of the view that the behaviour
and practices of parts of the lending industry (mainstream and
sub-prime sectors) have contributed to the unprecedented levels
of personal borrowing in the UK. The FSA's recent Financial
Risk Outlook reports that 1 in 8 families are having difficulty
meeting their obligations[337].
59. We have been critical of a number of
practices followed by the sector[338]
in particular:
Unsolicited credit limit increases
and unsolicited credit card cheques
Aggressive direct mail marketing
campaigns which promote inappropriate or expensive products when
better options are available
Mis-selling of add-on products such
as payment protection insurance
Lenders not doing enough to ensure
that consumers can afford the credit offereddata sharing
is a particular issue.
60. As part of our Time For A Change strategy
we are developing a series of principles and practices including
specific measures for the lending sector. These will cover: product
design marketing practices, pre-contractual information, credit-checking,
final contract and account management, and data sharing. We are
hoping to persuade the sector to work with us in developing a
set of voluntary standards to promote fair and responsible lending
along the lines of our successful Fair Mortgage Campaign.
61. So far, we have ruled out supporting
the idea of a cap on interest rates to tackle extortionate lending.
Our fear is that given the existing capacity constraints there
is a risk of more consumers being displaced into the fringes of
the lending industry. We believe it is preferable if the government
focuses on building capacity in the third sector.
Providing access to financial advice
62. As mentioned below in our response to
question 3, we think the case for a coordinated, centrally managed
National Financial Advice Network is compelling. We appreciate
that debt advice is a priority for government. However, we believe
that it is preferable to look at providing advice on consumers'
general financial needs rather than focus on one specific aspect.
Moreover, we think this would be more cost effective rather than
have individual advice solutions for debt, pensions and other
general financial advice needs.
3. FINANCIAL
EDUCATION AND
ACCESS TO
FINANCIAL ADVICE
The role of the Financial Services
Authority, the Department for Education and Skills and others
in promoting and supporting improved financial education in the
schools, other education institutions and the workplace and the
progress of the national strategy for financial capability;
The provision and regulation of generic
financial advice about savings and debt
63. We strongly support the work of Government
and others such as the Personal Finance Education Group (PFEG)
to promote and support financial education. Financial education
and information campaigns as a prerequisite for an informed and
active consumer population. However, it is our view that given
the legacy problems facing the UK it may take a generation for
initiatives to pay dividends. More importantly financial education
should not be seen as a substitute for effective regulation of
markets.
64. We believe there is evidence of growing
demand and need for unbiased advice and guidance on general financial
matters. We do not think it is possible to look at debt and savings
in isolation. General financial healthchecks and help on individual
matters are becoming increasingly important.
65. These demand factors include:
1.5 million overindebted households
in the field of pensions, the risk
and responsibility of providing for the future is increasingly
being transferred from the state and employers to individuals,
coupled with major changes to employers final salary schemes
the need for `emergency' advice in
the face of mis-selling scandals eg. pensions mis-selling, mortgage
endowment mis-selling and contracting out mis-selling. Consumers
can be reluctant to return for advice to the same industry which
caused problems in the first place.
Consumers may need advice and guidance
when obtaining due redress whether at the individual level or
as a result of major scandals. An indication of that demand and
need can be seen from the 1 million unique visits Which? had to
its mortgage endowment website.
The UK's state benefit system is
seen as being very complex and there is a need for advice on claiming
benefits and resolving benefit problems.
The UK financial system and products
is hugely complex so we believe there is a real need for help
with general financial planning. However, the retail industry
is unable to serve consumers on lower-medium incomes because of
the economics of access.
66. It is too early to judge the effectiveness
of the national strategy for financial capability. However, we
are very concerned that the FSA appears to be placing too much
emphasis on the private sector to meet this need for generic advice.
67. The need and demand for advice and guidance
among all parts of society can be best met by a `mixed economy'
of providers including the state, third sector and private sector.
68. There are already a large number of
third sector organisations of various types who are involved in
delivering advice and education doing a commendable job. However,
we are of the view that these efforts are being dissipated by
the absence of a coordinated programme to provide access to advice
to those who need it most.
69. We conclude that the combination of
factors facing the UK mean that the need for a National Financial
Advice Network is more compelling than ever. This network should
be the key agency for delivering advice and coordinating the delivery
of the national strategy for financial capability.
70. We are campaigning for the creation
of a National Financial Advice Network using the existing infrastructure
of citizens advice bureaux, local government advice centres, the
workplace, specialist charities, trades unions etc and supported
by a dedicated helpline) to provide access to financial healthchecks/guidance
but which could also coordinate and deliver financial education
on the ground. This is built around the existing model of the
Community Legal Service which provides access to legal advice
for consumers on lower incomes.
71. Which?s preliminary estimates are that
it would cost about £200 million a year to run. This need
not necessarily be new moneyit could be funded by redirected
resources from the existing fragmented financial education programmes
and by fines on industry. If consumers are to be truly educated,
informed and protected there will need to be a move away from
the current fragmented and uncoordinated approach towards a more
coherent and coordinated strategy which addresses the different
stages of consumer need.
72. A degree of additional central funding
may well be needed but not providing this much needed resource
would be a false economy. Providing access to financial advice
for consumers on lower-medium income consumers costs money regardless
of whether this is provided through a NFAN type institution or
through existing private sector channels. The question is which
is the most cost-effective and fairest mechanism for meeting the
existing need for unbiased advice?
73. We are of the view that it is likely
to cost more to meet this need through private sector channels
not least because of the additional regulatory requirements. One
of the main reasons for regulation is where conflicts of interest
exist in the distribution chaina primary cause of these
conflicts of interest are the commercial imperatives which operate
when the private sector financial services firms are involved.
This is not a criticism per se, but there are clear conflicts
between consumer and shareholder/producer interests which need
to be addressed by regulation/intervention with consequent cost-implications.
These particular conflicts would not exist with a NFAN type organisation.
74. Moreover, we believe that a NFAN would
result in cost-savings for the industry as many consumers who
are not profitable for industry to serve would be filtered out.
This would produce a double benefit for industry as conversion
rates[339]
would be improved which in turn would free more time for `prospecting'
for new sales leads. As the Pensions Commission report shows,
these prospecting costs are a significant proportion of business
costs and when coupled with low conversion rates results in major
inefficiencies in the advice system (see answer to Question 5
below for details).
75. However, it is difficult to put a precise
figure on the cost of operating a NFAN because of the different
assumptions and because we do not have access to the commercial
data needed. Therefore, this is why as a first step we are calling
for the Government to fund a proper feasibility and pilot study
to evaluate the costs. We suggest this could be a job for the
Financial Inclusion Task Force.
76. We do not see the FSA as being the appropriate
organisation for operating this network. Its priority should be
focusing on making markets work in the consumer interest. We have
previously raised concerns about the structure of the FSA primarily
concerning the dual roles of wholesale and retail regulation.
Requiring the FSA to coordinate the delivery of advice and education
would further undermine its effectiveness.
77. We favour two possible models for coordinating
delivery of advice and education. Either a standalone agency similar
to the Financial Ombudsman Service could be established which
would be linked to the FSA but operationally independent. Alternatively,
a standalone agency could be created under the auspices of a major
government department similar to the Legal Services Commission
which coordinates the Community Legal Service. Whichever model
for coordinating delivery of advice and education is chosen, the
critical factor is that this should be properly resourced[340].
4. INCENTIVES
AND BARRIERS
TO SAVING
FOR PEOPLE
ON BELOW
AVERAGE INCOMES
The operation of the Government's
Savings Gateway accounts programme;
The impact of the Basic Advice Regime
in encouraging saving;
The extent to which decisions on
saving are influenced by factors affected by financial services
regulation, such as the cost of regulated advice, as opposed to
other factors, such as State benefits system
78. This issue is the main focus of our
submission to the TSC and is hugely relevant given the recommendations
of the Pensions Commission to establish a National Pensions Savings
Scheme. Our analysis suggests that the retail industry cannot
provide pensions to the lower-medium income segment of the market
as the economics of access prohibit this. We are pleased to see
that the collective approach to providing access to savings that
Which? has been advocating for some time now[341]
has been recommended by the Pensions Commission in the form of
the National Pensions Savings Scheme. We see no other way of providing
the decent, fair, sustainable and affordable pension schemes consumers
want.
79. However, we are very concerned that
the retail insurance industry recognises that the NPSS exposes
the poor value of its pension products and will seek to undermine
the NPSS before it is established. Moreover, we are concerned
that actions taken by the FSA will undermine the NPSS, further
exacerbate affordability problems in the pensions market, and
inadvertently create the conditions for mis-selling (see RU64
below).
Reasons why UK consumers are not saving enough
for the future
80. Before commenting on the three specific
issues outlined above it may be helpful to set out the reasons
we believe consumers in the UK are underproviding for the future.
81. Which?s qualitative and quantitative
research points to the following reasons as being the prime factors:
unaffordability (compounded by record levels of personal debt);
industry inefficiencies caused by weak competition and the absence
of economies of scale; lack of incentives due to lower long-term
investment returns; lack of confidence and trust in pensions and
pension providers; fears about stockmarkets and a marked preference
for less risky assets such as cash deposits and other `assets'
such as property.
The impact of the FSA's proposals to remove the
RU64 rule
82. The RU64 rule was the mechanism which
gave effect to the substantial improvements stakeholder pensions
(SHPs) brought to one of the most dysfunctional sectors consumers
encounter. The FSA's proposals are hugely detrimental to the consumer
interest and the wider public interest. The removal of RU64 will:
(i). undo much of the progress made by the
government and consumer advocates in introducing market disciplines
and meaningful competition to the retail pensions sector and will
simply prolong market inefficiencies. Prices are bound to rise
significantly breaching the SHP price capmaking pensions
even less affordable and wasting substantial amounts of taxpayers
money in the process;
(ii). undermine the valuable consumer protection
provided by RU64, by creating the conditions for sales of unsuitable,
expensive products; and
(iii). undermine public policy initiatives
initiated by the government. Removing RU64 will fatally damage
stakeholder pensions thereby setting the FSA in direct conflict
with the government's desire to introduce market disciplines and
make retail pensions competitively priced and affordable. The
abolition will also allow the retail pensions industry to seriously
undermine the National Pension Savings Scheme before it gets off
the ground. Abolishing RU64 will allow the retail industry to
build up a `war-chest' to fund marketing initiatives to persuade
consumers to opt out of the NPSS.
83. The FSA has fallen for the classic industry
lobbying technique which argues that regulatory intervention is
preventing the market from working. Therefore, it is trying to
create the conditions for the market to deliver.
84. We are at a loss to explain why the
FSA seems to have bought so unquestioningly the disingenuous arguments
put forward by the insurance industry that the SHP price cap has
exacerbated pension underprovision by lower-medium income consumers
in the UK and that, if only prices were allowed to rise, the industry
would play its role in closing the pensions gap.
85. For this contention to be valid, a number
of conditions would need to be metnamely, (a) that the
industry has an interest in selling products to this market and
(b) the price cap has prevented consumers from accessing pension
providers.
86. The FSA has not made a reasonable case
to support either argument. There is no evidence that the industry
has ever been interested in this particular market except on hugely
expensive terms. Nor is there any evidence to suggest that the
industry would be interested in this segment of the market given
the margins available elsewhere (unless of course they were able
to sell to this market in the belief that the likelihood of regulatory
intervention would be reduced because of the removal of RU64).
87. Crucially, the FSA has not explored
in any detail the more likely reasons why lower-medium consumers
are not contributing enough to pensions. The FSA is wrong to blame
restricted access to pensions on the price cap effect and therefore
is wrong to justify allowing prices to rise on these grounds.
To allow substantial price rises to occur at a time when affordability
and lack of trust and confidence are the key barriers to consumers
contributing to pensions is misguided in our view.
88. The impact on public policy initiatives
seems not to have been understood by the FSA. The insurance industry
is well aware that the report of the Pensions Commission and other
research highlights the basic unsuitability of the `retail' pensions
model for meeting the pension needs of lower-medium income consumers.
There is a growing belief that alternative models are needed to
meet the needs of this consumer segment to circumvent the inefficiencies
of the retail model. This, of course, threatens the basic business
model of the industry.
89. So, we suspect the real reason for this
lobbying to raise prices is that, as well as allowing firms to
maximise revenues from higher income groups, a rise in personal
pension charges will allow the insurance industry to entrench
its position in advance of the implementation of the Pensions
Commission's recommendations.
90. We hope at this stage that the TSC would
be able to bring some pressure to bear on the FSA to reconsider
its approach to RU64 as its proposals in our view are a grave
mistake and would constitute a major strategic policy error on
the part of the FSA.
91. Even if the industry was interested
in the lower-medium income market, making pensions more unaffordable
is counterintuitive and the very consumers the FSA claims it wants
to help will have less incentive to save for the future, and industry
sales people will have less scope for recommending personal pensionsassuming
of course personal pensions are sold in a properly regulated environment.
92. The industry may well have sold products
to lower-income groups in the past. But it should be remembered
on what terms this wasthe charging structures were such
that it was taking between 7-10 years for consumers making monthly
contributions to break even and this was at a time when markets
were delivering double digit growth. Overall, it must be reasonable
to assume that the combination of industry inefficiency, and shareholder
demands will force firms to maximise the opportunity provided
by FSA to extract greater revenue from higher income groupsindustry
is unlikely to want to sell to lower income groups unless it can
missell without fear of regulatory intervention.
93. But it needs to be said that the FSA
will be creating the conditions for the mis-selling of unsuitable
products if it goes ahead with these proposals. One of the other
major benefits of SHPs was that it made mis-selling almost impossible
in a properly regulated environment as SHPs were so demonstrably
better value and more suitable for consumers. RU64 was the mechanism
which made this benefit clear. Removing RU64 will make the sale
of more expensive and therefore unsuitable products easier for
industry who it should be remembered have a primary duty to shareholders.
It is expected that bancassurers and multi-ties will grab an increasing
share of market among lower-medium income groups and as the FSA's
realises these distribution channels only have to recommend most
suitable products within their `range'and it is unlikely
that they will include the remaining SHPs within their range.
94. It is misguided of a regulator to condone
and promote significant price rises when affordability is a major
issue. As mentioned, we find little to suggest in the FSA's arguments
that information solutions or `competition' will keep a lid on
price riseseven the FSA seems to accept that to be fair.
Indeed, it is likely that further upward pressure will be put
on charges as a result of depolarisation. As the ABI report on
`Paying for Financial Advice' suggests, commission levels already
appear to be bid up. This must feed through to higher charges
unless the industry is willing to absorb these increased costswhich
is highly unlikely.
95. The answer to the underfunding of pensions
is not to allow pension charges to rise but to implement the National
Pension Savings Scheme as recommended by the Pensions Commission.
Savings Gateway
96. The idea behind government initiatives
such as the Savings Gateway and the Child Trust Fund is attractive.
Getting consumers used to the savings habit can have significant
additional benefits in terms of financial inclusionnot
least in providing consumers with greater confidence to deal with
financial issues. The savings gateway concept seems a relatively
simple concept with the benefits readily understandable.
97. However, it is too early to say whether
the Savings Gateway will make a significant difference to financial
inclusion. We suspect that much more will need to be done in terms
of raising awareness to overcome the barriers to saving outlined
above.
Impact of the Basic Advice regime in encouraging
savings
The extent to which decisions on saving are influenced
by factors affected by financial services regulation, such as
the cost of regulated advice, as opposed to other factors, such
as State benefits system
98. The issues relating to the Basic Advice
Regime and impact of financial services regulation are linked
so we have commented on these two issues together.
99. We do not think that the introduction
of the Basic Advice Regime will have any significant impact in
encouraging savings. This goes back to the fundamental point that
the retail industry cannot serve this target market on terms which
both (i) provide an incentive for consumers to forgo current consumption
and save for the future and (ii) meet shareholders expectations
of returns on capital. Nor has this been the case in the past
despite the claims of the industry. Therefore, not surprisingly
we see no sign that the Basic Advice regime is encouraging retail
insurance firms to actively target consumers on lower-medium incomes.
100. Regulation can have potentially positive
and negative effects on the levels of savings:
Effective regulation can provide
consumers with confidence to provide for the future, while at
the same time avoiding unnecessary costs
Ineffective regulation can undermine
consumer confidence and/or add to distribution costs which can
have the effect of denying access to consumers
misguided regulatory actions can
cause inefficiencies and distortions in a market.
Regulation and consumer confidence
101. We have not explicitly researched whether
regulation per se is having an impact on consumer confidence but
our research suggests that one of the key barriers to providing
for the future is consumer confidence and trust in the financial
system and products[342].
We believe that this confidence has been badly shaken by a series
of financial scandals such as Equitable Life, various mis-selling
scandals such as pensions and mortgage endowment scandals and
scares relating to occupational schemes.
102. One of the FSA's statutory objectives
is to maintain confidence in the financial system and while this
objective may well be met in relation to `systemic' issues in
the wholesale financial markets it is difficult to maintain that
this objective is being met sufficiently well in relation to individual
consumer confidence. Therefore, we would argue that improving
confidence in the regulatory system is one of the critical factors
in improving and maintaining confidence in the financial system
and products.
103. Which? is producing a policy report
in the Spring of 2006 which will detail our proposals for improving
the effectiveness of the regulatory system from a consumer perspective.
104. Regulatory costs and savings behaviour
105. It is important to challenge some of
the claims made by the retail financial services industry about
the impact of the costs of financial regulation on savings behaviour.
To summarise, the industry claims that the existing regulations
are too costly and this prohibits firms from selling to lower-medium
income consumers under the stakeholder pensions price cap1.5%
for the first ten years and 1% thereafter[343].
106. We actually agree with the retail industry
that it cannot sell to the target market at the price cap levels
(certainly in its current form). The point we have always made
to HMT and FSA is that the industry would need to sell at a charge
level around twice the current price cap level. This would clearly
be unacceptable as it would provide no incentive for consumers
to save using long-term products and selling products at those
charge levels would in our view constitute mis-selling given consumers
appetite for risk.
107. We argue that during the consultation
on the level of the stakeholder pension price cap the industry
was being disingenuous in arguing for an increase in the price
cap from the then 1% per annum. It did not seek a price cap rise
in order to sell to the Government's target market but rather
to maximise revenue from more profitable groups of consumers on
medium to higher incomes. In the end we were pleased that the
Government did not give in to the industry's more unacceptable
demands and limited the increase to 1.5% for the first 10 years
and 1% thereafter. Our evidence suggests that this is more than
enough to allow the industry to make a reasonable return on capital
from consumers making contributions of around £100 a month.
108. However, while we were encouraged by
the Governments firm but fair stance towards the industry during
the price cap consultation, it is dismaying to see that the industry
seems to have achieved its objective of breaking the new price
cap through alternative means (see The impact of the FSA's proposals
to remove the RU64 rule, above).
109. Without access to confidential figures
it is difficult to say precisely what proportion of distribution
costs arises from explicit regulatory costs. No one supports unnecessary
regulation and we have argued for a long time that an overreliance
on rules based regulation encourages a culture of compliance and
adds to costs without addressing the root causes of market failure
and consumer detriment[344].
110. However, we have long suspected that
the industry has tried to overplay the cost of regulation by conflating
general business costs and regulatory costs. Even if the FSA didn't
exist (with the associated compliance costs), firms would still
have to gather information in order to establish which products
are suitable for potential clientsthis should be a requirement
as part of due diligence, and it should be hoped that firms and
advisers would see this as being good business practice anyway
regardless of whether statutory regulation existed or not.
111. In a sense, the conduct of business
and disclosure rules, and compliance requirements deployed under
statutory regulation simply `codify' what should be part of the
normal business and risk management process. To be sure, there
is a debate about the amount of information that must be disclosed
and collected and we see merit in having a debate around streamlining
this volume of information.
112. A common criticism we hear from industry
is that FSA requirements have greatly increased the costs associated
with the sales process (ie. the fact finding referred to above)
and compliance costs. The FSA does indeed mandate certain information
requirements. However, it should also be noted that the FSA also
works by setting down high level principles and allows firms significant
discretion as to how these high level principles are met. The
FSA does not mandate specific approaches for example in ensuring
sales are compliant with high level principles. It is very much
up to directors in firms to weigh up the risks to the firm of
various approaches. They are free to choose how many sales are
double checked by compliance staff. We have been made aware of
one example inside a major UK financial institution where compliance
departments double check 100% of sales by front line staff.
113. The industry claims that the length
of time to complete the sales process has increased signficantly
under regulation and this has therefore increased distribution
costs. It is not clear how much of this increase is attributable
to regulation per se. We suspect that much of the claimed increase
is `self-imposed' in that firms are `gold-plating' the regulatory
requirements to ensure that mis-selling is not occurring. As mentioned,
the FSA allows firms significant discretion as to how the high
level principles are met.
114. Therefore, it has been our view that
the main costs of distribution relate to general business costs
and specifically marketing and selling costs, and set-up costs
not regulatory costs. So, cutting regulatory costs would result
in a very small reduction in overall distribution costs.
115. There is strong evidence to support
this view. To begin with, charges on personal pensions and other
long-term savings products such as endowments were unacceptably
high even before the FSA came into existenceor the disclosure
requirements which were introduced in 1995.
116. Compelling evidence comes from the
Pension Commission's Second Report which looked at the distribution
costs associated with the existing personal pensions market. The
Commission modelled the set-up and ongoing costs of providing
a group personal pension to a small employer[345]
of 23 employees. The total costs assumed by the Pensions Commission
were £805 in set-up costs plus a further £31 a year[346]
in ongoing costs.
117. The key components in the set-up costs
were:
Costs embedded in IFA commission
| |
Prospecting/ marketing | £233
|
Establishing the scheme | £217
|
Advising individual whether it is worth saving
| £80 |
Persuading individual to save in particular scheme
| £80 |
Initial set-up costs for provider |
|
Sales consultant and staff incentives | £160
|
118. It is worth noting that compared to these major
set up costs the Pensions Commission modelled the cost of complying
with regulations to be £5. In terms of ongoing costs, of
the £31 annual cost, compliance costs amount to £4.50.
Impact of benefits on savings behaviour
119. Some commentators have argued that a combination
of a higher universal state pension (which would remove the need
for means testing) plus incentives would provide the necessary
encouragement to stimulate savings.
120. It would seem `obvious' that means testing is a
barrier to getting consumers to save. But the issue is more complex
that it may first seem. We begun our qualitative research programme
on pensions expecting to find that that means testing would be
a clear disincentive to save. However, on reflection it became
clear that if means testing was a disincentive then a number of
conditions would need to be met.
121. Firstly, consumers would need to be consciously
thinking about contributing to pensions and be consciously weighing
up options for providing a retirement income some years down the
line. Secondly, consumers would need to be aware of means testing
and the impact of means testing on pensions.
122. However, the qualitative research Which? undertook
suggest that neither conditions are necessarily metcertainly
within the reluctant groups of savers.
123. There did not seem to be a great deal of awareness
of how means testing works among the groups we surveyed (see Summary
of research contained in Which?'s submission to the Pensions Commission).
To be sure, once this was explained there was a great deal of
`anger' among group members. However, in practice means testing
did not make a difference as the groups had no intention to save
anyway. The majority were simply not making conscious decisions
or choices about whether to rely on means tested benefits. The
sense we got from our research was that respondents were expecting
`something to turn up'. But there was no sense that means testing
was that `something'.
124. Therefore, although it may seem counterintuitive,
it looks as if means testing is not having a significant direct
impact on savings behaviour of groups who are not making the necessary
level of contributions. It is unclear whether means testing is
having an impact on the savings behaviour of those groups who
are currently making some savingsie. if means testing is
causing those savers to contribute less than they might do.
125. The key point is that, whatever the perceived impact,
changing means testing on its own will not provide effective incentives
to save.
126. However, regardless of the direct impact of means
testing we do take the view that simplifying the pensions structure
is important and should be done as one of a number of measures.
Simplicity is crucial to encouraging consumer engagement with
the pensions system. Means testing per se may not be a
barrier to savings, but it does add to the complexity of the pensions
system and this complexity does act as a very real barrier. Moreover,
means testing makes the advice process more complex, more uncertain
and therefore more expensive.
5. THE ROLE
OF THE
GOVERNMENT, THE
FINANCIAL SERVICES
AUTHORITY AND
OTHER BODIES
AND ORGANISATIONS
IN PROMOTING
FINANCIAL INCLUSION
The work of the Financial Inclusion Taskforce,
and the use of resources from the Financial Inclusion Fund;
Lessons from successful local or regional initiatives
designed to address geographical concentrations of financially
excluded households.
127. Which? supports the various government initiatives
and the work undertaken by others to promote financial inclusion.
However, we take the view that this work needs to be better coordinated
particularly in relation to developing alternative financial products,
providing access to unbiased advice, delivering financial education
programmes, and implementing policies to tackle financial exclusion
(including industry monitoring).
128. As stated in our answer to question 3, we favour
two possible models for coordinating action. We do not think the
FSA is the appropriate body for coordinating this work. We would
suggest that either a standalone agency similar to the Financial
Ombudsman Service or Legal Services Commission be created.
129. While the coordination of financial inclusion policy
should be undertaken centrally, specific problems with exclusion
need targeted solutions especially when it comes to access to
banking services, and provision of advice. As outlined above,
the regional dimension is important with 68% of financially excluded
groups living in the 10% of the most financially excluded postcode
districts, with a quarter living in the 3% of post codes with
the highest concentrations of financial exclusion[347].
130. The Financial Exclusion Taskforce provides an ideal
opportunity to coordinate pilot studies for shared branch banking,
and the National Financial Advice Network.
6. THE BENEFITS
OF FINANCIAL
INCLUSION AND
THE EXTENT
TO WHICH
FINANCIAL INCLUSION
MEASURES CAN
CONTRIBUTE TO
COMBATING POVERTY
AND REDUCING
BARRIERS TO
EMPLOYMENT
131. We have not made any comments in relation to this
issue as other organisations are much better placed to do so.
January 2006
322
These needs are: decent, secure and sustainable retirement incomes;
protection against lifetime risks (income, health); decent long-term
and social care; access to fair and affordable banking services;
affordable home ownership; fair and affordable borrowing; short
term savings; saving/ investing for future events; and insurance
for possessions/ lifestyle. These are underpinned by the need
for objective financial advice and guidance. Back
323
Eg. there would not be much point campaigning for state operated
mortgage markets even if we were convinced that the existing market
based system was irredeemably dysfunctional. However, we are pleased
that the idea of a National Pension Savings Scheme has been recommended
by the Pensions' Commission. Back
324
For example, see HM Treasury, Promoting Financial Exclusion,
December 2004, or nef discussion paper, Basic bank accounts:
The case for a universal service obligation, 2005 Back
325
nef discussion paper. Basic bank accounts: the case for a
universal service obligation, nef, 2005. Back
326
HMT Promoting financial inclusion, December 2004, p 14,
para 2.18. Back
327
HMT Promoting financial inclusion, December 2004, p 10,
para 1.10. Back
328
the BBA reports net openings of 285,761 accounts over the half
year to September 2005 yet there has been an increase of just
under 52,000 post office accessible accounts over the same period. Back
329
Nef discussion paper: Basic Bank Accounts: the case for a
universal service obligation. Back
330
see Banking Code Standards Board, Survey of Subscribers providing
Basic Bank Accounts, November 2005. Back
331
see page 5, Banking Code Standards Board, Survey of Subscribers
providing Basic Bank Accounts, November 2005 Back
332
see Which? evidence to TSC inquiry on ATMs, December 2004. Back
333
Which? is a core member of this campaign. Back
334
Nationwide Building Society, The increasing threat to free
cash withdrawals, November 2005. Back
335
In its report of 30 July 2002, the TSC expressed an intention
to revisit the issue on completion of the BBA pilot study. Back
336
NCC, Mind the Financial Gap, Access to Financial Services,
September 2004 Back
337
FSA, Financial Risk Outlook 2005, p 41. Back
338
see Which?, Sneaky Tricks and Hidden Charges, January
2005. Back
339
that is, the number of successful sales as a proportion of initial
interviews Back
340
we find the CLS model an attractive one in terms of coordinating
delivery of services. However, the Government's record on providing
access to legal advice has attracted criticism recently. We attribute
this to levels of funding rather than any flaw in the LSC/ CLS
concept. Back
341
see Which?: Blueprint for Pensions, 1997; Blueprint
for National Pensions Policy, 2003; Choice and Pensions,
2005. Back
342
see Which? Choice and Pensions, 2005. Back
343
as the Pensions Commission report states, `there are currently
8.5 million individuals aged 21 or over who earn in excess of
£5,000 a year who do not currently to any form of pension.
Yet the insurance industry does not appear to be strongly interested
in selling pensions to many of these people, arguing that the
costs of providing and administering pensions makes them unprofitable
under the present Stakeholder Pension charge cap regime. This
is despite the fact that the present price cap is far above the
costs achieved in large occupational schemes. Back
344
Financial products regulation, Consumers' Association, 1998. Back
345
details can be found in Figure F.12, Appendix F, page 227 of
the Pensions Commissions Second Report. Back
346
for in-force policies. Back
347
HMT Promoting financial inclusion, December 2004, p 14,
para 2.18. Back
|