Select Committee on Treasury Written Evidence


Memorandum submitted by the Association of Investment Trust Companies (AITC)

  1.  The Association of Investment Trust Companies (AITC) welcomes the Committee's decision to seek views on financial education as part of its inquiry into financial inclusion.

EXECUTIVE SUMMARY

  2.  The Committee has previously indicated its support for developing financial education. In its report Restoring confidence in long-term savings it recommended (paragraph 102) that initiatives to improve consumer understanding should be carried out in tandem with efforts to make information on financial products clearer and more accessible. It also supported the financial services sector contributing to the cost of any expanded programme to improve financial capability. The AITC strongly supports these views. This paper highlights the need for this agenda to be pushed forward because insufficient progress is currently being made. It sets out key recommendations.

  3.  A new Financial Education Agency should be created to replace existing bodies which are fragmented and inefficient. Establishing a centralised body will create the capacity to deliver an effective programme of financial education.

  4.  Sustainable funding lines must be developed. These should be based upon; central government contributions, a levy on financial services providers, lottery funding and unclaimed assets.

ROLE OF EDUCATION IN DELIVERING FINANCIAL INCLUSION

  5.  Financial education has a clear role in delivering financial inclusion. Individuals who have no basic understanding of, say, how they might compare prices of competing credit offers are less likely to be able to access affordable credit. If they have no understanding of the advantages of a bank account (for example, that they can pay bills by direct debit and consequently receive discounts on utility charges because of it) then they are less likely to try and gain access to them. Where a consumer lacks the skills to engage and has no framework of reference it can only be a barrier to financial inclusion.

THE NEED FOR A REVITALISED APPROACH

  6.  The AITC has been promoting financial education for some years. It was a founding member of the Personal Finance Education Group and our Director General, Daniel Godfrey, was its first Chairman. We recognise that there is significant goodwill within the financial services community to deliver financial education and that many companies are making real contributions in some areas. However, we remain concerned that the current arrangements for delivering financial education are unsatisfactory. Key problems include:

  7.  Lack of coordination: Current government bodies with a remit over in financial education include the DTI, OFT, HMT, DfES and DWP. The FSA also has a statutory obligation to increase levels of financial understanding. There is no one body that can take a lead and ensure that priorities are consistently driven forward with a clear focus on what work needs to be undertaken.

  8.  Funding issues: We are unconvinced that adequate funding is being devoted to financial education. Schools do not have dedicated budgets and there is no clearly identifiable source of funds for community-based adult learning initiatives. Building an infrastructure to deliver financial education to address financial exclusion will require sustainable funding over the long term.

  9.  Apart from the overall level of funding, current voluntary arrangements are unsatisfactory as they do not necessarily focus resources on priorities. They also rely on a few "good citizens" who may not be able to sustain funding. This means funding is uneven and not targeted strategically. Voluntary industry sponsors also bring commercial considerations, such as branding, to this area which is not necessarily helpful (for example, materials may be mistrusted by teachers).

  10.  These problems are having a real impact on the ability of financial education to deliver financial inclusion on-the-ground. For example, the take-up of "free money" to invest in new Child Trust Fund accounts is far from ideal. Figures from August show that less than half of the two million vouchers issued have been taken up by parents. Reports suggest that some parents have been bewildered by the scheme or suspicious of the small print. Others have simply been confused by the range of choices open to them. The general lack of financial understanding among parents is clearly a contributing factor in the low take-up. The shame is that a comprehensive financial education programme could have helped address these problems. For example, an adult outreach programme could have used the CTF as a catalyst to offer prospective parents educational opportunities via pre-natal or maternity groups so increasing take-up of the CTF and helping address broader issues of financial inclusion.

  11.  The low take up of the Child Trust Fund is just another example of an area (along with the introduction of stakeholder pensions) where Government policies designed to encourage financial inclusion could have been supported by a coordinated and sustained programme of financial education. Higher levels of financial education might have also ameliorated some of the mis-selling scandals that have hit the industry in recent years. In turn this would have reduced suspicion of financial institutions and reduced the hurdles to engaging the financially excluded.

A NEW APPROACH

  12.  The Government should adopt a radical approach to delivering financial education.

  13.  Create a Financial Education Agency: It should centralise the currently dissipated efforts from government departments in a central "Financial Education Agency" (the Agency). This Agency which would fall under the auspices of the FSA. We do not believe that this would create a substantial new bureaucracy. We envisage that it would absorb (and replace) the resources currently spread around the various government departments already examining these issues.

  14.  The Agency would have a ring fenced budget and a separate board and management structure to the FSA. It would take on responsibility for the FSA's statutory duty to promote public understanding and report annually on its progress.

  15.  We do not envisage that the Agency would be a delivery mechanism. Instead it would set the strategy and priorities for financial education, provide advice (for example to local education authorities), identify partners for delivering projects on-the-ground, and distribute funding to local delivery partners. (Partners might for example, include teams established by local education authorities, charities, advisory services and trade unions.) More information on how we envisage the Agency operating is included in the attached annex.

  16.  Comprehensive coverage: If financial education is to tackle financial exclusion the programme developed should be ambitious. Clearly it will have to cover schools. Children are increasingly being drawn into the personal finance arena. From basic budgeting to making decisions on store cards or mobile phone tariffs, financial education would make an impact with this group immediately. In the longer term the Child Trust Fund (CTF) creates the opportunity for sustained efforts to educate school-pupils about the risks, and benefits, of long-term saving and investment. This will mean that future generations of young adults will be better able to deal with financial issues immediately and throughout their lives

  17.  However, adults should not be neglected. Any programme which fails to target adults would have no chance of addressing financial exclusion in the wider community. A comprehensive approach should involve developing community and other outreach programmes to reach adults who may be at a stage where they would seek help if it were available. We do not expect people to volunteer for financial education evening classes. However, much could be done by going into the community where people may be receptive to learning about these issues. For example, pre-natal groups, where expectant parents may be considering their CTF choices. Prisoners facing release might welcome help in learning to deal with financial challenges. Jobseekers might find financial education useful when they take up or change employment. The challenge will be to ensure that where people are willing to learn, providers are able to reach them.

  18.  We would anticipate that a Financial Education Agency would develop strategies to ensure that both in-school learning and community projects were developed. It would have the remit and vision to ensure that these projects were properly prioritised and co-ordinated.

  19.  Develop sustainable funding line: To have a real impact on financial exclusion, the UK's programme of financial education has to be both comprehensive and sustainable. It requires a reliable funding line of sufficient size. We recommend that funding should be derived from the following sources:

    —  Central government budgets: Central government funds should be dedicated to financial education. Existing budgets should be allocated to the Agency. The DfES in particular has a clear obligation for funding schools projects and the development of additional funding lines (see below) should not enable central government to escape entirely its financial obligations.

    —  Industry levy: The Government should consider imposing a levy on regulated retail financial service providers and holders of consumer credit licences. If the burden was spread around the amounts payable would be very small. A total annual budget of, say, £50 million would provide a massive boost to developing financial education for financial inclusion. At the same time this is a tiny fraction of what the financial services sector turns over. The AITC does not have a definitive view of the amount that could be raised. However, we are confident that the industry could be reassured that the money would be used effectively. Ring fencing the Agency's budget would be an important start.

  Apart from the practical attractions there is also a clear logic to levying regulated financial services providers. Higher levels of financial inclusion and understanding should help create demand for financial services products. Trust in the sector has been compromised because individuals have not understood it. Mis-selling scandals have also caused problems of trust—but higher levels of consumer understanding would help reduce both mis-selling and misunderstanding. In the very long term a better informed body of consumers could even play a role in reducing regulatory burdens.

    —  Unclaimed assets: The AITC raised the idea of using unclaimed assets to support financial education some years ago. The recent Pre-Budget Statement included plans to free up this capital for good causes. We strongly recommend that part of this income should be used to support financial education.

    —  Lottery funding: We have also proposed that Lottery money could be used to support community outreach projects dedicated to developing financial education and inclusion.

CONCLUSION

  20.  Various issues are important to developing financial inclusion. However, we are convinced that financial education is a critical foundation for other initiatives to be effective. It can help motivate individuals to think about their financial circumstances.

  21.  Individuals with a basic grounding in relevant skills and information will be better able to understand the choices they are presented with and advice they may be given. This process has the potential to benefit people throughout their lives and not just when they get engaged in personal finance issues. Once they are "on the ladder" individuals will be less likely to slip into problems such as over indebtedness or be disadvantaged by buying inappropriate products.

  22.  The structural changes we have recommended (creating an Agency with a sustainable funding line) are critical to ensuring that financial education has a real impact on levels of financial exclusion. Without such a commitment the current situation—characterised by goodwill but with little real progress made in reaching the financially excluded—will continue for the foreseeable future.

December 2005

Annex

ROLE OF FINANCIAL EDUCATION AGENCY

  The proposed Financial Education Agency (FEA) would support on the ground providers delivering initiatives across the country. It would replace the capacity currently spread across various government bodies. Its key activities would include.

Co-ordination and planning

    —  Advising the DfES, QCA, FSA etc on relevant issues.

    —  Developing a strategy to deliver complementary adult and schools based education.

    —  Identifying learning needs of young people and adults.

    —  Auditing and quality marking available resources.

    —  Working with stakeholders (eg providers, regulators, employer groups, trade unions, libraries, universities/further education colleges, libraries, advice centres, local authorities) to identify and deliver collaborative projects.

    —  Identifying partners to deliver projects on the ground.

Developing capacity

    —  Creating (either in-house or through outsourcing) teaching resources for use in schools and with adult audiences.

    —  Providing training for schoolteachers and adult educators who wish to develop their expertise to deliver financial education within schools and in the community.

    —  Co-ordinating the delivery of financial education projects and identifying gaps in provision. This would include maintaining a database of progress being made in different areas and what projects are running to help plan future initiatives.

Funding

    —  Channelling resources to support on the ground projects.

    —  Administering the financial industry levy.

    —  Allocating lottery funds to support community/outreach projects devoted to developing adult financial capacity.





 
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