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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