Memorandum submitted by the Children's
Mutual
INTRODUCTION
The Children's Mutual is the country's only
specialist dedicated solely to long-term savings for children
and as such we have extensive and unparalleled knowledge of this
subject given our 50 year history of activity. Prior to the introduction
of the Child Trust Fund (CTF) more than 200,000 children's families
had started to save regularly for them, with us and following
the introduction of the CTF this is now 400,000.
EXECUTIVE SUMMARY
1. The Children's Mutual has considerable
experience of talking to families from all income levels, particularly
those less well off families about their priorities for their
family's ability to save for important events and for their and
their children's futures. We have some very interesting research
findings which reflect people's real hopes and fears and ambitions,
some of which might be surprising. We have found that people on
low incomes who save give considerable priority to opportunities
to do so for their children. Their emotions to protect their youngster
for the future gives way to, for instance, saving for their own
future needs. Barriers to saving and therefore to financial inclusion
of course vary depending on the lifestyle of each individual but
we believe that in addressing the issue of financial inclusion
Government should begin with helping those on the lower income
levels, who in many areas of either saving or in household budgeting
are discriminated against.
2. Those generally who are financially excluded
are confused by (1) far too much detailed paperwork to read and
complete before even being able to open a simple bank account
(2) the lack of basic financial education on how to manage their
daily spend and make the most of their limited funds. An individual
might be able to buy a £500 sofa on the "never never"
far easier than setting up a £20 savings account or paying
into a pension, for instance. Credit cards can be obtained and
therefore expensive items, holidays and other durables can be
bought, with little checks and balances. In terms of utilities,
those who do not set up direct debits to pay utility bills pay
more than those who do—those who do not set up direct debits
are generally the poorest in society with no bank account, they
are therefore paying not only more than those with bank accounts
but a far higher proportion of their limited household income.
3. We believe that an individual should
be able to open a simple bank account as simply as committing
to other financial obligations. A cash deposit of no more than
X amount, with no overdraft facility, would allow everyone access
to saving and direct debit schemes through a simple bank account.
The check on possible future concerns would be countered by the
current prescribed mechanism for setting up an account once the
amount in the bank account had reached an agreed amount (hence
a large insurge of funds could trigger said checks). Those setting
up accounts in this way could also trigger a system of learning
about managing household finances, a wider discussion of what
this could be needs to be incorporated in overall financial capability
policy debates.
4. We also urge that consumer credit agreements
are reviewed for regulation. We urge that advertising of financial
products, particularly loans, is reviewed. Saving and depositing
money should be easier than borrowing it.
5. Financial Education is key—and
it is about people understanding the financial consequences of
actions, things that will or might happen or indeed things they
want to happen.
MAIN POINTS
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.
1. Access to banking services would be achieved
almost universally if opening a bank or building society or mutual
account was made simple.
2. The 1.9 million households without a
bank account in the UK could be reduced if there was a reduction
in the paperwork that it takes to open one. We believe there is
a case for reducing the paperwork for opening a bank account if
the amount does not go over a certain amount. Once it does, and
this should be encouraged of course, the next stage of detailed
questioning begins. Once an individual starts saving they see
the rewards (higher interest rate the more they save)—we
need to address those who are currently unable to access this
financial benefit.
3. Some institutions might be resistant
to what they see as less well off customers since they do encourage
small account holders but they must become part of the long term
plan to increase people's financial awareness and education to
recreate the savings culture.
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.
1. There is a very important role for credit
unions and community development finance institutions but before
these are promoted, the issue of rogue loan companies needs to
be addressed alongside that of financial education. Credit unions
and community development finance institutions simply do not have
the finance to compete on advertising and marketing as others
so a quick step to curb the irresponsible lenders needs to be
taken as a matter of urgency. Bona fide credit unions and
community development finance institutions need to be able to
compete at rates they can compete on, which their customers from
less well off families can afford.
2. The provision of interest free loans
from the Social Fund must take up the opportunity given to the
authorities to educate the individual with the loan. Once in this
system, that individual could begin to be given basic household
and spend/savings advice. ….why the loan; how to pay it off;
what next; what do they need ...
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 schools,
other educational institutions and the workplace and the progress
of the national strategy for financial capability.
— The provision and regulation of generic
financial advice about debt and savings.
1. The Children's Mutual is a prominent
advocate and indeed provider of financial education for children
and their parents and takes an active role in pfeg. Any move to
include basic financial education in the school curriculum, through
parent/children groups, places of higher education, would provide
a benefit to the whole social and economic welfare of the UK.
2. The objective should result in a significantly
greater proportion of consumers being aware of the importance
of planning and reviewing their personal finance situation. They
will understand the potential financial consequences of (some
certain, some possible, some desirable) events in their lives
and the risks of taking action AND of not taking action. A desired
outcome should NOT be that consumers will be sold lots of financial
products, it may be that they buy more—that is different.
3. Understanding the welfare state should
be included in the strategy since a great deal of confusion over
saving for one's own life style needs can come from consumers
thinking the state will take care of it.
4. Basic financial education should include
a Website that will prompt people to think about the future—a
calculator that people can use to forecast their needs—very
simple but talking in language they understand rather than product
terminology ie events such as on average there are three school
trips in a child's life; cost of clothing; holidays, times of
unemployment, caring, so that families can plan for their life
style.
5. When a family starts receiving child
benefit, or it could be some other trigger, they receive a pack
that includes lists of the usual basket of household bills they
need to think about (utilities, house insurance,TV licence, car
insurance, MOT, council tax etc). Those items that are generic
and need paying for every year.
6. The Government now has an excellent peg
on which to support financial education—the Child Trust
Fund. In three years time, children age seven will be in school
and will all have a Child Trust Fund. Used generically, teachers
can begin to educate this and future generations of young people
as to why it is important to save and plan financially for everyday
living.
7. The benefits of a better informed public
are enormous—
(i) Better informed consumers would be more
likely to save. In turn this will mean better value for money
as distribution costs (the largest proportion of the cost associated
with a financial product) will reduce, but much more.
(ii) The risk of both mis-selling and mis-buying
will be reduced. It is more likely that consumers from less well
off backgrounds will be engaged.
(iii) It is important to note that this is
not just about the purchase of financial products. Consumers who
are more financially aware are more likely to pay off debt, better
understand their gas, electricity and mobile phone bills and the
most efficient ways to pay and budget. They would understand how
"on the never never", Hire Purchase, really works. We
therefore believe that the "less well off" who do not
have ready access to information about money and savings would
benefit enormously if financial capability projects were directed
their way. This is the key audience.
(iv) Financial capability is not about buying
a pension, for example, it's about understanding that you will
have to have a strategy for paying your bills and enjoying life
after you have stopped working. It's about helping people to help
themselves. How many understand that paying for gas by slot meter
means they pay a huge premium on the cost of their gas supply.
8. Education needs to reach some of the
financial services industry—the message being that we need
a culture change where it is not a matter of "selling to
customers""—its about customers knowing they need
financial assistance and come to seek it because they know they
need it. The objective should be for consumers to act and want
to make decisions about their financial position.
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 the State benefits system.
1. The Savings Gateway is a good incentive
to save, particularly if it is built on with a system that takes
the individual's initial savings pot from the Savings Gateway
to say a cash ISA (a proven successful and attractive savings
mechanism), and eventually through to the benefits of an equity
based ISA. If the transition is smoothed people would soon find
savings in more sophisticated products simple.
2. The Basic Advice Regime is a good idea
but it is not that basic and unless it becomes truly basic we
do think financial providers will use it. We would be delighted
to provide further insight and ideas on this if the Committee
would like.
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.
1. Currently the financial services industry
comes under the regulation or legislation of many different Government
Departments, regulators and associations. We believe that the
first policy to address is financial education and urge that responsibility
for this is placed under one umbrella organisation that has real
experience of what works. Pfeg. The financial services industry,
alongside Government, would benefit from encouraging financial
inclusion but a culture and regulatory change is required to make
it simple.
6. The benefits of financial inclusion and
the extent to which financial inclusion measures can contribute
to combating poverty and reducing barriers to employment
— The extent to which problems of financial
exclusion can be tackled by actions in the sphere of financial
policy as opposed to wider policy developments relating to welfare
policy, pensions and benefits.
1. We think that the Child Trust Fund is
a good example of Government policy that will promote financial
inclusion. It is universal in that every child from September
2002 will have access to financial savings. A small amount can
make every difference. If a young person has access to funds,
for say driving lessons which then means they are more employable,
this has to be a good thing.
January 2006
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