Select Committee on Treasury Written Evidence


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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