House of Commons - Treasury - Written Evidence

Select Committee on Treasury Written Evidence

Memorandum submitted by the National Consumer Council

SUMMARY

Benefits of financial inclusion

— Financial inclusion is an essential element of tackling social exclusion and combating poverty, helping to ensure that the poor don't pay more for essential goods and services.

— Financial inclusion policy must be seen in the context of wider policy developments in order to achieve sustained financial inclusion. This required a joined-up policy approach from Government.

— Government and industry measures such as the third party deductions scheme can be a stepping-stone to financial inclusion. The scheme should be expanded to become a payment option of choice rather than last resort.

— Financial products and services must be designed and delivered in a way that is makes them accessible, affordable, available and appropriate for the particular needs of the financially excluded.

— The success of financial inclusion policy is contingent on the most basic financial services being an attractive option for people on low-incomes.

Access to banking

— Numerical targets alone will not deliver appropriate banking services to the unbanked.

— Lack of counter access and charges for unpaid/returned direct debits, of up to £39, are among the features that make basic bank accounts in their current form, inappropriate for low-income consumers.

— Basic bank accounts need to be redesigned to reflect the particular needs of the financially excluded.

Access to affordable credit

— Low-income consumers have an urgent and consistent need for credit, but 7.8 million are excluded from the mainstream market because the product design and delivery mechanisms do not meet their needs.

— The Social Fund does not meet the needs of all eligible applicants, with one in five being turned down. High-cost credit is the only option for many excluded consumers, with people on benefits spending an estimated £330 million per year on home credit.

— An affordable credit model is urgently needed, and a partnership approach between government, third sector lenders and the mainstream providers is required.

— Design and delivery must be built around low-income consumers' needs, allowing for weekly payments and incorporating flexibility. The Social Fund should act as building block for such a model.

Financial Education and Advice

— Financial education, generic financial advice and the financial capability strategy must focus on the needs of the financially excluded if they are to play any part in achieving financial inclusion. They need long-term support in terms of development, implementation and resources.

— The FSA's Financial Capability Strategy needs to have secured funding and must target hard to reach groups including the financially excluded.

Incentives and barriers to saving

— A stepped approach to promoting saving among low-income consumers is required. Starting with breaking the cycle of poverty and exclusion; followed by facilitating and incentivising saving.

Promoting financial inclusion

— The Government must spearhead a joined-up, consumer-focused approach to financial inclusion policy.

— The Financial Inclusion Taskforce should develop Government's long-term strategy for sustained financial inclusion.

— The Financial Services Authority should promote cultural change in the financial services market, by ensuring that the concept of treating customers fairly extends to the financially excluded. It should continue and expand the financial capability innovation fund, and set out a specific and sustained commitment to its financial inclusion work.

The benefits of financial inclusion and the extent to which financial inclusion measures can contribute to combating poverty and reducing barriers to employment

1. Our research with consumers consistently shows that the poor pay more, or get less, when it comes to essential goods and services. The result is a process of market-based exclusion that deepens disadvantage and reduces the effectiveness of welfare and social inclusion policies such as benefit payments, tax credits and local regeneration, set up to address people's poverty and vulnerability. One reason why the poor pay more, or get less, is the way that they interact with financial services.

2. Financially excluded consumers are overwhelmingly the poorest and most vulnerable members of society. Consequently, achieving financial inclusion is an essential element of the solution to tackling social exclusion and combating poverty. Therefore a joined-up policy approach to financial inclusion is required from Government.

3. Being financially included reduces the additional costs of being poor. It helps consumers to avail of cheaper tariffs, and access services that require electronic payments or bank accounts.

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

4. Consumers do not live their lives in silos, the way that industry and Government are organised. Therefore, financial inclusion is unlikely to be achieved solely through financial policy. This does not diminish the value of financial policy, it simply means that it must be considered in the wider context of the way that people live their lives. Strategic direction is required from Government to join up financial policy with other areas including welfare and wider inclusion policies. This applies to policy between Government departments as well as policy from industry and government. This is the best way to achieve policy outcomes that work for consumers.

Meaningful financial inclusion

5. Unless being financially included makes a positive difference to the lives of those who are excluded, it will not be inclusion in any meaningful sense. The success of policy in this area is contingent on the most basic financial services being an attractive option for people on low-incomes. Meaningful financial inclusion can only be achieved if financial products and services are designed and delivered to meet the particular needs of people on the lowest incomes, ensuring that they are not only accessible, but also attractive, affordable, appropriate and available.

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

6. Although significant progress has been made in reducing the number of unbanked consumers, research by the Banking Code Standards Board (BCSB)[200] and Services Against Financial Exclusion (SAFE)[201] shows that access problems persist.

7. Branch staff in banks and building societies need further training on special arrangements around identification requirements for basic bank accounts to remove it as a barrier to account opening.

— In addition consumers that only have access to a Post Office Card Account (POCA) are not included in the statistics for the unbanked.

8. Consumers that only have a Post Office Card Account should be included in the number of unbanked as the functionality on the POCA does not allow for transactional banking.

Access to banking services, including the operation, usefulness and regulation of basic bank accounts, and access to cash withdrawals.

9. Financial inclusion is more than just a numbers game. Numerical targets for achieving financial inclusion will not deliver useful and appropriate banking services to the unbanked. The focus must shift to the design of basic bank accounts. Ensuring that accounts are more attractive and useful to financially excluded people is a far more sensible way of improving and sustaining a higher level of take-up.

10. Lack of counter access and default charges of up to £39 make basic bank accounts in their current form inappropriate for low-income consumers. People on low-incomes cannot afford these charges and therefore they act as disincentives to being financially included.

11. Some banks actually charge basic bank account customers more for an unpaid/returned direct debit than they charge to current account customers (see annexe 1). Levying higher charges on those customers who are least able to pay is clearly inappropriate, given that the account is supposed to meet the needs of people on low incomes. This brings into question these providers' commitment to financial inclusion.

12. Research by NCC and Policis[202] found:

— Half of low-income consumers with a bank account still prefer to manage their money in cash. Therefore simply having a basic bank account does not necessarily result in meaningful financial inclusion.

— Low-income consumers with bank accounts have higher levels of arrears and indebtedness than their unbanked counterparts. Indicating that in their current form, use of a basic bank account for money management can undermine previously successful cash-based money management strategies.

13. Basic bank accounts need to be redesigned to meet the needs of the financially excluded.

— Features of a revitalised basic bank account should include:

— counter access at branches

— a small penalty-free overdraft to act as a `buffer zone' (£10-£20) to guard against unpaid direct debits;

— systems that recognise and fit with the weekly budgeting cycle, including statements and payment mechanisms such as direct debits and standing orders;

— automated payments that are triggered by money entering the account so that payments cannot be made without money to cover them; and

— payment systems that can incorporate occasional payment holidays.

14. The Association of Credit Unions (ABCUL) has developed a basic bank account that includes some of these features, therefore we know that it is possible.

— Banks and building societies must improve their basic bank account design so that it meets the particular needs of people on low-incomes.

The NCC will be undertaking further work in 2006 around what low-income consumers need from banking services.

Access to cash

15. Research indicates that UK bank customers are set to pay £250 million to withdraw their own money from fee-charging cash machines in 2006. Fee-charging ATMs increased 16% in 2005, while free non-charging ATMs decreased by 0.3%[203]. More than a quarter of charged ATM withdrawals are for £20 or less. As people on low incomes are more likely to make smaller and more frequent cash withdrawals, they may well be disproportionately affected.

16. Consumers now pay for 5% of ATM transactions[204]. However, it has yet to be established if there is a particular lack of free ATM access for financially excluded consumers. The NCC has previously recommended that the location of free and charging ATMs should be mapped against the indices of deprivation and data on clusters of financial exclusion to establish if there are gaps in provision of free access to cash.

— The Financial Inclusion Taskforce should take responsibility for undertaking this exercise in addition to its other work on how low-income consumers access cash.

17. Another Post Office closure programme is expected in the near future as the current subsidy, which sustains many rural and urban deprived branches, expires in March 2006. This is set to reduce free over-the-counter access to cash for POCA holders and for the 2.3 million basic bank account holders who can make free withdrawals at a Post Office.

— The Government must recognise the impact that Post Office closures will have on financial inclusion.

Access to affordable credit

18. Research by NCC and Policis Affordable Credit: A model that recognises real needs[205] shows that low-income consumers' needs for affordable credit are not being met.

— Low-income consumers have an urgent and consistent need for credit, but 7.8 million are excluded from the mainstream market because the product design and delivery do not meet their needs.

— The Social Fund does not meet the needs of all eligible applicants, with one in five applications being turned down.

— High-cost credit is the only option for many excluded consumers, with people on benefits spending an estimated £330 million per year on home credit.

206

Measures to enable households excluded from mainstream credit to have access to affordable credit

19. An Affordable Credit model should not be developed in isolation from the other components of a financial inclusion strategy. It is essential that in developing solutions the Government and providers recognise, understand and respect the realities of why the poor, often knowingly, pay more for high cost home credit. The possibility if a new affordable credit model offering many of the features valued by those on low incomes more cheaply and efficiently should be explored. Facilitating the development of less costly products that do not meet their needs and simply `educating' them about the cheaper alternatives available is not a solution.

— The real cost of delivery of the high cost credit products currently used by the poor must be established. Options for delivering this to consumers at a lower price can then be explored.

20. A successful and inclusive model of affordable credit would need to offer:

— Access to loans that are simple, transparent and available for any purpose;

— Lenders that are familiar, are perceived to be trustworthy, understand low-income consumers' circumstances; do not penalise them for occasional missed repayments; won't pursue people who are genuinely unable to repay through the courts.

— Application procedures that are simple, accessible and non-judgemental; can accommodate numeracy and literacy problems; result in quick and relatively predictable decisions.

— Loans that are small, short-term and available in cash.

— Repayments that are set at an affordable level; are compatible with their household budgeting cycle (usually weekly); combine the discipline of weekly home collection with occasional, penalty-free missed payments (payment holidays); can be deducted direct from income.

21. Our research shows that a system of direct deductions from income for credit repayment is attractive to many benefit recipients, but as an option of choice rather than a last resort. Although the Government announced[207] that it will consider "arrangements whereby, in certain circumstances, private and third sector lenders could apply for repayments to be made by deduction from benefit, where normal repayment arrangements have broken down" this is not set to be a pro-active payment option of choice for the consumer. This is a missed opportunity.

22. A new Affordable Credit model which delivers these features could be built around direct deductions from benefit and, for the working poor who make up most home credit borrowers, through adaptations to the tax credit system and, potentially, a revitalised model of basic banking.

The role of credit unions and community development finance institutions

23. Credit unions and Community Development Finance Institutions (CDFIs) have a key role to play in the provision of a new affordable credit model. However, despite encouraging progress third sector lenders have so far been unable to achieve the scale, sustainability and professionalism necessary to offer a universal solution to credit exclusion. Therefore commercial sector involvement has to be part of the solution.

24. An affordable credit model is urgently needed, and a partnership approach between government, third sector lenders and the mainstream providers is required.

The provision of interest-free loans from the Social Fund.

25. Interest-free loans, or advances on benefit income, from the Social Fund must be maintained for the very poorest. However, they are not serving all those in need. Changes to be implemented in April 2006 will increase the predictability of the scheme and the size of the fund overall. However, these relatively minor changes are still unlikely to result in the meeting the emergency credit needs of all eligible applicants.

26. Research[208] shows that many consumers that borrow from the Social Fund also borrow from high-cost commercial lenders, such as home credit companies, to meet their additional credit needs. High-cost borrowing can lock consumers into a spiral of debt, and therefore it would be sensible to target these consumers with trusted affordable credit options. As there is a client cross over with high cost credit users and the Social Fund, applicants to the Fund should be a main target group for an affordable credit model, so they have a cheaper credit alternative which is less likely to trap them in a cycle of debt and dependence.

27. The Social Fund could, in addition to interest free loans for the poorest, form part of a partnership with low-cost lenders to provide low cost interest bearing loans. This would act as an accessible alternative to high-cost credit that low-income consumers have little choice but to turn to. When loan payments are completed consumers could be given the choice, and facilitated to continue payments, to build savings.

28. A radical rethink of the Social Fund is required, and its relevance to financial inclusion must be recognised by Government. Options for making the Fund the basis for a new affordable credit model and a stepping-stone towards saving and asset building should be explored by the Department for Work and Pensions.

FINANCIAL EDUCATION AND ACCESS TO FINANCIAL ADVICE

The role of the Financial Services Authority (FSA), the Department for Education and Skills (DFES) 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;

29. Financial education and advice build on the provision of information about financial products, to help develop financial capability, which are essential for all consumers. However, in order for them to have any impact on financial inclusion this work must specifically target financially excluded consumers. Only then will these three elements become key parts of the medium and long-term work on promoting financial inclusion. These areas of work are interlocking and therefore those with responsibility for them, principally the FSA and the DFES, must work in a joined-up way to ensure delivery in the most effective and efficient way for consumers.

30. The FSA and the DFES must ensure a specifically targeted approach to improve financial inclusion as part of its work on financial capability, advice and education. They must also ensure sustained support for this work in terms of priorities, resources and policy development over the long-term within Government, trade unions and employers, educational institutions, financial services industry and within their own organisations.

31. The stakeholders outlined above all have a role to play in continued support for the financial inclusion element of financial education, financial advice and the financial capability strategy.

Financial Education

32. The DFES must recognise the need for a flexible financial education programme. Innovative ways of delivering financial education must be identified and implemented in order to reach disadvantaged consumers who are no longer involved in formal education or the workplace. It is essential that the DFES liases with the Treasury, financial education practitioners and other relevant stakeholders to keep pace with developments, ensuring that the programme remains relevant and useful to consumers of all ages.

THE FINANCIAL CAPABILITY STRATEGY

Funding

33. We welcome the FSA's work to develop the financial capability strategy. However, we are concerned that the strategy does not yet appear to have funding for implementation. We believe that a levy on industry has been ruled out as a funding option. In the light of this situation the NCC made the following recommendation:

— dormant account assets, to be released by the Chancellor, should be used to fund the implementation of the FSA's a robust Financial Capability Strategy within the context of tackling poverty and promoting social justice.

34. The Chancellor announced in the 2005 Pre-Budget Report that dormant account assets would be used for communities and youth services, however the details have yet to be worked out. Therefore, at present, it is unclear if the financial capability strategy, or the parts directly relevant to youth and communities will be funded from dormant account assets. However, given the benefits that implementation of a robust and inclusive strategy would deliver, it should be given serious consideration by the Treasury and the Commission on Unclaimed Assets.

35. An alternative funding option is through voluntary donations. However, as we have seen with the money advice sector, this could be unpredictable and limit the scope for long-term planning and the sustainable development of the strategy. It is also questionable whether it is appropriate for the success of a regulator's project to be contingent upon voluntary donations from the industry that it regulates. This funding option ultimately risks the long-term success of the strategy, and may result in delivery being sparse and fragmented, and provision being inconsistent over time. This would be to the detriment of the consumer and, ultimately, the industry, as it would mean that improvements in financial capability would be limited. Therefore this would not be the most effective option for tackling financial exclusion in the long term.

36. The FSA must secure funding arrangements for the Financial Capability Strategy that will ensure effective and consistent delivery for the long term to benefit all consumers, including the financially excluded and other hard to reach groups.

Targeting

37. In order to tackle financial exclusion it is vital that the Financial Capability Strategy continues to prioritise work with the hardest to reach and most vulnerable groups including those Not in Employment, Education or Training (NEET), who are most at risk from long-term social and financial exclusion. It is essential that the strategy has a financial exclusion focus, yet it is currently unclear if this work will continue, even though other priorities have been set out. We are concerned that these priorities have been decided in the absence of key information from the FSA's financial capability baseline survey, which has yet to be published. It is essential that the FSA's priorities for achieving organisational targets for delivering the financial capability strategy does not result in the easiest to reach groups, such as those in higher education, being prioritised over groups that are harder to reach, including financially excluded consumers.

— The Financial Capability Strategy should prioritise work with the hardest to reach and most vulnerable groups, who are most at risk from long-term social and financial exclusion.

The provision and regulation of generic financial advice about debt and savings

38. There is a real need for some form of generic financial advice to help all consumers plan their finances; understand their options; determine their priorities; and increase their confidence in financial decision-making. This service could make a vital contribution to increasing financial capability and reducing financial exclusion, mis-selling and inappropriate choices. This form of advice will be of particular value to disadvantaged consumers for whom making the right financial choices is crucial but who currently find it hardest to access appropriate and affordable advice and are, therefore, especially vulnerable. There is a gap in the provision of generic advice through the market for a number of reasons including the lack of financial incentive for industry, high level of charges to the consumer, and consumer confusion, lack of demand and consumers' failure to recognise their need for this advice.

Regulation

— Those offering generic financial advice should be accredited both to increase consumer confidence and reflect the importance of the skills required to deliver such a service.

39. Quality and consistency in the advice provided are crucial to the success of generic financial advice, as is ensuring that the service is delivered according to professional and measurable standards. This will enable generic advice to act as an effective and useful building block for further financial advice. Generic advice practitioners should be equipped to go further than simply signposting consumers to their options. They should be able also be able to discuss options for action. Clearly it is also important that consumers have access to, and are aware of redress mechanisms should they feel that they have been misadvised.

Provision

— Generic financial advice must complement, rather than replace existing advice provision.

40. It should assist people to move through the advice system with greater confidence, helping them to gradually become financially included. Simple measures such as generic advisers developing a basic financial profile that customers could take with them when they seek further advice would help establish generic advice as a key component of the advice regime, while simplifying things for consumers.

Delivery

— A one-size-fits-all approach to delivery of generic advice will not work. A range of methods are required to meet the particular needs and circumstances of different groups.

41. Vulnerable consumers, who may be financially excluded, with low financial literacy and little, if any, positive experience of financial advice or mainstream financial services will clearly require face-to-face advice provision. Other consumers will be more comfortable with, and able to act on, telephone advice, while computer-based packages—used alone or with guidance—will be appropriate for others.

Charging

— Consideration should be given to funding generic advice through a combination of industry subsidy and a sliding scale of consumer charges, which would be free to those on the lowest incomes.

42. Decisions about charging for generic financial advice must be taken in the context of overall funding and delivery of the service. If, in practice, offering a free service would constrain the scope of service—including the numbers of people served, waiting times, consultation times, or the quality/professionalism of staff—this could seriously undermine its success. It could, ultimately, result in a situation where, as now, people who can afford to do so choose to pay for alternative sources of advice, resulting in a real or perceived two-tier system. There is a strong case for the financial services industry to be required, at least in part, to subsidise generic advice services as they will, ultimately, benefit from a better informed, more confidence customer base. There may also be a case for charging users of the service on a sliding scale basis, as occurs with other charitable services such as Relate. It is likely that demand for generic advice services will extend beyond low-income consumers who cannot afford to pay for advice at all to include those with higher incomes who may still be unable to afford to pay for independent financial advice or for whom existing regulated advice services are inappropriate. In this context, charging a subsidised rate to those who can afford to pay for advice could enable the service to be developed in a much more sustainable way, and to grow in line with the scale and nature of demands placed on it.

Incentives and barriers to saving for people on below average incomes

43. Promoting savings is a key element of the Government's long-term anti-poverty strategy. The benefits to individuals can be life transforming, reducing stress and pressures that unexpected expenses can bring, and promoting employment prospects. Increased saving also directly benefits the financial services industry and brings wider economic benefits. Therefore tackling barriers to saving is everyone's interests.

— A stepped approach to promoting saving among low-income consumers is required. Step one is breaking the cycle of poverty and exclusion, followed by step two facilitating and incentivising saving.

Income maximisation through reducing the cost of being poor

44. Although skilful budgeting and good money management practices among consumers on the lowest incomes means that some do have a limited capacity to save, many more simply do not see saving as an option. Being poor in today's society brings about a `double deficit'—the people with the least money end up paying the most for the goods and services they need.

45. These extra costs means there is even less money available for a savings safety net. The extra costs and the absence of savings mean people on low-incomes are more likely to need to borrow to deal with emergencies or cover everyday essential expenditure, than people with higher incomes. The only sources of credit open to many of these consumers is expensive (eg home credit and so-called sub-prime credit cards). The structure and sales and marketing of these products can tie these consumers into a cycle of on-going borrowing, which then makes the prospect of saving even less likely. Breaking this cycle would free up disposable income for saving.

46. Successfully tackling market-based exclusion to ensure that the poor do not pay more for basic goods and services, provision of appropriate payment mechanisms, affordable credit, benefit health checks, reducing barriers to employment, building financial capability, and combating financial exclusion will all help to maximise income and increase this group's ability to save.

— Government, regulators and industry must recognise and tackle market-based exclusion to ensure that the poor do not pay more for essential goods and services. This will assist the least well off in society to maximise their income, increasing their capacity to save.

Facilitating and incentivising saving

47. Once consumers are in a position to save, there are five key elements to making it possible and attractive, they are products, incentives, providers, barriers and skills and advice.

48. Products: Savings products must be simple for consumers to understand. Complicated products are unattractive and confusing. Cash-based are preferable as they are less complicated and carry little or no risk to the consumer. This is especially important to people on low incomes, as they are not prepared to risk losing the money that can act as a lifeline in difficult times.

49. Incentives: It is essential that incentives are meaningful and targeted if they are to work. Stakeholder Pensions for example have tax incentives. However these are opaque, difficult to communicate, and regressive, which makes them less attractive to low-income consumers. The Child Trust Fund's incentives are easier to communicate because its universality. This is an excellent basis for promoting financial education and engagement. However, the Child trust Fund does not provide a meaningful incentive for the poor to keep saving, and further development is required. The Savings Gateway £-for-£ matched-savings incentive is welcomed. It is clear and makes money saved worth more than money spent. It is a far more attractive incentive for people on low incomes than tax breaks. Once the right products and incentives are in place delivery issues.

50. Providers: The products need to be delivered through trusted providers in order to make them accessible, attractive and ensure that consumers have confidence in the product. There may be access problems associated with products that operate on a single provider model, particularly in rural and urban deprived areas where the provider may have a limited or no presence.

51. Barriers: Problems such as identity requirements; minimum saving amounts; the need for a bank account; and erosion of benefit entitlement due to savings must be removed if saving is to be an attractive option for the poor.

52. Skills and Advice: Financial capability and basic financial advice are key to increasing saving among those on the lowest incomes. This group is not necessarily benefiting from products such as the Savings Gateway that are designed to promote saving. This may be due to a lack of awareness or access issues. Steps must be taken to address this. Generic and regulated financial advisers, advice agencies, local authorities, GPs, the Post Office and Job Centre Plus should be used to promote and raise awareness of the products such as the Savings Gateway among low-income consumers.

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.

53. Barriers including charges and identification requirements, and consumer confidence are key decision making factors for potential savers, and financial services regulation affects all of these. For people with low incomes and low financial capability these decision-making factors are even more important. A strict regulatory regime may inspire confidence but it is expensive, and this results in higher charges to the consumer, which may be a barrier to access. Therefore a balance between the two is required. However, the effects of Government policy around welfare and the wider economy, and their effect on consumers' decisions about saving should not be over looked.

Confidence

54. Bad experiences with financial services, whether personal, or that of a friend or family member affect consumers' decisions about savings and investments, including pensions and mortgages. Past failures to regulate the industry effectively have resulted in many consumers losing out through bad advice and unscrupulous traders manipulating the system. This has been damaging to consumer confidence.

55. Scandals as far back as the Mirror pensions crisis and mortgage endowment mis-selling have a long-term effect which extends beyond the individuals affected, damaging the confidence of potential savers. Confidence in savings products is contingent on the right balance of regulation. Clearly regulatory measures must take account of costs, which are ultimately paid for by the consumer. This must be weighed against the value of a robust compliance regime, visible and proportionate sanctions for breech of regulations, and quick and appropriate compensation for the consumer when things go wrong.

56. A regulatory balance is required to minimise charges and other access barriers and maintain and promote consumer confidence. While the FSA's risk-based approach to regulation is welcomed, the regulator must be prepared to use tough sanctions against those that breech its rules and damage consumer confidence and the industry's reputation.

57. Government policy also impacts upon consumer confidence in savings. Constant changes in pensions policy and economic disasters such as "black Monday" are likely to have a negative impact on consumer confidence in saving. They remove the certainty and predictability that we know people on low-incomes want. These factors also affect saving choices for those who do decide to invest. They are likely to be influential in low-income consumers' risk averse attitude and strong preference for cash-based savings products, even though these might not always be the best option. This is a particular issue around long-term savings products. The Governments' new ethos of asset-based-welfare is welcomed, including changes to the benefit system, where saving is less likely to be penalised than it has been in the past, and the introduction of the Savings Gateway and the Child Trust Fund, which are all positive steps in promoting saving. However a consistent and joined-up approach, across Government and over time, is required in order to build consumers confidence and make a real change in consumer behaviour.

Barriers

58. Charges are a clear barrier to all financial services for people on low-incomes. We welcome the principle of the simpler charging structure around the stakeholder suite of products, which is a step in the right direction. However, we also recognise the costs associated with providing certain services, particularly advice, are necessary. It is important that the consequential charges levied on the consumer are proportionate. Additionally, where the charges are not subsidised, they should be cost-reflective.

59. Another barrier to saving which can be attributed to the unintended effects of financial services regulation is identification requirements. Despite a recent review of guidance this continues to present an access barrier for account opening, and therefore saving. It appears that the problem is with frontline staff, and recommendations about training to improve this situation have been made by the Banking Code Standards Board. However, it is likely that the individual responsibility and associated penalties placed on financial services staff stipulated in the regulations has been instrumental in the persistence of this barrier.

THE ROLE OF THE GOVERNMENT, THE FINANCIAL SERVICES AUTHORITY (FSA) AND OTHER BODIES AND ORGANISATIONS IN PROMOTING FINANCIAL INCLUSION

Government

60. The Government has taken on a leadership role by making financial inclusion a policy priority. It has been instrumental in stimulating the debate and focusing the policy work of relevant stakeholders on this issue. Creation of the Financial Inclusion Taskforce has assisted those working on this issue to concentrate on solutions to achieving inclusion. If longer-term financial inclusion is to be achieved this level of leadership and commitment needs to continue.

61. The Government also needs to lead by example by taking a consumer-focused, joined- up and consistent policy approach to financial inclusion, including changes to the Post Office network and the POCA (outlined below), expansion of the third party direct deductions scheme, reform of the Social Fund and developments in social inclusion and welfare policy, including pensions.

62. The unbanked and many of the POCA holders do not have access to direct debit and standing order facilities to make automated payments and avail of cheaper tariffs. Charges of up to £39 for an unpaid direct debit make this a risky option for many basic bank account holders. Therefore, an option for a penalty-free way of making automated payments via third party deductions would be a helpful way for consumers to avoid expensive tariffs, debt and disconnection from essential services. However, the current scheme has strict eligibility criteria and low awareness levels. The NCC and other consumer groups and utility company representatives are recommending that the DWP expand this system.

63. In the light of significant utility price rises, and an increase in fuel poverty of between 200,000 and 800,000 of the most vulnerable consumers[209], access to such a scheme is particularly important.

64. The Department for Work and Pensions should reform the third party deductions scheme to ensure that it would:

— Have a centralised application/clearing process

— Build on automated credit transfers to enable automated deductions for bills.

— Be offered as payment option of choice not as a repayment arrangement of last resort for people in arrears.

— Allow consumers to join the scheme and remain on the scheme when they are not in arrears.

— Extend the scheme to include all income replacement benefits (including working tax credits).

65. The scheme could act as a stepping-stone to financial inclusion, building consumer confidence in automated payments, without the risk of charges. It would also assist in debt prevention. Consumers like the certainty and control that the scheme provides them with. Despite these positive factors the DWP are resistant to plans to reform the scheme because of the decreasing numbers of people using it. However, the decline in usage is due to failings in the current scheme, such as low awareness, failure to adhere to eligibility guidelines, changes in the structure of the benefits offices and the set up of Jobcentre plus. DWP, is considering mandatory pension contributions, yet criticises the third party deductions scheme for taking control and responsibility away from the consumer. However, an expanded scheme would be optional, and therefore would be as much of a choice as a direct debit is.

66. Clearly there are cost implications for an expanded system. However, there are also a number of cost savings to be made. These include reduced bad debt costs to suppliers, reduced need for debt advice, reduced stress and therefore improved quality of life for the consumer. Associated with this is the potential reduction in health care costs and other public services that indebted consumers may have an increased need for when their finances get out of control. There are also benefits for other areas of public policy particularly around social exclusion and poverty reduction. Research[210] shows that two-thirds of children living in severe poverty had parents who experienced debt in the past year. Therefore, it would seem logical for the Government to offer pro-active debt prevention tools, such as third party deductions, to people on low incomes. Unfortunately it is difficult to quantify many of these savings.

Financial Services Authority

67. The FSA should make a specific and sustained commitment to long-term work on financial inclusion, promoting the specific needs of financially excluded consumers.

68. The FSA does not have explicit responsibility for tackling financial exclusion. However, its overall aim is to promote efficient, orderly and fair markets and to help retail consumers achieve a fair deal. It has a core objectives to maintain confidence in the financial system and to secure the appropriate degree of protection for consumers. Those excluded from the mainstream market are consumers too, and are least likely to have confidence in the financial system and more in need of regulatory protection than people on higher incomes because of the disproportionate effect lack of access to appropriate financial services has on their lives. Therefore, the regulator should interpret its aims and objectives in the widest sense to ensure that financially excluded consumers are also protected, have confidence in the market and are offered a fair deal, so that they have access to appropriate basic financial products.

— Through its work to achieve cultural change within the financial services industry the FSA should ensure that Treating Customers Fairly means providing all consumers, including those who are currently excluded, with access to the financial services market and its basic products. This will assist to build confidence in the financial services market among people on low incomes, and will therefore assist the regulator achieve a core objective.

69. We welcome the FSA's £200,000 Financial Capability Innovation Fund and acknowledge the high proportion of financial inclusion projects that have benefited from the fund in the most recent round of awards[211].

— The FSA should continue and extend the Financial Capability Innovation Fund to ensure that it can fund further financial inclusion projects as part of its contribution to tackling financial exclusion.

70. We also welcome the FSA's work on developing the Financial Capability Strategy, which we have commented in section 3. But, the FSA must prioritise work in this area with the hardest to reach and most vulnerable groups, who are most at risk from long-term social and financial exclusion. If it does not, the Financial Capability Strategy will have limited impact on financial inclusion.

71. We recognise that, as a result of the Pre-Budget Report announcement for a ten-point plan to reduce the regulatory burden on the financial services industry[212] that the FSA may be subject to increased scrutiny, particularly in the area of efficiency. In the light of this, we seek assurances that the regulator's work on financial inclusion will be a high priority across the organisation.

Banking Code Standard Board (BCSB)

72. We welcome the Banking Code Standards Board's regular mystery shopping work around basic bank accounts. Although it has shown progress in tackling barriers to accessing basic bank accounts, more needs to be done. There is currently insufficient incentive for the banks to make improvements in this area.

— The Banking Code Standards Board should publish the results of its basic bank account mystery shopping exercise broken down by account provider. Publicly acknowledging the industry's efforts to financially include the unbanked would provide a positive incentive for banks to ensure that their basic accounts are accessible.

Post Office

73. The Post Office provides 4.8 million Post Office Card Accounts (POCAs), cash withdrawals (and some deposits) for 2.3 million basic bank account holders and access to approximately 2600 ATMs[213]. Therefore, it plays a significant role for consumers, and it should be an important consideration for taking financial inclusion policy forward.

74. However, it is difficult to establish what the Post Office's role will be in the future for two reasons. Firstly, because of the uncertainty around the future of POCAs when the contract runs out in 2010. And secondly, the precarious position of the rural and urban deprived elements of the branch network as the social network payment—a subsidy which has been helping to prevent branch closures—runs out in March 2006.

75. It is unclear when the Government will make an announcement about the future of the Post Office Card Account. The Department for Trade and Industry are set to consult on the social value of the Post Office network in February 2006, which will determine the extent of branch closures and alternative methods of service delivery going forward. The Government is scheduled to announce this decision in July 2006.

76. The Government must recognise and accept its responsibility for ensuring that financial inclusion is a key consideration in decisions about the future of both the Post Office and the Post Office Card Account. It must ensure that the DTI, the Treasury, the Department for Work and Pensions, and the Office of the Deputy Prime Minister take a joined-up approach to policy making in this area, including accepting responsibility for funding where relevant.

77. Despite this lack of clarity over the future of the branch network Post Office Ltd should:

— Work with the financial services industry to develop innovative and commercially viable products and services for disadvantaged consumers, such as low-cost accessible loans and insurance.

— Continue to negotiate with the banks to extend Post Office counter access to all basic bank accounts.

The work of the Financial Inclusion Taskforce, and the use of resources from the Financial Inclusion Fund;

78. NCC is pleased to be able to contribute to the work of the Financial Inclusion Taskforce through taskforce member Claire Whyley, NCC's Deputy Director of Policy. We consider the taskforce priorities to be clear and appropriate in a stepped approach to tackling financial inclusion in both the short and medium term.

79. However, we do have concerns about the possible of a lack of independent and expert policy input over the longer-term as the Taskforce has only been set up for a three-year period, ending in February 2008. Financial inclusion must not disappear into a policy vacuum as Government and Treasury policy focuses attention elsewhere in the run up to the next General Election.

80. The Treasury, advised by the Financial Inclusion Taskforce, must develop and allocate sufficient resources for a long-term cross-government financial inclusion strategy.

81. The Taskforce has identified its first level priorities as access to banking, affordable credit and money advice. However it is important that its second level priorities namely insurance, savings and other asset accumulation are not forgotten. These should be should included in the Government's long-term strategy for financial inclusion.

82. The £140 million Financial Inclusion fund is welcomed. However, it is clear to those working in this area that the funding is just a drop in the ocean of what is needed. For the fund to have a lasting impact on tackling financial inclusion it is essential that decisions about the use of this funding are informed by existing experience and best practice; that it does not displace existing funds; and that it is used to fill gaps in current provision, rather than duplicate services that already exist.

Lessons from successful local or regional initiatives designed to address geographical concentrations of financially excluded households.

83. There is likely to be a wealth of expertise and experience in tackling financial exclusion at local level that may not currently be widely recognised or shared. The concentrated, local nature of financial inclusion makes the role of local authorities crucial in creating and stimulating an environment in which the needs of the financially excluded can be recognised and addressed. Round 8 of the Beacon Council's scheme, currently underway, includes a theme on financial inclusion and over-indebtedness. The NCC's Claire Whyley has been appointed as a Specialist Panel Member for the Scheme, working alongside the DTI and the Treasury to develop criteria for identifying and assessing good practice among local authorities in tackling these issues. This process will not only highlight the range and nature of local authority-led financial inclusion initiatives, but the selection process will bring best practice in this area to the forefront enabling widespread learning and replication of successful models.

January 2006

Annex 1

CHARGES FOR UNPAID DIRECT DEBITS

Current account	Fee for returned transaction or direct debit[214]	Charge for unpaid direct debit[215]	Basic Bank Account
Abbey	£32	£35	Abbey
The Abbey Account			Basic Account
Alliance & Leicester	£34	£34	Alliance & Leicester
Current Account			Basic Cash Account
Barclays	£30	£15	Barclays
Bank Account			Cash card account
Co-operative bank	£35	£19.50	Co-operative bank
Current account			cashminder
Halifax	£39	£39	Halifax
Current Account			Easycash account
HSBC	£30	None	HSBC
Bank account		Account closed after 3 unpaid	Basic bank account
Lloyds TSB	£35	None	Lloyds TSB
Classic		Account closed after 3 unpaid	Basic bank account
Nationwide	£30	£30	Nationwide
FlexAccount			FlexAccount Cash Card
NatWest	£35	£38	Natwest
Current Plus			Step Account
Royal Bank of Scotland	£35	£38	Royal Bank of Scotland
IPCA			Key Account