Memorandum submitted by Resolution Foundation
1. EXECUTIVE
SUMMARY
1.1 The Resolution Foundation welcomes the
Treasury Select Committee Inquiry into Financial Inclusion as
timely and important.
1.2 The focus of this submission is on the
vital and challenging issue of access to financial advice, particularly
for basic rate taxpayers on less than average income. They have
both the most to gain from getting financial decisions right and
the least access to help in doing so. They are excluded from advice
because they tend not to be economically attractive to target
with products, and advice comes bundled with products.
1.3 Today, some one in three of the UK workforce—more
than eight million basic rate taxpayers—live in an advice
"exclusion zone", with little or no access to financial
advice. Partly as a result, consumer debt is spiralling and more
and more of citizens face a grim future of dependence on the state.
Against this background, the Resolution Foundation believes that
the time has come for the Government and the private sector to
work together to close this advice gap and to create a new national
financial advice resource.
1.4 The Resolution Foundation is a research
and policy organisation which aims to provide new thinking on
how people with below average earnings can access and use the
financial services system. It is focusing particularly on how
the advice needs of people earning less than the national average,
but above the level on which they are wholly reliant on state
benefits, are met either by the public or private sector. It also
focuses on how such individuals can navigate successfully their
most important financial decisions, and will explore how improving
the quality of financial decision-making among this group can
have a measurable impact on future welfare costs.
1.5 Given our areas of interest, we wish
to make an informed contribution to the public policy debate around
financial inclusion and to assist the Committee's consideration
of these issues. While our particular focus is on access to financial
advice, we also have an interest in incentives and barriers to
saving for people on below average incomes, as well as in the
role of Government and other bodies in promoting financial inclusion.
1.6 The Foundation is working intensively
with Government departments, the Financial Services Authority,
voluntary groups, consumer stakeholders and the financial services
industry in an attempt to catalyse agreement on the key issues
and on possible solutions. We have also initiated a programme
of research, which includes new research to understand better
the financial decision-making behaviours of affected households.
Early findings will be available at the beginning of February
2006. Other research includes costing the value of poor financial
decision-making to the individual and the state and developing
proposals for how a national advice resource could work in practice.
1.7 We would be pleased to give oral evidence
to the Committee if asked to do so.
2. THE RESOLUTION
FOUNDATION
2.1 The Resolution Foundation is a not-for-profit,
non-party political, organisation and is committed to producing
the highest quality socio-economic research into the issues of
generic financial advice, together with practical proposals for
action, capable of implementation by Government and industry.
2.2 The Foundation is chaired by Clive Cowdery,
who is also Chairman of Resolution plc and its Chief Executive
is Sue Regan. The Foundation has a Board of Trustees which includes
Baroness Greengross.
2.3 The Foundation is privately funded,
with no revenue from government or groups within the financial
services industry.
3. BACKGROUND
3.1 There are around 8 million people in
the UK today who pay basic rate tax on incomes between £10,000
and £22,060 per annum. Both figures are significant—the
higher is the national average income and the lower is the threshold
from which people are deemed to start becoming independent of
state support. It is a large group consisting of more than a third
of the full-time workforce.
3.2 Basic rate tax payers with this level
of income largely fall outside of the catchment criteria for financial
advice in the UK. Most free advice services cater to the remedial
needs of unemployed people or those already in serious debt. Meanwhile,
the financial services industry offers advice only when bundled
with a product sale. At these income levels, such sales are just
not attractive to most product providers who focus on the most
profitable customers—i.e. those on higher incomes.
4. OUR AIMS
4.1 The Resolution Foundation believes that
it is in the interests of all stakeholders (the individuals concerned,
the state, and the financial services industry) that the 8 million
basic rate tax payers currently without access to financial advice
are better served. To support this aim, we have three goals:
4.1.1 firstly, to examine the rapid development
of a new national financial advice resource funded through a public/private
partnership, which will make broad and impartial advice on all
important financial decisions at the point of need
4.1.2 over the medium-term, to design and
promote new ways for individuals to connect optimally their housing,
credit, saving, and pension decisions in order to maximise their
opportunities of creating future financial assets
4.1.3 in the longer-term, to support the
work of other organisations in critical areas including financial
education, and reforms of the product, fiscal and regulatory framework
4.2 On a limited income, this group of 8
million people needs to deal with financial complexity in daily
life, such as:
— student loan repayment programmes,
dovetailed with earnings capability
— credit options to finance necessary
purchases
— life events such as unemployment,
sickness and divorce, requiring a mix of basic protection and
savings programmes with continued access to state resources
— pension decisions, reflecting employer
options, individual choices, and state-sponsored schemes as they
evolve in the next few years
— steps taken immediately prior to
retirement, which can significantly improve income and access
to capital in older age.
4.3 The Resolution Foundation understands
the importance to individuals of making financial decisions. This
understanding has derived from the activity of Resolution plc,
which serves millions of investors who have made past contributions
to life assurance funds which subsequently closed to new business.
However, the Resolution Foundation is privately funded and its
views cannot be taken to reflect the views of Resolution plc.
5. THE ADVICE
GAP
5.1 It is particularly important that people
in this group make their financial decisions carefully. Yet many
of the 8 million are not well placed to do so. Most have low financial
awareness. Although the financial services industry spends more
than £1 billion promoting various products and services,
there is a need to provide clarity and direction that cuts through
the noise.
5.2 Crucially, few have access to the kind
of impartial advice, guidance and expertise that would help them
to get the key decisions right—at the time they need to
make them.
5.3 There is already a range of initiatives
that will benefit this group in the long run, including the Financial
Services Authority's Financial Capability Programme. Others, like
the Product Simplification Campaign, chaired by Ron Sandler, will
be of some benefit in the short term. The industry is also playing
its part.
5.4 This advice gap matters hugely to individuals
and to the state. By making bad basic decisions—for example,
by using available money for saving whilst leaving expensive borrowings
in place—individuals do themselves long-term financial harm.
This will be a financial cost to the state, if not immediately
then in the future, when people who have made inadequate provision
will be thrown back on the public benefits system.
5.5 The Resolution Foundation is currently
calculating the cost to the state of bad financial decisions.
We will argue that this cost could be greatly reduced by a new
national resource, structured as a public/private partnership,
spending a fraction of state savings annually on providing impartial
advice at the moment a critical financial decision is being made.
6. CAN THE
FINANCIAL SERVICES
INDUSTRY FILL
THIS GAP?
6.1 The financial services industry today
offers advice to the higher income population as part of a package
that includes sales of products by banks, life insurance companies
and limited availability of paid-for advice.
6.2 In the past, basic services were also
available to prudent households, through trusting relationships
with, for example, high street mutual building societies, to encourage
saving as the first step towards home ownership. Additionally,
door-to-door service was delivered by more than 20,000 insurance
agents serving the community.
6.3 The landscape has irreversibly changed.
The basic, community-style service has gone and our target group
of 8 million basic rate tax payers is unprofitable for the financial
services industry. We call this the advice `exclusion zone'.
6.4 The financial services industry is not
just a major contributor to the British economy, it is also a
vital stakeholder in social welfare. In recent years it has made
significant improvements in competitiveness, and thus the value
delivered to consumers.
6.5 It is unrealistic to expect industry
to return to the old model of broad service funded by higher margin
products. Instead, in a mixed economy, a partnership between industry
and government across all income groups is needed to address this
public need for advice.
6.6 The Resolution Foundation is committed
to exploring such a public/private partnership as a way of closing
the advice gap.
7. NEXT STEPS
7.1 In pursuing its goals, the Resolution
Foundation has begun to:
— commission independent research into
the most important life stage decisions people make, and to cost
fully the value of a good or bad decision both to the individual
and to the state
— consult widely with voluntary groups,
the Government, the Financial Services Authority, trade unions,
employers and the financial services industry on how best to tackle
the infrastructure gap for impartial advice
— develop some early drafts of concrete
and fully-costed proposals for how a national advice resource
might work in practice
— examine how such a solution might
be implemented and funded either by Government or industry or
both.
7.2 The Resolution Foundation plans to facilitate
a forum for all interested parties to share perspectives on the
advice gap and to discuss possible solutions for inclusion on
the agenda of Government and the financial services industry.
This will start with a conference scheduled for February 2006,
which will also provide an opportunity to examine initial outcomes
from current Resolution Foundation research activities.
7.3 As well as providing a comprehensive
review of the current state of progress towards enabling better
financial decisions, a holistic plan may emerge allowing all interested
parties to move towards action rather than prolonged analysis.
8. ACTION IS
NEEDED NOW
8.1 Inappropriate financial decisions are
being made every day. The future impact of these decisions seriously
hampers those on marginal income from accumulating assets over
their working lives and accrues a future cost to the state. Unless
addressed, this situation will deteriorate:
— with the financial services industry
spending over €1 billion on promoting its products, confusion
continues to grow
— consumer debt, already over €1
trillion, continues to increase with the potential for devastating
personal impact
— pension reform is necessary but has
the potential to add to personal confusion or, even worse, lead
people to believe their financial problems are resolved.
8.2 The Resolution Foundation believes passionately
in the need for urgent action to establish a public private partnership
in order to ensure the widespread availability of life-changing
financial advice for those who need it most.
January 2006
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