Conclusions and recommendations
Progress on the financial inclusion agenda
1. We
discuss the Government response to a number of individual recommendations
later in this Report. However, we welcome the positive tenor of
the Government response and the range of actions it has taken
to give substance to that positive response. (Paragraph 4)
2. Although we make
more specific comments about aspects of the Government's financial
inclusion strategy document published in March 2007 later, we
welcome its publication and the establishment of the Ministerial
working group on financial inclusion. We look forward to examining
the Government's financial inclusion action plan and further proposals
of that working group in due course. (Paragraph 7)
3. We welcome the
Government's commitment to continued funding to enable maintenance
of the current level of intensity of action to promote financial
inclusion up to 2010-11. We expect to examine the final allocation
of resources to the Financial Inclusion Fund following the announcement
of the final outcome of the 2007 Comprehensive Spending Review.
(Paragraph 8)
4. We welcome the
commitment to continued funding of face-to-face money advice up
to 2010-11 and look forward to learning more about the Government's
evaluation of projects so far. (Paragraph 9)
5. We welcome the
Government's commitment to a continuing and expanded role for
the Financial Inclusion Taskforce. (Paragraph 10)
6. We look forward
to the publication by the Financial Inclusion Taskforce of further
information on the opening and operation of basic bank accounts.
We also look forward to a statement by the Government later this
year about further action agreed between the banks and the Government
to ensure that the number of people who are "unbanked"
is further reduced. We expect to continue to monitor developments
in this area, possibly in the context of our forthcoming inquiry
into Competition in Retail Banking. (Paragraph 15)
7. We welcome the
progress so far achieved towards the target of providing over
600 new non-charging cash machines and look forward to examining
further progress in due course. (Paragraph 17)
8. In view of the
steps that have been taken to enhance the flexibility of identity
requirements relating to money laundering regulations, we are
disappointed that the Government has apparently discounted the
option of making even limited cash deposits into the successor
to the Post Office Card Account. We recommend that the Government
re-examine this possibility in conjunction with the FSA as a matter
of urgency. We note the Minister's confidence that the process
of tendering for a successor to the Post Office Card Account will
strengthen the Post Office network, and we will monitor the progress
of the tendering process and the migration to the successor product
to see that this confidence does not prove to be misplaced. (Paragraph
20)
9. We welcome the
Government's plans for the nationwide extension of projects to
tackle illegal lending. We recommend that the Government set out,
in its response to this Report, any evidence of the effectiveness
of the projects so far in reducing levels of illegal lending,
and that it report progress regularly thereafter. (Paragraph 22)
10. In view of the
urgency which we attached to progress on data-sharing within the
credit industry as a method of increasing access to affordable
credit, we regret the lack of reported progress on this matter
by the credit industry and the Government. We recommend that the
Government, in its response to this Report, provide a full account
of actions taken in this area and proposed further actions. (Paragraph
23)
11. We welcome the
Government's commitment to an objective of achieving a step-change
in the coverage of third sector lenders and its actions so far
in pursuit of that objective, including its promotion of a dialogue
involving senior representatives from the banking sector and its
further financial support for capacity-building among third sector
lenders. We expect to continue to monitor progress in relation
to this new objective, including through examination of the contribution
of banks to support for third sector lenders. (Paragraph 24)
12. We recommend that
the Government initiate a dialogue with the credit industry to
examine whether arrangements for the repayment for debt, including
the Common Financial Statement, could be adapted to provide increased
provision for and encouragement of saving at a suitable level
by those in debt. (Paragraph 25)
13. The Government's
response to our conclusions and recommendations relating to the
Social Fund suggests a lack of commitment to improving the Social
Fund. We wish to see a renewed commitment from the Government
to the reform and future funding of the Social Fund as part of
the 2007 Comprehensive Spending Review, bearing in mind that there
will be a considerable time lag before measures to achieve a step-change
in the coverage of third sector lenders make a significant impact
on the capacity of that sector. (Paragraph 27)
14. We look forward
to the publication of the Government's financial capability action
plan by the end of 2007 and we will continue to monitor the activities
of the FSA and the Government to enhance financial capability.
(Paragraph 29)
15. We welcome the
Government's commitment in principle to the development of a national
generic financial advice service and the establishment of the
Thoresen review to examine its feasibility. We note the emerging
themes of that review and look forward to examining its outcome.
(Paragraph 32)
16. We welcome the
Government's decision to treat insurance as a priority area within
its financial inclusion strategy and the initial investigation
of the nature of the problem of exclusion from insurance which
is underway. We recommend that the Government and the Financial
Inclusion Taskforce report on the outcome of their initial investigation
in response to this Report. (Paragraph 33)
Saving and financial inclusion
17. Evidence
received during the current inquiry has reinforced our view that
saving should be accorded a high priority in the Government's
financial inclusion strategy. We welcome the Government's acceptance
of our earlier recommendation on this matter, and look forward
to the formal extension of the remit of the Financial Inclusion
Taskforce to cover savings issues, which we wish to see promulgated
before the end of 2007. (Paragraph 54)
18. The current inquiry
has provided some signposts for ways in which savings issues could
be taken forward in the context of financial inclusion. The statement
in the Government's latest strategy document that "saving
accounts should be available to all who need them" is not
ambitious. That part of the goal concentrates on a formal saving
product. It does not include any specific target or means by which
progress against that part of the goal can be measured. It does
not deal with the issue of the promotion of entry into saving,
as opposed to availability. We recommend that the Government's
strategy on saving and financial inclusion be formulated in consultation
with the Financial Inclusion Taskforce and with the following
aims:
- to acquire further information about the extent
of personal saving of varying kinds, having particular regard
to saving patterns among individuals and households with lower
incomes and to the extent and variety of informal saving;
- to ensure that public policy is concerned with
the motivations for saving and with ways of promoting saving for
particular purposes, as well as with the promotion and regulation
of particular savings products;
- to ensure that public policy on saving pays greater
regard to informal means of saving as well as formal saving products;
- to ensure that public policy on savings pays
greater attention to the saving needs of lower income individuals
and households and to shorter term as well as longer term products;
- to ensure that the objectives of National Savings
and Investments give proper weight to the encouragement of savings;
- to establish a measure of personal saving within
the economy and at particular income levels that reflects people's
own understanding of what constitutes saving and that captures
the extent of informal saving; and
- to set a target for increased savings among lower
income households and individuals and enable progress against
that target to be measured. (Paragraph 55)
Christmas saving schemes
19. The
collapse of Farepak caused distress for many families. Although
we have not examined the particular circumstances of that collapse,
we have heard evidence suggesting that the "hamper"
market does not operate with a flawed business model, and the
"hamper" product has distinct positive features enabling
it to compete within the broader Christmas saving market. The
establishment of trust accounts by the Park Group and the prospect
of the adoption of such accounts across the "hamper"
market go a considerable way towards allaying concerns about consumer
protection within the market. To reinforce confidence in that
market, we want the Christmas Prepayments Association to agree
a code of practice that meets all criteria within the Office of
Fair Trading's Consumer Codes Approval Scheme and is thus approved
by the Office of Fair Trading. Provided that the operation of
trust accounts within that market proves to be satisfactory, it
seems likely that regulation by the Financial Services Authority
of the hamper market will not prove to be proportionate or appropriate.
An extension of FSA regulation and the additional costs associated
with such regulation would create a risk that consumers might
choose other, cheaper informal saving products with lower levels
of consumer protection. (Paragraph 86)
20. The collapse of
Farepak has highlighted the lack of attention that public policy
had paid to a range of informal savings and prepayment vehicles
with inadequate consumer protection. Notwithstanding our specific
conclusions about regulation of the "hamper" market,
we remain concerned about the limitations of consumer protection
for prepayments generally. We recommend that the Government and
the Office of Fair Trading, as a matter of urgency, consider:
- what further steps can be taken to extend the
coverage of consumer protection for prepayments through codes
compatible with the Consumer Codes Approval Scheme;
- what further measures can be taken to schemes
for the protection of prepayments that are affordable to the businesses
concerned;
- how far implementation of the Unfair Commercial
Practices Directive will permit more effective enforcement action
against inappropriate prepayment requirements; and
- what further measures can be taken to promote
consumer awareness of the risks associated with prepayments.
We further recommend that the Government report on
progress in each of these areas in its response to this Report.
(Paragraph 90)
21. The original purpose
envisaged for a consumer awareness campaign by the Pomeroy was
to respond to the needs and concerns of consumers affected by
the collapse of Farepak relating to Christmas 2007. It is not
immediately evident that the campaign begun by the Office of Fair
Trading in June 2007 will be effective in responding to this intention.
We are concerned by the inconsistencies in the evidence from the
Office of Fair Trading about the best time for a national advertising
campaign directed towards saving decisions for Christmas 2008.
We recommend that, before committing to expenditure for a national
advertising campaign, the Treasury review the conduct of the campaign
by the Office of Fair Trading and ensure that the Treasury is
satisfied that the appropriate timing has been determined to inform
consumers in making saving decisions for Christmas 2008. We expect
the Treasury to report on the outcome of that review in its response
to this Report. (Paragraph 96)
22. We welcome the
inclusion of informal saving within the range of matters to be
considered by the Thoresen review of generic financial advice.
We look forward to reviewing the proposals of that review on how
such advice can give due weight to informal saving options, bearing
in mind the risks to the consumer that continue to be associated
with some informal saving options. (Paragraph 97)
The Saving Gateway
23. Any
national Saving Gateway ought to be closely targeted on those
individuals and households with the lowest incomes and which are
currently least likely to have savings in order to maximise the
prospects that the Gateway will attract new saving and ensure
value for money. Subject to considerations relating to the ease
of identifying eligibility, we would expect to see a national
Saving Gateway using eligibility criteria broadly similar to those
of the first pilot project. (Paragraph 102)
24. The pilot projects
for the Saving Gateway have proved conclusively that the principle
of matching, whereby the Government makes a contribution to an
individual's account for every pound that individual saves up
to a fixed limit, is essential to the success of any national
Saving Gateway. We accept that, on grounds of affordability as
well as other grounds, a national Saving Gateway could be based
on a level of matching lower than pound-for-pound, and that a
lower level of matching might be effective in encouraging saving
among low-income individuals and households. However, we note
that certain forms of saving by the highest income groups obtain
subsidy through tax relief at an effective rate of 40%, and we
consider that the level of subsidy in percentage terms for those
on the lowest incomes ought to be higher. On grounds of simplicity,
this argues for a rate of matching of 50 pence for every pound
invested by the individual, although we also see merit in the
proposal that a pound-for-pound match rate might be set for saving
in the initial two months of an account to encourage participation.
(Paragraph 106)
25. The evidence which
we have received during this inquiry reinforces the impression
that low-income households are most likely to be able to save
for short periods, and may be deterred by products with a longer
maturity period. We recommend that any national Saving Gateway
account be designed to operate for no more than 18 months. We
see no reason why those who continue to be eligible should not
be able to open a further account following maturity of an initial
account for as long as the Saving Gateway operates. (Paragraph
107)
26. We are not convinced
that the Saving Gateway product is suitable for development in
a competitive market. We would not wish to see potential customers
confused by a multiplicity of offerings. However, we recommend
that, in designing what should be a single, unified product for
a national Saving Gateway, the Government have regard to the desirability
of ensuring that the product can be promoted by, and accessible
through, as broad a range of financial institutions as possible.
(Paragraph 109)
27. The introduction
of a national Saving Gateway would be the most important single
step towards achieving the aim of increasing the level of saving
among low-income individuals and households. Although a national
scheme would involve a substantial public expenditure commitment,
this seems likely to amount to little more than one tenth of the
annual subsidy for Individual Savings Accounts and Personal Equity
Plans and little more than one twentieth of the annual subsidy
for employee pension savings, both of which categories of subsidy
are less likely to be utilised by those low-income households
for whom shorter term saving is most important and beneficial.
We recommend that the Government launch the Saving Gateway on
a national basis at the earliest practical opportunity. (Paragraph
112)
Savings and credit unions
28. We
welcome the Government's commitment to consult on changes to the
current, outdated legislative framework within which credit unions
operate and the Government's subsequent publication of a consultation
document. We note that a Bill relating to credit unions and co-operatives
does not appear in the draft legislative programme for Session
2007-08. We recommend that the Government commit itself to publishing
a draft Bill on that subject in the first half of 2007 in order
to facilitate pre-legislative scrutiny and to enhance the prospects
for the inclusion of such a Bill in the legislative programme
for Session 2008-09. (Paragraph 116)
29. In order to provide
further impetus and strategic direction to the preparation of
new legislation relating to credit unions, we recommend that the
Government match its objective to achieve a step-change in the
coverage of third sector lenders with an objective of achieving
a step-change in coverage of third sector saving institutions.
We further recommend that it set a specific target by which progress
in relation to that objective can be measured. That target might
be to raise the savings held by credit union members of around
£428 million in September 2006 to over £1 billion by
the end of 2010. (Paragraph 117)
30. We recommend that
the new legislation include a much more flexible definition of
the "common bond" for membership of credit unions. (Paragraph
118)
31. We recommend that
the new legislation permit organisations and corporate bodies
to become members of credit unions. (Paragraph 119)
32. We recommend that
the new legislation permit credit unions to pay interest on savings.
(Paragraph 120)
33. We welcome the
inclusion of a possible name change from "credit unions"
to "community banks" within the Government's consultation
on legislation. We look forward to learning about the responses
to that consultation. We recommend that, in parallel with legislative
consultation, the Government explore with credit unions and others
ways in which the modern role of credit unions, including their
functions as saving institutions and providers of current accounts,
could be more effectively promoted in the branding and promotion
of credit unions, possibly by use of the term "credit and
savings unions". (Paragraph 121)
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