Select Committee on Treasury Thirteenth Report


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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