Select Committee on Treasury Written Evidence

Memorandum submitted by the British Bankers' Association

  1.  The BBA is the leading UK banking and financial services trade association and acts on behalf of its members on domestic and international issues. Our 219 members are from 60 different countries and collectively provide the full range of banking and financial services. They operate some 130 million personal accounts, contribute £35 billion to the economy, and together make up the world's largest international banking centre.

Executive Summary

  2.  BBA members have a continuing commitment to the financial inclusion agenda, which they have demonstrated in a number of ways; in particular through their participation in initiatives designed to improve accessibility and advance the shared goal of halving the number of households without a bank account, such as Basic Bank Accounts, funding of Post Office Card Accounts and the Saving Gateway pilot schemes. We believe that the increase in confidence and financial knowledge that participation in such schemes brings has the additional benefit of improving take-up of other financial services, such as savings products.

  3.  The banking industry is active in the area of shorter term savings and continues to be innovative in developing simple, easily accessible products. These products are of course regulated, provide protection for customers, and therefore should be differentiated from the type of schemes typified by the unregulated Christmas hamper market, which specialises in schemes designed to lock in savings for a fixed period to facilitate a planned one-off spend.

  4.  At the time of Farepak's collapse, the BBA voiced their concern that many of the affected customers were likely to be financially excluded and that this raised the issue of the advisability of people taking part in unregulated savings schemes outside the mainstream financial services. However, it also points to the need to ensure that accessible and secure savings products are available to service this market, and that consumers are provided with clear information on the relative risks and rewards of different products and schemes.

  5.  The BBA supports initiatives such as the Saving Gateway and results of the pilot studies so far are indicating that this type of scheme is capable of encouraging more people to save. However, we are keen that there should not be a "one size fits all" approach to shorter term savings products and that innovation should continue. Banks are at the forefront in designing savings products targeted at specific consumer groups and taking into account their particular needs.

  6.  Financial capability is a key concern in regard to consumers' understanding of the importance and benefits of saving to enable better financial planning and management. The BBA has participated closely in the work being driven by Government in this area and banks provide wide-ranging support for initiatives to improve financial literacy from childhood through to retirement. The benefit of savings for all should remain a key part of this agenda.

The Role of Saving in the Government's Strategy on Financial Inclusion

  7.  HM Treasury has set out within its recent report "Financial inclusion: the way forward" that financial inclusion is about improving accessibility to financial services to ensure that everyone is thereby enabled to: manage their money effectively, securely and confidently; plan ahead and to cope with financial pressure; and deal with situations of serious financial difficulty. Ready access to a full range of banking and other financial services will be required in order to deliver against this agenda, including those relating to the provision of savings products, which enable people to plan ahead to manage short-term variations in income and expenditure and to cope during periods of more serious financial pressure.

  8.  The BBA concurs with HM Treasury's view of what financial inclusion is about and remains committed to moving the agenda forward. Our members have, in particular, supported the initiatives to improve accessibility to basic banking services and, indeed, agreed a shared goal with HM Treasury in 2004 in relation to reducing the number of adults in households without a bank account. They have opened over a million Basic Bank Accounts for people who had previously had no bank account at all, are contributing £182 million towards the Post Office Card Account and continue to fund free independent debt advice.

  9.  In our view, the increase in confidence and financial knowledge that the provision of Basic Bank Accounts brings to the account holders has an additional benefit in that it also improves access to other banking services, including the wide range of savings products available. This is borne out by research recently carried out by HBOS, which has shown that the proportion of their social banking account customers in deprived areas also holding savings products stands at 31%. It is, of course, part of the core banking model that our members offer savings products on a short-term as well as long-term basis and with a range of different features. We refer below to the wealth of savings products currently available and to some of the innovative and accessible products launched in recent times.

  10.  We would, however, emphasise the need to maintain, and potentially increase, the breadth of offerings within the savings field in order to reach those who might otherwise be excluded from such products and in recognition of the different needs of different consumer groups. For example, the document prepared by Brian Pomeroy entitled "Review of Christmas savings schemes" suggests that the particular features of these types of schemes might make them more attractive to those on lower-incomes. Such features generally include the fact that customers are "locked-in" for a period of time leading up to Christmas and that savings can ultimately not be withdrawn as cash, but rather as goods or vouchers. Schemes of this nature may be inconsistent with the more mainstream savings model offered by most banks, but there are indications of products being developed to incorporate some of these features. This is also an area in which credit unions and the Post Office, with its wide network of outlets, have a key role to play. The additional effects of people saving via the credit unions being an increase in the funds then available for lending out. We do agree that Government should continue to encourage development of suitable savings products across all regulated providers to broaden choices available to consumers and ensure that consumers are properly informed of the relevant features of such products.

The Role of the Saving Gateway

  11.  In principle, the BBA supports initiatives such as the Saving Gateway that the Government has been piloting as a tool for encouraging saving amongst lower income households and for promoting engagement with mainstream financial services. The Saving Gateway is structured as a fixed term, regular savings account, with payments being matched by contributions from the Government up to a ceiling. In its recent responses to the Committee, Government has noted that the evidence from the pilots is showing that incentivisation to save through matching might provide a better framework for support of lower-income savers, for whom tax benefits are often not applicable. We will be interested to see how Government intends progressing this initiative and whether there is an appetite for committing further funds.

  12.  The Halifax is the financial institution given the sole responsibility for piloting the Saving Gateway. HBOS has reported that over 23,000 accounts were opened by the Halifax during the first pilot which, finished at the end of 2006, and approximately half of all savers say they intend to continue to save on a regular basis once the pilot is over. An independent review of this pilot concluded that the scheme was capable of encouraging people to begin saving on an on-going basis. The second pilot is still underway and awaiting review by Government to decide on the next steps, but the Halifax has noted their support for the initiative.

  13.  We also note that consideration is being given to incorporating features of hamper schemes, such as lock-ins, to make the Saving Gateway more attractive to users of such schemes. We have commented earlier on the need for there to be a wide range of savings products available to consumers and suggest that more work is done to understand the needs of specific target markets for each product and not to attempt a "one size fits all" approach. The key will be to ensure that consumers are made aware of the availability of different savings schemes and products and the risks and rewards associated with each.

The Role of Financial Capability in the Context of the Shorter Term Savings Market

  14.  The BBA supports the Government's long-term financial capability aspirations and considers that financial capability skills are important across all areas of personal financial management, including an understanding of the importance and benefits of saving. We have participated closely in the work carried out in this area to date and will be responding in due course to the Thoresen Review's call for evidence. In this regard we commented in our recent response to HM Treasury's consultation paper "Financial capability: the Government's long-term approach" that a Generic Financial Advice service should cover both debt and savings aspects of a consumer's financial circumstances. We also consider that the review should cover all types of saving schemes, including those typified by the Christmas hamper schemes, which are not covered by current financial services regulation.

  15.  Our members provide support to the provision of financial education in schools through organisations such as the Personal Finance Education Group, consistent with the view that financial education should start at the earliest possible stage with all children being taught financial capability skills. Financial education is something that everyone should have a right to, so that the next generation understands financial matters better. However, this is not something industry can drive on its own and we believe that the main thrust needs to come from Government to ensure that financial education is available to all, by making this a part of the core curriculum.

  16.  Banks also provide funding for organisations such as the Money Advice Trust, the CAB and Toynbee Hall in addition to offering free general advice to their customers, as part of the drive to improve financial capability skills amongst adults. There are numerous initiatives launched by the banks themselves as part of their community projects to reach out to those who might feel excluded from the financial system due to their lack of understanding. We consider that it is important to build on this work and provide a stronger focus on existing advice networks, through additional promotion, resources and funding, before considering any new developments in this area. This approach is most likely to achieve early and better long term results in making advice available to those who need it.

  17.  We have given emphasis above to the need for a wide range of products to meet the need of different consumers in relation to short-term as well as longer-term savings requirements. We would therefore also suggest the need to provide consumers with comprehensive accessible information and advice on the relative merits and risks associated with such products to enable informed choices to be made, whilst recognising that the level of choice itself is likely to be off-putting to those in lower-income groups. This may be particularly pertinent in the case of consumers attracted to Christmas hamper schemes, who may feel excluded from saving through the mainstream financial system but may also not be aware of the associated costs and disadvantages of hamper schemes, for example loss of interest.

Responses to the Recommendations Contained in Chapter 4 ("Savings for all") of the Committee's Twelfth Report of Session 2005-06 and in Paragraph 62 of the Committee's First Report of Session 2006-07

  18.  Within the Government's response to the Committee, we note the desire to restore consumer confidence in the hamper industry for this year in the wake of the Farepak's collapse, and that this is likely to be brought about by the establishment of ring-fenced accounts to protect advance payments made to providers. It is of course the case within the regulated financial services arena that any money effectively held on behalf of clients is afforded protection in some way. We think it is important that the distinction between regulated and non-regulated providers is made during any campaigns to inform consumers, together with any special measures being taken to improve asset protection.

  19.  We have referred earlier to the Government's response in relation to the pilot schemes on the Saving Gateway. This is an area in which our members are likely to have some involvement if it is decided to progress this initiative and, as noted, we await the decision on whether or not further resources will be committed.

The Design, Promotion and Regulation of Products in the Shorter Term Savings Market, Including Hamper Products, Christmas Savings Accounts and other Similar Products and Potential Products

  20.  When giving consideration to the design, promotion and regulation of all savings products careful consideration needs to be given to target markets, specific features and likely providers. There is currently a wide range of products available and our members continue to be innovative in this field, as part of the drive to promote the importance of the need to save on a cradle to retirement approach. For example, the introduction of Child Trust Funds was welcomed by the BBA and we support the extension of the ISA regime.

  21.  In regard to shorter term savings products in particular, reference to the products listed by Moneysupermarket indicates over 4,000 savings products, of which almost 2,500 are classified as "easy access". It is clear that there is no shortage of accessible shorter term savings products and additional products continue to be developed. However, the focus of future promotion activity will need to be on clarity of what is on offer. In particular, people at the lower-income levels might need more help in assessing what is an appropriate savings product and this should be considered as part of the generic financial advice solution.

  22.  Our members continue to make their products more accessible and attractive to consumer groups across the social spectrum, to encourage saving at every level. Lloyds TSB launched their "Save the Change" scheme whereby every time a debit card is used the amount is rounded to the nearest pound and the "change" placed into a savings account. As part of its financial inclusion agenda, the Halifax is piloting a Christmas Savings Account to its social banking customers, where savings can be taken out in the form of cash or high street vouchers, but with the protection of the Financial Services Compensation Scheme. To encourage savings, Barclays includes a savings account application with their Basic Bank Account ("Cash Card") brochure and enables regular savings by standing order for any amount. This segment is also attracting newcomers, such as ING Direct who offer "simple" savings and other products which can be operated by phone as well as online.

  23.  BBA members are clearly active in this area and it is possible that more will consider offering products with some of the specific features seen in Christmas hamper and other similar schemes. It is important to recognise that these schemes do provide a means of saving for those who, for one reason or another, may not feel able to participate in the mainstream financial market. Other providers are entering into the hamper market and may be more suited to provide products with the relevant features sought by consumers (eg credit unions and some major retailers) and the Post Office is also well-placed in this respect.

  24.  In regard to the regulation of shorter term savings schemes particular attention needs to be given to the range of methods of saving, which may not all be captured under the normal definitions of a savings product. For example, money paid under Christmas hamper schemes is not currently afforded any protection as the schemes are not considered as savings schemes in regulatory terms, but as advance payment for goods. Nevertheless consumers taking advantage of such schemes inevitably will consider that they are saving. It is clear that such schemes require better protections to be put in place for customer assets, as is the case for money held within mainstream financial products, particularly as the people attracted to such schemes are likely to be less well-able to bear any losses occurring.

  25.  The BBA and its members will continue to support initiatives in this area and to develop innovative shorter term savings products in the hope of encouraging savings amongst those who may currently feel financially excluded.

April 2007

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