Select Committee on Treasury Written Evidence

Memorandum submitted by Citizens Advice


    —  The Government's financial inclusion strategy and the remit of the Financial Inclusion Taskforce should be expanded to include savings. CAB evidence shows that a lack of savings often results in people falling into debt and becoming financially excluded.

    —  A savings element should be introduced into debt repayment arrangements accepted by creditors so that the schemes are more sustainable and to ensure that debtors do not build up further debts and that they develop savings behaviour. In addition, existing small savings should not be taken into account when initially formulating repayment schemes.

    —  Financial capability is vital in developing confident consumers with budgeting skills and in encouraging a savings culture. Long-term funding is needed to sustain and develop these programmes.

    —  The short term savings market should be brought under independent regulation as soon as possible to ensure that consumer investments are protected in future. Funding for a consumer awareness campaign on Christmas savings schemes and mainstream alternatives is welcome and Citizens Advice would be pleased to take part in this.

1.   Introduction

  1.1  Citizens Advice is the national body for Citizens Advice Bureaux (CABx) in England, Wales and Northern Ireland. The CAB service is the largest independent network of free advice centres in Europe, with 496 main bureaux in England, Wales and Northern Ireland. Bureaux provide advice from over 3,200 outlets, including courts, prisons, GP surgeries and hospitals, probation services and prisons. All CABx are registered charities.

  1.2  In this short memorandum Citizens Advice considers the issue of savings in four areas:

    —  The Government's strategy on financial inclusion

    —  Debt management

    —  Financial capability

    —  Regulation of the short term savings market

2.   The Government's strategy on financial inclusion

  2.1  Citizens Advice has extensive, first hand knowledge of the money problems experienced by the many people who turn to us for help. In 2005-06, Citizens Advice Bureaux in England and Wales dealt with 5.2 million enquiries, including 1.4 million relating to debt. Debt now generates more demand for bureau help than any other issue.

  2.2  In April 2006 Citizens Advice was awarded a total of £33 million over two years to provide more face-to-face debt advice from the Government's £45 million Financial Inclusion Fund. With this funding we have now recruited and are training an additional 350 full-time specialist debt advisers. This means that around 100,000 more people on very low incomes and facing serious debt problems will be helped through in-depth casework in 2006-07 and 2007-08. The announcement in March 2007 that this fund will run until 2011 was very welcome. Citizens Advice was also pleased to hear the Treasury's statement that the Government will be "mainstreaming financial inclusion into Departmental budgets and Public Service Agreements" in the long-term (Financial inclusion: the way forward, March 2007, p. 41).

  2.3  This commitment to financial inclusion is been commendable, but Citizens Advice considers that its scope should be broadened. Our 2006 survey of CAB debt clients, Deeper in debt, found that only 10 per cent of the sample had a positive balance in a bank or building society account and the average amount held was just £404. Though 44% had other assets, such as a vehicle or home insurance policy, in many cases the value of the assets was not realisable. Citizens Advice considers that savings should play a more central role in the Government's financial inclusion strategy.

  2.4  An earlier study of CAB clients' experience of debt (In too deep, May 2003, p.63) demonstrated the importance of savings in preventing debt problems from developing:

    "A high proportion of clients reported a change of circumstances involving loss of income or increased expenditure as a reason for debt. However when the actual financial effects of these changes were ascertained, in a significant proportion of cases the amount of change in income was relatively small, around 10% of annual income. This suggests strongly that for a proportion of CAB clients with debt problems the level of their commitments relative to their income was such that a relatively small change turned what were previously manageable payments into debt problems."

  2.5  Citizens Advice therefore strongly welcomes the Committee's recommendation in the Twelfth Report of Session 2005-06 (paragraph 118) which urges that "saving is accorded a higher priority in the context of financial inclusion". We also welcome the Government's positive response to this recommendation (Fourth Special Report of the Session 2006-07) and urge action in the short-term.

  2.6  Citizens Advice also welcomes the Committee's recommendation in the First Report of Session 2006-07 (paragraph 68) that the remit of the Financial Inclusion Taskforce "should be expanded to include access to savings and insurance".

  2.7  However, we regret that although the Taskforce's remit has been expanded to incorporate insurance the issue of savings remains outside the Taskforce's remit. Citizens Advice evidence on the absence of savings amongst those in debt, suggests that savings are a key insurance against debt problems and could prevent debt problems and the concomitant cycle of financial exclusion. Indeed CAB evidence of popular insurance schemes such as payment protection insurance suggest that these products often fail the most vulnerable in society. The Office of Fair Trading upheld these concerns in its response to the 2005 Citizens Advice super-complaint on the issue.

3.   Savings and debt management

  3.1  The CAB service money advice process has been in place for 30 years. It aims to preserve the client's home, fuel supplies and liberty, make them aware of their rights and responsibilities and help them make informed choices about how they deal with their debt problems. As part of this process CAB advisers assist clients in agreeing repayment schedules with creditors.

  3.2  In order to work out a repayment plan for the client, the adviser will fill in a financial statement with the client, outlining the clients essential expenditure, helping them to budget, maximise their income and indicating the amount of surplus money left over to repay their debts. This financial statement is used to negotiate repayments with their creditors.

  3.3  These debt repayments are based on the amount of money left over after paying for essentials such as mortgage or rent, housekeeping, travel and fuel. There is very little flexibility allowed by the credit industry when assessing an individual's means, and so expenditure is often kept to a bare minimum. As a result, repayments are often at the limit of affordability for the debtor with the effect that payments may be missed if there is a minor or temporary change in circumstances or an increase in expenditure. For example, the client is self employed and loses some time due to sickness, or a client needs to replace an item such as a cooker. This would mean the client would need to re-negotiate the debt each time and undermines the long term sustainability of the repayment.

  3.4  To remedy this Citizens Advice recommends that debtors should be encouraged, where possible, to save a small amount each month or week to build up a small "buffer" or "reserve". This should be seen as good practice and an allowable expense by the credit industry. As well as improving the sustainability of the schemes it would encourage debtors to save. The Insolvency Service allow individuals a surplus amount after meeting essential needs to allow for budgeting and unforeseen expenses. This also helps to ensure that the individual can maintain his/her income repayment order.

  3.5  Advisers should be assisting clients to make small regular savings by referring them to local organisations such as Credit Unions and advising on the benefits of savings. This would hopefully enable debt clients into longer term financial health, at the same time as sorting out the pressing debt issues.

  3.6  Citizens Advice recommends the use of the Common Financial Statement (CFS) which is a Money Advice Trust and British Bankers Association initiative. The CFS is a standard format along with agreed "trigger figures". The credit industry has agreed to accept offers made by money advisers for their clients as long as discretionary spending such as housekeeping is under the agreed trigger figure. It would be possible for there to be an agreed trigger figure for savings incorporated into the common financial statement to encourage debt clients to save. Further steps should also be taken to ensure that where possible clients' existing savings up to a reasonable amount are protected.

4.   Financial capability

  4.1  Citizens Advice considers that developing financial capability is key to improving budgeting and borrowing skills and helps to encourage a savings culture.

  4.2  The financial capability programme Financial Skills for Life was established by Citizens Advice in partnership with Prudential plc in April 2002. It was designed as a response to the Citizens Advice evidence report Summing Up (November 2001) which showed that CAB clients are often ill-equipped to make crucial financial decisions across a range of personal finance matters. The report also highlighted the growing number of bureaux carrying out financial skills work in their communities as trusted and independent sources of information.

  4.3  Nine bureaux were provided with three year grants to test the delivery of face-to-face educational programmes to a wide range of hard to reach communities across England and Wales. An independent evaluation of this work showed the overall success of the programme. The work, undertaken by ECOTEC Research and Consulting Ltd in 2005-06 concluded that the nine bureaux made a direct and positive difference to participants' lives.

  4.4  The evaluation found that the clients benefited in a range of ways, particularly that the clients had developed a greater understanding of budgeting and saving strategies. Importantly the benefits were sustained over time. A sample of participants surveyed some months afterwards had changed their patterns of behaviour and enjoyed improved economic well-being. Almost all of the sample had improved their savings position and had kept to budgeting plans.

  4.5  Over 80 bureaux throughout England and Wales are now involved in financial capability work in their communities. The number has grown substantially over the last four years. Building on experience gained through delivering money advice services, these bureaux are supporting young people and adults to develop the skills and confidence to budget, borrow and save with genuine confidence. But this still represents about 20% of all bureaux, compared with the 100% providing some level of debt advice.

  4.6  We have benefited from significant funding from Prudential and Barclaycard. But resources are the major limitation for bureaux wanting to do financial education work. Having a dedicated worker in every bureau would cost around £20 million pa. We estimate that such an expansion would allow us to help one million "hard to reach" people develop their financial capability skills each year.

  4.7  Bureaux involved in financial capability work often work closely with other delivery agencies in their communities. This year, as part of its Financial Skills for Life programme, Citizens Advice has provided grants to enable bureaux to establish 14 regional forums. These forums enable bureaux, credit unions, housing associations and public sector interests to exchange information, share skills and resources and develop opportunities for joint working. These forums benefit from one year funding from Friends Provident Foundation and Abbey Charitable Trust as well as Prudential.

  4.8  Bureaux work with front-line workers is key to maximising the reach of our financial capability programme. HM Treasury's Long-term Approach to Financial Capability (published in January 2007) recognises the Citizens Advice work with the FSA since 2005 in delivering financial capability education to those working with young adults not in education, employment or training. Feedback from participants attending the intensive one-day courses has been very positive. It has reinforced our view of the importance of such frontline workers having a basic understanding of eg budgeting, borrowing and banking issues—and the extent to which there is a knowledge gap.

  4.9  Frontline workers will typically have the chance to share their improved skills with several tens of clients every year. We have therefore extended this approach within the substantial Barclaycard-funded three-year "Horizons" programme with lone parents groups. We are also piloting HMRC-funded bureaux training for those working with elderly and migrant groups. Independent evaluations are being undertaken of all these programmes, the first of these will be complete by summer 2007.

  4.10  Financial Capability is a long term project, as attitudes, lives and finances take time to turn round. For many, it is only when budgets and borrowing are under control that saving becomes a realistic option. Funding for financial capability tends to be short-term and too often linked to pilot schemes providing short-term fixes. More sustained programmes with long-term funding, encouraging local and national partnerships, are needed.

5.   Regulation of the short term savings market

  5.1  People on limited incomes need to plan ahead for times of higher than average expenditure. Schemes such as those provided by Farepak are intended to allow consumers to do exactly this. However, the collapse of Farepak left 150,000 such people without their savings, proper compensation or a regulatory safety net. Many CAB clients were affected by these events.

    A young single mother with five children sought advice from a CAB in Wales on hearing of the company's collapsePembroke & District 57197628. She had finished paying her contributions to Farepak early, and was awaiting £900 worth of vouchers.

    A bureau in Berkshire Reading CAB found that its clients had lost an average of £500 through the collapse of Farepak. The bureau mounted a fundraising campaign with the local newspaper which uncovered that £111,000 had been lost by 192 families in the local area.

  5.2  Consumers are rightly encouraged to save and to plan their expenditure. Indeed, the Government has worked to encourage this savings behaviour through schemes such as the Savings Gateway. It is vital that steps are taken to ensure that the collapse of Farepak does not undermine savings behaviour.

  5.3  Citizens Advice welcomes the Committee's recommendation in the First Report of Session 2006-07 (paragraph 62) which notes that `the Farepak case has highlighted a serious lack of consumer protection' and urges that the Government, in conjunction with the OFT and FSA, should consider whether appropriate safeguards are in place.

  5.4  Citizens Advice regrets that the Government have concluded in their response to this recommendation (Fourth Special Report of the Session 2006-07) that such short-term savings schemes should not be subject to independent financial services regulations. Though we do welcome the Government's commitment that they will work with the FSA and OFT to examine the regulatory framework in which Farepak operated, we are however concerned about the amount of time that it will take to conclude this process.

  5.5  Citizens Advice broadly supports the recommendations of Brian Pomeroy's Review of Christmas saving schemes (March 2007) particularly that the DTI must urgently ensure that consumers' investments are protected in future.

  5.6  We also strongly welcome the Government's announcement on 28 March 2007 of £1 million funding for the OFT to conduct a consumer awareness campaign on Christmas savings schemes and mainstream alternatives. Citizens Advice would be pleased to take part in the development and delivery of this campaign.

April 2007

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