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
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.
1.1 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
Regulation of the short term savings
2. The Government's strategy on financial
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
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
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
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 issuesand 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,
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.