Memorandum submitted by the Financial
Services Authority
INTRODUCTION
1. This memorandum is submitted by the Financial
Services Authority in the context of the Committee's further inquiry,
announced on 29 March, into saving for all and shorter-term savings
products.
2. The memorandum:
— considers the role of financial capability
in the shorter term savings market;
— outlines work the FSA has undertaken,
with others, following the Farepak hamper scheme collapse; and
— notes our current review of the Basic
Advice regime.
A. The role of financial capability in the
context of the shorter-term savings market
3. Making sound financial decisions is an
essential life skill. Improving the UK's financial capability
is a fundamental part of enabling people to make these sound decisions.
This applies as much for decisions on savings, short and long-term,
as for bank accounts or insurance plans.
4. As the Committee will recall, the FSA's
2006 Financial Capability Survey measured financial capability
in terms of how well people make ends meet, keep track of their
finances, plan ahead, choose financial products, and stay informed
about financial matters.
5. The Survey found that:
— large numbers of people from all
sections of society are not taking basic steps to plan ahead;
— over-indebtedness does not affect
a large proportion of the population—however, when it does
occur it is often severe;
— people do not take adequate steps
to choose products to meet their needs;
— the under-40s are typically much
less financially capable that their elders; and
— unless steps are taken to improve
levels of financial capability, we are storing up problems for
the future.
6. The first of these findings is particularly
relevant to this inquiry: only 61% of the UK population hold a
savings account, and nearly half of adults in the UK have no savings
at all.
7. Our National Strategy for Financial Capability
aims to address these key findings by getting the right information
to people at the right time and to reach people at certain points
in their lives when they need help. It is designed, among other
things, to improve the financial capability of children and young
adults, to lay strong foundations for the future. It provides
employees with ready access to information in their place of work.
It targets resources to people at crucial life stages, for example
when they are starting a family. And it provides more generally
relevant, user-friendly and accessible information and money advice,
to help with planning and choosing products, including savings.
8. One important element in our direct contribution
to improving financial capability is the information we provide
on our Moneymadeclear website (www.Moneymadeclear.fsa.org.uk).
This includes an online guide, "Saving for tomorrow",
which provides clear, simple messages on how to take stock of
one's finances and take action, in both the short and longer term.
Our information on different types of savings products includes
credit union accounts and will soon include information about
hamper schemes and other alternatives to mainstream saving (see
paragraph 11 below).
Farepak and Christmas saving schemes
9. In its 1st report of 2006-07, the Committee
highlighted the collapse of Farepak Food & Gifts Ltd and the
lack of protection for consumer pre-payments to this scheme. It
recommended that Government, with the FSA and the OFT, consider
the implications of this and how consumer pre-payments could be
safeguarded in the future. This would also examine whether an
expansion of the FSA's regulatory responsibilities was necessary
or whether the appropriate degree of protection could be achieved
by other means.
10. We worked closely with the OFT, Treasury,
the DTI and Sir Brian Pomeroy to deliver the consumer protection
needed in future for those who use hamper schemes. We contributed
fully to the report OFT submitted to DTI in December 2006. Our
contribution is found at paragraphs 63-76 of the report. It notes
the principles which underpin our regulation of deposit-takers
(including credit unions) and the costs and benefits of such regulation,
including those associated with the Financial Ombudsman Service
and the Financial Services Compensation Scheme. It also describes
our current regulatory approach to pre-paid funeral plans. We
believe that the OFT report represents a proportionate response
to the problem, especially given the Government's and FSA's commitment
to better regulation.
11. As noted in Sir Brian Pomeroy's report
on Christmas savings schemes, there are clear implications for
the FSA's work on financial capability. As the Committee will
be aware, we believe that our work in leading the UK's National
Strategy for Financial Capability is one way we can help address
financial exclusion. We have agreed to enhance the existing savings
information on our Moneymadeclear website by including information
about Christmas hamper schemes and other alternative forms of
saving. The website, providing impartial financial information,
forms an important part of the National Strategy, which is designed
to improve the confidence and capability of UK consumers. Use
of our consumer website is increasing; in the financial year 2006-07,
for example, we recorded over 2.2 million visits, just under 750,000
of them in the last quarter.
12. We will also promote our consumer information
to those trusted intermediaries who are our partners in the National
Strategy, particularly those who work directly with the sort of
consumer likely to use hamper schemes.
13. One part of the National Strategy is
the FSA's Innovation Fund. This was launched in June 2005 to provide
support for innovative projects run by voluntary organisations,
and in March 2007 we announced the latest round of funding. For
example, one recipient was Coast and Moors Voluntary Action, based
in Scarborough and Whitby, which was awarded £16,000. Working
with women, especially those in disadvantaged groups, the project
will tackle debt and overspending issues which can occur over
Christmas, so that they can apply these skills throughout the
year in day-to-day lives. The project aims to replicate the resources
across the region and North Yorkshire.
Basic Advice
14. In its 12th report of 2005-06, the Committee
noted that "the restricted range of products available under
the basic advice regime, combined with the perception that the
scheme has not been as light touch as expected, has led to a low
number of major providers introducing the basic advice regime"
and recommended that the FSA conduct a full review of the basic
advice regime.
15. We introduced Basic Advice in April
2005 as a new, more streamlined form of regulated advice for the
sale of "Stakeholder" savings and investment products.
As the Committee is aware, we are now planning a review of the
Basic Advice regime. At the end of May we will publish a policy
statement setting out the scope and timetable for this review,
taking into account the suggestions we received from respondents
to our October 2006 consultation paper. We will keep the Committee
informed of progress.
April 2007
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