Select Committee on Treasury Written Evidence

Memorandum submitted by the Building Societies Association


  This memorandum highlights the importance of financial inclusion to the retail savings operations of building societies.

  Saving provides security and opens opportunities, enabling people to develop from using financial products merely for transactions into more advanced products and saving for longer term needs. Building societies help to promote financial inclusion by offering simple savings accounts, many allowing deposits of only £1. They show a greater propensity to keep branches open than banks and the Post Office, and are major contributors to the success of cash ISA and CTF cash accounts.

  The BSA supports the principle of the Saving Gateway initiative. Building societies are well placed to provide the Saving Gateway as trusted savings providers with strong links to their local communities. The scheme needs to be carefully designed in order to achieve the goals of increased financial inclusion and capability while still being viable for financial service providers to supply.

  Financial capability is a crucial determinant of saving behaviour. The less financially capable an individual is, the more important psychological and behavioural influences are on their decision, rather than the rate of return. Financial education should be made compulsory in schools to develop financial skills and instil better understanding of future financial requirements in individuals.


  1.  The Building Societies Association is the trade body representing all the UK's 60 building societies. These societies have total assets of over £310 billion, around 15 million adult investors and over 2.8 million borrowing members. Building societies account for 19% of UK retail deposits and 18% of residential mortgage loans outstanding. They operate through around 2,100 branches and, including their subsidiaries, employ nearly 50,000 staff.

  2.  The Building Societies Association welcomes the opportunity to contribute to the Treasury Select Committee's inquiry into financial inclusion. Promoting financial inclusion is inherent in much of societies' core business. This can be seen in the simple saving products offered by societies, and by the much greater propensity of building societies than banks or the Post Office to keep their branches.


  3.  The Building Societies Association strongly believes that saving plays a number of important roles in financial inclusion. These mainly relate to the security and the opening of opportunities that a base of savings provides.

  4.  Research by the Financial Inclusion Taskforce shows, not surprisingly, that those without a savings account tend to be on low incomes[6]. These people are more likely to suffer shocks to their income due to illness, unemployment, divorce and so on. They are also less likely to be insured, should anything go wrong. A stock of savings enables people to respond to sudden expenditure needs or drops in income, and prevents these events developing into deeper financial problems that can keep people excluded. Saving can also help alleviate the pressures on household finances caused by the lumpy nature of expenditure through the year. As such, saving allows individuals to plan with more certainty. Having an accumulated asset also enables opportunities, such as higher education, house purchase, and so on, to be realised without financial constraints becoming prohibitive.

  5.  Simple savings accounts assist in financial inclusion because they can be one of the first ways that individuals deal with financial institutions. This develops financial capability, and allows the individual to accumulate an asset that they can then invest, or use to achieve other aims. This applies particularly to children, and constituted part of the rationale for the Child Trust Fund. Short-term saving therefore provides the basis on which people can develop from using financial services merely for transactions to access more advanced products and markets. Short-term saving can provide foundations in terms of financial capability and financial security. In this way, short-term saving can be a bridge towards longer-term saving. BSA research has found some evidence that a hierarchy exists in saving behaviour[7]. By overcoming the barriers to saving in the short-term, it can become apparent to the saver that the act of saving itself is not overly arduous.

  6.  Reducing the barriers to financial inclusion is inherent in the savings operations of building societies. Most societies offer simple savings accounts which can be opened with a minimum deposit of £1, many of which offer instant access to the deposited money. Many of these can be accessed with a passbook, allowing savers to immediately see the balance on their account.

  7.  In 2004 the BSA commissioned Dr. Karl Dayson of the University of Salford to conduct independent research into building societies' contribution to the promotion of financial inclusion[8]. The research found that most building societies had products suitable for new savers, with 57% allowing deposits of less than £1 and 94% allowing withdrawals of a £1 or less. 50% of societies allowed "savings holidays" on their accounts, and 94% had accounts capable of receiving state benefits. The research also found evidence of societies being as flexible as possible with the identification and verification requirements in the Joint Money Laundering Steering Group guidance.

  8.  Building societies are major providers of ISAs and in respect of cash ISAs, societies are market leaders, accounting for over 37% of cash ISA balances (£46 billion out of £124 billion in February 2007). This is more than double building societies' share of the market for cash-based savings as a whole and demonstrates both building societies' commitment to the cash ISA market and their success in attracting funds to this important product.

  9.  ISAs are sometimes criticised as being the preserve of the wealthy middle classes. The figures do not bear this out. In fact, the cash ISA has been particularly popular among those on lower incomes. For example, in 2003-04, the latest year for which HMRC figures are publicly available, 72% of cash ISAs were subscribed by people on annual incomes of less than £20,000 and only 12% were subscribed by those with incomes of £30,000 or more. Nor is the ISA confined to older savers. 24% of those subscribing to an ISA in 2003-04 were aged 34 or under.

  10.  Building societies also are the main providers of Child Trust Fund cash accounts. Of the 19 providers offering the cash option, 13 are building societies. Where people use institutions that offer both cash and stakeholder CTFs, 70% have opted for cash accounts, and a quarter of all CTFs that parents have opened have been cash accounts. Those on the margins of mainstream financial services are more likely to prefer to deal with cash products rather than starting with an equity based product.

  11.  The Building Societies Association was pleased to observe that Brian Pomeroy's recent review of Christmas saving schemes acknowledged the contribution made by societies in providing festive saving accounts. Scarborough, Skipton, Furness and Dudley building societies all responded to the collapse of Farepak by introducing new products. These accounts have features that appeal to those who use Christmas saving schemes, such as allowing small regular deposits and locking away the money until it can be spent on Christmas items.

  12.  All the new festive savings accounts offered by societies had opened by 1 February 2007, and one was available as early as December 2006. This is an example of societies responding to the needs of the less financially capable by trying to increase awareness of the savings options available.

  13.  The majority of societies also take steps explicitly to tackle financial exclusion, whether this be sending staff into local nursing homes to enable elderly members to manage their savings or improving access and services for those with disabilities[9].

  14.  Branches are important to financial inclusion as lower income customers tend to be heavier users of branches. An independent report by the University of Nottingham[10] showed that building societies had a much better record than banks in maintaining a branch presence, particularly in areas of social deprivation. The chart below shows the difference in branch closures between building societies, banks and the Post Office across the UK as a whole.

  15.  The Nottingham University report found that building societies gave greater consideration than banks to the impact on customers in the communities they serve when assessing branch performance. Instead, the report found that because banks are owned by shareholders, pressure to reduce costs outweighs all other factors in their decision. Those societies with ATMs also extend these wider considerations to the siting of their cash machines.


  16.  Building societies await with interest the publication of the final results of the second trial of the Saving Gateway. The BSA supports the principle of the Saving Gateway. Several building societies have already volunteered to meet with Treasury officials to discuss the implications of the results on the design of the scheme, and to consider the practicability of running the scheme across the UK.

  17.  At this preliminary stage, building societies appear well suited to the provision of the Saving Gateway scheme. Participants in the second trial viewed building societies as more trustworthy, more ethical and better at looking after their customers than banks[11]. In order to make it a viable option for societies to provide the product, the final scheme design needs to be simple and flexible, as well as allowing a long-term relationship to develop between the institution and the customer.

  18.  The Saving Gateway is explicitly aimed at reaching the financially excluded. The eligibility criteria will need to be carefully defined to ensure that those who currently do not save are reached by the scheme. Some have advocated the use of community groups or voluntary organisations to increase participation of hard-to-reach groups[12]. However, similar matching schemes in America have shown that while the involvement of community organisations helps to access the financially excluded, it is very resource intensive and this has limited the scale of the project[13]. The American schemes started on very small scales with slight differences in operating models, and then tried to expand these established programmes. Designing and implementing a larger scale scheme from scratch, carefully defining the roles and responsibilities of each group involved in the provision of the scheme, may enable the administrative burden to be reduced.

  19.  The provision of financial education could be formally integrated into the scheme design from the outset, and with clear objectives in mind. This would aim to capitalise on the individual's saving experience during participation in the scheme.

  20.  While the pound for pound match in the first trial was a significant (and simple) incentive for the financially excluded to investigate the product, there were a number of people who were still not persuaded to save. Increasing the monetary return is a blunt tool, and the psychological barriers to saving also need to be addressed in the scheme design.

  21.  Research recently published by the Building Societies Association[14] investigated why people in seemingly similar circumstances saved vastly different amounts. Almost one in five respondents said that of a range of factors identified in the research, none could persuade them to save. One of the main conclusions of this report was that while simple products were necessary, simplicity alone was not enough. A change in the way that people think about saving needs to be engendered as well. People need to be encouraged to think about the benefits to themselves in a few years time of putting money away now.


  22.  The BSA's research into the saving decision found that financial capability was a considerable determinant of saving behaviour. The less financially capable a person was, the less sensitive they were to the rate of return. They also tended to place a lower value on their future needs, so failed to make sufficient provision. Instead, behavioural and psychological factors were relatively more important. As such, how offers were presented could sway decisions, and the level of trust in institutions, or a friend's recommendation or advice were more influential. Choosing products by word-of-mouth and heuristic behaviour, where people learn by trial and error, were found to be more accurate descriptions of saving behaviour in the less financially capable.

  23.  For the Saving Gateway, this means that the match has less of an impact on its target audience than it would have on a more financially capable group. Other more psychological aspects of the scheme design are therefore very important.

  24.  The BSA report called for financial education in schools to be compulsory for all children. As well as teaching the skills needed to operate accounts, education should try to teach why it is important to look over longer time horizons to engender a more realistic present valuation of future needs. Better understanding of personal saving requirements should also help people to ask informed questions of financial providers. The report also suggested using stark imagery in a public awareness campaign to try to stimulate non-savers to reappraise their current saving behaviour.


  25.  Financial inclusion is integral to much of building societies' activities. Offering simple savings accounts, the rapid reaction by several societies to the problems with Christmas saving schemes, and the propensity to maintain the branch network are testament to this. The ISA has been a success story to which building societies have been major contributors. The cash CTF, provided mainly by building societies, offers parents an important alternative to equity based products. Building societies also seem well placed to provide the Saving Gateway, provided the design makes this a viable option. Financial capability is a crucial part of reducing exclusion, but paradoxically, using financial products such as short-term savings accounts to build up financial experience is the best way to improve capability.

April 2007

6   "Access to financial services for those on the margins of banking" Financial Inclusion Taskforce, 2006 Back

7   "The Individual's Saving Decision", The Building Societies Association, 2007. Attached as an appendix to this submission, or available at Back

8   "Improving Financial Inclusion", Dayson, K, 2004, Back

9   "Societies in Society", BSA, 2006, Back

10   The Changing Geography of British Bank and Building Society Branch Networks, 1995-2003. Leyshon, A, Signoretta, P, French, S, 2006. Back

11   "Interim Evaluation of Saving Gateway 2" IFS and Ipsos MORI, 2006 Back

12   See, for example, "The Saving Gateway: From principles to practice" ippr, 2006 Back

13   See, for example, "Achieving Scale in Asset Building: Operational challenges and opportunities from IDA Programs", The Aspen Institute, 2006 Back

14   "The Individual's Saving Decision", ibid Back

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