Select Committee on Treasury Minutes of Evidence

Examination of Wintesses (Questions 1-19)


1 MAY 2007

  Q1 Chairman: Brian Pomeroy, welcome to the Committee and to our inquiry into the Financial Inclusion Taskforce. Would you introduce yourself, please?

Mr Pomeroy: I am Brian Pomeroy, Chair of the Financial Inclusion Taskforce. I understand I am here principally in my capacity as the author of the recent Review of Christmas saving schemes, since the Taskforce itself has not yet looked at savings.

  Q2  Chairman: I commend you on the work you have been doing in the area of financial inclusion. I also note the Government's positive response to our Committee's recommendations and the positive agenda that has been developing since then. Do you want and expect the Taskforce remit to be changed to give greater prominence to savings issues? You have previously expressed concern about the resource implications for the Taskforce on the expansion of its remit. What assurances do you have about the funding for the Taskforce in the period of to 2011 and savings within that?

  Mr Pomeroy: On the first point, the Taskforce would be happy to take on savings if the Treasury asks us to do that. Our terms of reference were given to us by the Treasury, so it is up to them. My understanding is that the Treasury is considering that and is looking to see the output of the Saving Gateway pilots and its own decision-making on that before giving us a remit, but if they give us a remit, we will be happy to take it on. I should add that our remit has recently been extended to include insurance, which is one of the recommendations of this Committee. As far as resources are concerned, the Taskforce has a budget for itself, which we have found perfectly adequate to commission the research we need. So far as the period to 2011 is concerned, we are aware that the Government has committed to a new Financial Inclusion Fund, but we do not yet know what the amount of it will be or how it will be deployed.

  Q3  Chairman: Following the Review of the Christmas savings schemes which arose from the collapse of Farepak—and we are not focusing on Farepak here directly but the consequences of it—the Government has announced an agreement with the industry on the provision of secure, ring-fenced accounts for such savings. I know that discussions are still going on about that. Does the latest information that is available reassure you regarding the removal of the risks, particularly in the hamper market, for consumers?

  Mr Pomeroy: Yes. I should say that I have not been part of the detailed discussions and what I know is the concept that was announced by the DTI a few weeks ago. It seems to me the concept is a sound one, which is that the money will go into trust; the trustees will only release the money when it is needed to buy hampers or vouchers, whatever happens to be ordered. It seems to me that is a sound concept. Clearly, it depends on it being implemented in detail properly and effectively. Whilst I have no reason to think that it will not be, I have not seen the detailed fine print of what has been agreed.

  Q4  Angela Eagle: Staying with Christmas hampers and that market and following the collapse of Farepak, in your Review of Christmas savings schemes, you identified, very properly I think, the attraction of them to those who are low earners, and a range of advantages, particularly with locked-in finances, so that people can definitely guarantee that the amount of money they are saving will go on Christmas issues and not suddenly be taken for something else. How do you think this kind of an approach, which clearly low income customers like, can be preserved in future arrangements, whilst guaranteeing that we never have another Farepak?

  Mr Pomeroy: I think the key is to make sure that their money is safe and that the people who provide the product also provide long-term good value. It is clear, from the research I did, that the product is valued provided the money is safe. Something like three-quarters of a million families, mainly families on low incomes though not exclusively so, make use of it. They make use of it because for some of them it is the only way that they will save at all. The home collection of money is the only way they will save at all, and the lock-ins, as you say, are also vital. The important thing is to make sure that the money is protected but also that it is good value for money because as well as making a recommendation about protection of the money, I have also noted in my report that the market is highly concentrated now in the hands of one firm, and therefore that at least ought to be looked at to make sure there are no competition problems or issues that might give rise to poor value for money.

  Q5  Angela Eagle: So you agree with the attention that the Office of Fair Trading is currently paying to the fact that the Park Group are really the dominant player now with I think £230 million in profit?

  Mr Pomeroy: Yes; they have something like 90% of the hamper market. I very much welcome the fact that the OFT is looking at it. The fact they have 90% does not of itself mean there is an abuse of position but clearly to my mind it raises a need at least to examine the matter.

  Q6  Angela Eagle: This model again particularly depends on not having low-income savers physically going to an institution to deposit money, but actually having door-to-door sales forces, often from the local community who are known to individuals, going round collecting small amounts of money. It also, I think, relies quite a lot on deliveries to the door because often some of these people do not necessarily have cars and cannot pick up large products from a delivery point. Do you think that that almost offsets the paying of interest because there was much comment when Farepak collapsed that the savings were not getting interest at all, as well as the fact that they had been ripped off?

  Mr Pomeroy: I think it is certainly a factor that offsets it because clearly the home service that you describe, which is an absolutely vital component, is an expensive way of doing business. It means agents have to go to houses. That means they are paid for it. It is obviously a much more expensive way of doing business than having someone go to a supermarket and that needs to be covered somehow. I have not been privy to the detailed financial position of the companies or the economics of the product but I can say that the users of the product do not particularly complain about not having interest. Some commentators have noted it; the users of the product generally do not complain about not having interest. Clearly, those extra costs have to be covered somehow. There are other ways of covering it. For example, the providers make a margin when they sell a hamper and they also get a discount from the retailer when they buy a voucher. So there are other sources of income as well. It is interesting in the research I did, which involved talking directly to 100 users of this product, that lack of interest was simply not an issue at all.

  Q7  Angela Eagle: Do you think that might be because they are not that familiar with savings products that actually attract interest and that they tend to live in the more cash economy, though not all of them are unbanked, where interest is not such an issue?

  Mr Pomeroy: It might to some extent. It was quite interesting that in the workshops we ran a number of people, although they would not necessarily go to financial institutions, indeed sometimes would mistrust them, were aware that they would give interest, and certainly gave me the impression that if they were saving with a financial institution, they would expect interest. So they did understand that financial institutions give interest. They also understood that what they were doing, although they were saving, they were doing it with a retail firm. They understood that it was a retail, mail-order purchase essentially that they were making. A number of them did say, "Look, how much interest would we get, frankly? If we save £10 a week for 45 weeks, that is £10 interest. It is not a lot, is it?" So there was a sense, although you would normally expect to have interest on savings, the absolute amount was not something which they particularly missed.

  Q8  Angela Eagle: Do you think that this model with its very specific structure, the door-to-door issue and the lock-in, has any lessons for larger Saving Gateway issues and financial inclusion more generally, since it is clearly a model that has a history in fact in many communities? It is clearly a model that people like.

  Mr Pomeroy: I think the general lesson is that there are some people who find it very difficult to save unless there is some stimulus or prompt. Perhaps that does not have to be someone coming to your door but it is very clear that many people would only save if something prompts them to save. They will not of their own accord go down to a building society, a bank or a credit union. To me the lesson is that there are people who need some stimulus and incentive to save and therefore across the board of financial savings products, one needs to think about that issue when addressing particularly people on low incomes who have many competing demands on their cash.

  Q9  Angela Eagle: What do you think about the lock-in point because people clearly like the fact that they cannot get at their money once they have put it away?

  Mr Pomeroy: Indeed, they do like that. Of course, one of the consequences of the lock-in is that if you buy goods on the basis that you can only get the goods and you cannot get cash at the end, that removes it from financial services and actually at the moment removes it from the compensation scheme as well. One has to be aware that under present legislation those kinds of schemes can actually remove a protection. There is no question that when saving for something specific like Christmas, the lock-in is absolutely vital and it is partly, I suppose, that people do not trust themselves.

  Q10  Angela Eagle: And do not trust the financial pressures on them?

  Mr Pomeroy: Yes, particularly when it is very important because the background to all of this, as I have discovered, is the very high importance people place on having a good week at Christmas. It is because that is so important that they are prepared, in some cases at the expense of personal hardship, to ring-fence that money. It has that degree of importance for them.

  Q11  Angela Eagle: Finally, do you think that the point you have just made about the fact that you do have the lock-in and you cannot get the money out actually removes it from financial regulation? We clearly saw that there was an issue there with what happened to Farepak in terms of protecting people's money. Do you think that there is therefore an argument for having some form of regulation, not perhaps the full panoply of Financial Services Authority regulation, which applies in that very particular instance to protect people's assets?

  Mr Pomeroy: I definitely felt it was necessary to protect the asset in this case. Of course, the issue is quite complicated because legally this was a prepayment, and we prepay for things all the time. Throughout the economy there are prepayments. This product and the prepayment have two particular features: one the prepayment is for much longer than usual and up to a year; and, secondly, the people who are prepaying are the most vulnerable group financially and can least afford the loss. In that situation, I felt protection was necessary. So far as I am concerned, the most important thing is that the outcome of protection should take place rather than the means. I did not express a view as to whether it should be formal regulation or whether it should be done by an agreement; in fact, it has been done by the latter. The most important thing is the outcome. I think there are some circumstances to prepayment, when a combination of the length of the prepayment and the vulnerability of the prepayer definitely require protection, yes.

  Q12  Mr Gauke: Do you think an increasing emphasis could be placed on generic financial advice in this area so that consumers are more aware of the range of options, whether it be informal savings products or regulated financial services?

  Mr Pomeroy: Yes, I do. The question of generic financial advice of course is under review at the moment. Otto Thoresen is doing a feasibility study on it. Obviously I do not know what view he will come out with, but I am quite clear that a discussion that takes place between a generic financial adviser and someone being advised needs to take into account all kinds of products and all kinds of savings, and in this case savings, and in particular the adviser would need to be aware not only of formal savings products—I mean properly regulated financial services products—but also these alternative products. It is vital that they should be aware of them and be in a position to say to the person they are advising, "Perhaps you are using this. Have you thought of these alternatives? They are not quite the same but they have advantages and disadvantages. Here is the range", and be in a position to advise them. I think this kind of thing definitely should be within the purview of a generic financial advice scheme, yes.

  Q13  Mr Gauke: How do we go about placing greater emphasis on savings products? At the moment, generic advice tends to be focused more on debt really—the role of the Citizens' Advice, for instance. How do we go about increasing the emphasis on savings?

  Mr Pomeroy: I think the fact that generic financial advice is under review at the moment is an opportunity for getting it right, It will come down to the range of issues on which generic advice is given within whatever structure the Government decides to adopt. I think advisers should be told very clearly that they must understand that in fact there are products out there which are substantively financial services products—we are talking about one which is savings at the moment—but which are legally not and they must be aware of all of them and be prepared to advise on a range of them and give them appropriate emphasis.

  Q14  Mr Gauke: You have talked of having a specific consumer campaign to make people aware of the options. Are you thinking overall or specifically with regard to Christmas savings schemes?

  Mr Pomeroy: I am thinking with regard to Christmas savings, and I am thinking now because it is very clear that Farepak very much undermined, for obvious reasons, savers' confidence in that industry and these were savers, it is clear, who really were not aware of many other alternatives. Actually there are not many alternatives that replicate exactly the features of this product. It was clear from the people I spoke to that a number of them were very disoriented; they would like to continue saving but do not know whether they should; some have decided not to save at all; some are saving a bit; some are saving with friends, and some are doing other things. I am talking now about Christmas 2007 and not beyond that. I believe it is important to put some information out there.

  Q15  Mr Gauke: Who should be doing that?

  Mr Pomeroy: The "Government". In fact the OFT has been given the job, and that sounds fine to me. Firstly, it seems to me it is important to communicate the fact that secure arrangements are now being put in place and that the money will be safe because of the trust arrangements that I have just described, but also to explain to people that there are alternatives; there are credit unions who offer Christmas savings accounts; there are supermarkets that offer Christmas savings accounts; there are building societies. They do not all have the same features but some will suit some people. It is those two things: (a) communicate security and (b) communicate the range. I personally think it is urgent because there are people out there who want to save for Christmas to avoid getting into debt who will not save for 2007 because of what they know about Farepak.

  Q16  Mr Gauke: You say it is a question for now. Are you concerned that the OFT is being a bit slow on this?

  Mr Pomeroy: Again, having made the recommendation and having been very pleased to hear it has been accepted, I have not been involved in the detail. My understanding is that they are planning a campaign. I have no information about the timing of it or the detail of it.

  Q17  Mr Gauke: You are conveying very much a sense of urgency.

  Mr Pomeroy: Yes.

  Q18  Mr Gauke: I am not sure you are conveying that you have confidence that the OFT has that sense of urgency.

  Mr Pomeroy: I am afraid I do not actually know when they are planning to launch it. That is the honest answer. I do think it needs to be soon.

  Q19  Mr Breed: Do you have an idea of figures in terms of the fall-off since the Farepak situation? Have we seen a very steep decline or is it relatively modest? We only really have one big player now. Presumably they would be able to determine whether there has been very significant damage.

  Mr Pomeroy: I do not know, and I would very much like to know. I know that when I ran workshops with these 100 customers, a significant number of them said they would stop, though that does not mean that they will all stop. I also know, because I am sure it is on public record, that one of the firms, which has recently been taken over by Park, did announce a very much lower order book I think in February of this year than they would normally expect, implying that they would have been affected. One would anticipate there would have been some fall-off but the truthful answer is that I have no information.

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