Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)


1 MAY 2007

  Q40 Chairman: Professor Kempson, may I welcome to you the committee. Would you introduce yourself, please?

  Professor Kempson: I am Elaine Kempson, Director of the Personal Finance Research Centre at Bristol University and I am also a member of the Financial Inclusion Taskforce.

  Q41  Chairman: We all appreciate the work that you are doing in this area and the work that you have done for the Government in the Saving Gateway and other aspects. You did mention in your memorandum to our Committee last year that there are too many Government-inspired initiatives vying for the savings of people on low to middle incomes, including the Child Trust Fund, the Saving Gateway, ISAs and stakeholder pensions. How would you like to see the Government progress in the light of these comments in that area?

  Professor Kempson: I would like a much better understanding of how poor people save, how people on low incomes choose to save, the purposes for which the save, and for some kind of life-time savings accounts so that we can join up the various types of saving and money could be withdrawn for different purposes at different times.

  Q42  Chairman: Is it possible to quantify or at least clearly identify the difference it makes to low income individuals or families if they have accessible savings? We have had evidence from credit unions and others saying that even when people are paying off debt, there should be a facility for a small saving because that inculcates the savings habit.

  Professor Kempson: Quantifying the effect is rather difficult. We certainly know what impact it has on the lives of people to have savings but it is not as life-shattering as some earlier research suggested; when we replicated that, we could not get the same findings. That showed that having even a modest amount in savings protected you against job loss and relationship break-down. Unfortunately, when we refined that analysis, we found the effects largely fell away. What the Saving Gateway did show us was that it gave people almost a sense of worth for the first time. They were quite surprised, quite proud of themselves for having been able to save through the Saving Gateway. They had a sum of money which to them seemed like riches. They talked a lot about financial cushions and feeling much more secure. Even though to many of us £750, the maximum, would not be a large sum of money, for many of the people in the Saving Gateway, it was the largest amount they had ever had. So it gave them a sense of security, a sense that they could cope with some of the emergencies that came along and just really a feeling, as I say, of being proud of themselves and feeling very good about themselves. I had heard this from the United States and did not quite believe it, but when we interviewed the families, I have to say that it was absolutely true. You will see at the end of our report on the first pilot a couple of quotes from people who saved with the Saving Gateway. I think they are extremely telling and they summed it up very well.

  Q43  Chairman: You did express concern to me in a private conversation we had some time back about the pilot project. You thought the first pilot was excellent but the Government modified a number of elements of the second pilot and that is not so good. What message do you have for the Government on that?

  Professor Kempson: My message would be simple: go back to the design of the first pilot. I think the evidence from the second pilot is beginning to show (we only have the interim report; we are awaiting the final report). I think it is showing that the complexity of the different match rates is not delivering what one might have hoped and that the simple one-for-one matching is a very easy thing to understand and very motivating. Varying the match rates is showing exactly what we might have expected. It is not that £1 is a lot of money but that £1 for £1 is easier to understand, easier to calculate. I remember we interviewed one woman who said, "When it was pouring with rain I had to walk down to the bank to bank £25 at the end of the month. I felt I could not be bothered going down but I said to myself that I was not banking £25 but £50". That is a very easy message to understand. I think also what we are beginning to see from the second pilot is that it does need to be more closely targeted on those at the bottom end. It went a long way up the income scale to £50,000 household income. That is a long way up. It does need to be much more closely targeted.

  Q44  Chairman: How important are informal approaches to savings, such as Christmas hamper products and over-paying on pre-payment meters, to the finances of low-income households?

  Professor Kempson: They are absolutely crucial. One member said earlier that half the people have no savings. In fact, if you look at low-income households, many more than half have savings; they just do not have them in savings accounts. They do perceive quite different types of saving. As policy makers, that is what we have not fully understood. The Christmas hamper market is about putting money aside. Those are the words used; it is not saving. You are putting money aside towards something you know you have to pay for. It is a concept that those of us on adequate incomes find rather difficult to understand because we do not need to put money aside for these things; we have money to buy a Christmas turkey. We do not have to do that. Then there is the idea of saving up to buy something. That again you might do in cash at home; you might save up loose change in order to be able to redecorate a room, for example. Saving is something very different. Saving is what you do with a bank or a building society and it is when you have no particular purpose in mind for the money. People do use that language; they use it quite separately. They conceive of these things as quite different and so they use different vehicles for them.

  Q45  Angela Eagle: Do you think there have been some unintended consequences of financial inclusion in that basic bank accounts and people on very low incomes are being encouraged to become involved with profit-making finance institutions and they have suddenly realised that it is a lot harder than that when they are hit with penalty clauses they cannot really afford by going overdrawn? Do you think there is a double-edged sword there and that we do need a completely different scheme?

  Professor Kempson: I think that many of them already knew that because half of the unbanked have previously been banked and they have chosen to opt out because of the penalty charges, exactly that. I think we have got basic bank accounts half right; we have not got them completely right. We still need a method of bill payment that is not like the direct debit system that we have now where penalty charges can be imposed if there is not money in your account. It is not that people are going overdrawn on their accounts; it is often just that the timing of payments thwarts them. If you are on a very tight budget, as little as 12 hours' difference can cause you financial difficulties. Undoubtedly, some people are discovering that basic bank accounts perhaps are not all that they had hoped for and we still have more work to do to try to find a bill payment scheme. It is not proving easy, I might say. Through the Taskforce and personally we have had endless discussions with various potential providers. Personally, I am determined we will find a way forward because I think it is crucial.

  Q46  Angela Eagle: Are you disappointed that the financial services sector pays so little attention to those at the very bottom or do you think it is just impossible for it to be designed to give them services that suit them without putting them at risk of penalty charges, which they simply cannot afford?

  Professor Kempson: I think there is an irony. Financial services used to provide products that were much better suited to people on low incomes. With greater competition, greater use of technology, we have moved away from those. As a consequence, financial services provision is becoming less relevant to people on lower incomes. Given a fiercely competitive financial services market, it is almost inevitable that the big players will not serve the needs of poor people because there is very little money in it.

  Q47  Angela Eagle: There is no profit in it, is there?

  Professor Kempson: There is very little profit in it. We will always see alternative providers. Something which has exercised me for 10 years, and I think Brian Pomeroy said he was reading a 1999 report that Claire Whyley and I wrote together, is that most of these alternative services are either poorly regulated or unregulated. It takes a disaster for us to bring things within regulation.

  Q48  Angela Eagle: Such as Farepak?

  Professor Kempson: Such as Farepak; credit unions were not fully regulated under the FSA. We needed two credit unions to go bust before that happened. I fear we are going to need the same with informal credit schemes and we are going to need the same with informal insurance schemes and only then will we begin to turn our attention to these things. It is not for the want of trying to raise them; it is just it never seems to be listened to.

  Q49  Angela Eagle: Do you feel that the structure of those organisations that are left that try to provide assistance to very low paid or low income families is robust enough to be expanded? Are you optimistic about that or pessimistic?

  Professor Kempson: Do you mean the commercial sector or the not-for-profit sector?

  Q50  Angela Eagle: I mean the not-for-profit sector.

  Professor Kempson: The not-for-profit sector traditionally has not been very good either at serving the needs of people on very low incomes. It has not had products that emulate what the informal commercial sector has been doing and has been doing very successfully for a very long period of time. These things are not new. Many of us will have had parents or grandparents who used them, so they have been around a very long time. There are challenges to the not-for-profit sector, which they are beginning to take up to look at that very successful, informal, financial services market and see what can be learnt from it. I should perhaps say that I am working with APCO and indeed with the National Consumer Council with Claire with funding from the Joseph Rowntree Foundation to see if we can develop a business model for not-for-profit doorstep lending that could be adapted to doorstep saving too. Our suspicion is that the price of doorstep lending even through not-for-profit providers will be so high that it would be too embarrassing for a credit union to embrace it, but we will see. We are keeping an open mind.

  Q51  Angela Eagle: Is there anything that you think that the Government can do from a policy point of view to try to strengthen or encourage growth in this sector, which has been so poorly served by the more commercial profit-orientated banks?

  Professor Kempson: I think it can and that it should probably do it through the Financial Inclusion Taskforce. Those of us who have been working in the area for a long period of time and sit on the Taskforce have a large collective knowledge, although we have not looked at savings yet. Amongst us there is a number of people who have fairly detailed knowledge of savings, and indeed of insurance as well. I think that would be the vehicle to try to understand why people on low incomes choose to use the services they do because there is a perfectly good rationale for them using them, understand that, and understand how we can adapt services through the third sector, the not-for-profit sector.

  Q52  Angela Eagle: Finally, are you interested in the move that we have seen over the past few years with issues like the Child Trust Fund and the Saving Gateway away from simply the Government having income benefits available also to having small savings or wealth benefits available in certain circumstances? Do you think that is a policy model that has potential for dealing with financial exclusion?

  Professor Kempson: I think it does, as an adjunct to income security. I would not be part of a group that would say that it was an alternative to income security. I think you need the income security there. I would never want to see it replaced, but something like the Saving Gateway I think was a really lovely scheme. It met the needs of the people who participated. It did a great deal for them. In the scheme of things, it was not terribly expensive. If you stack that against the tax breaks given to those of us who have quite large pensions, then it is really very little money.

  Q53  Mr Gauke: Can I return to the question of generic financial advice and may I ask you the same question I asked Mr Pomeroy as to what role you think generic financial advice may have and what emphasis should be placed on it with regard to looking at informal savings products and regulated financial products?

  Professor Kempson: It should certainly cover it. I do not think it is the ultimate panacea. Many people who would use a hamper scheme would not be out there in the marketplace looking for advice. They just opportunistically use what is available. It is important that it considers informal as well as formal services, definitely, but I would not see either financial education or generic financial advice as being the solution to the problem such as we faced with Farepak. It has to go hand-in-hand with regulation and regulation day-to-day will play a bigger role.

  Q54  Mr Gauke: Accepting that but if there is a role to play for generic financial advice, how would you go about improving, encouraging and placing greater emphasis upon it?

  Professor Kempson: There is not much of it around. We have debt advice but that is more about post-sales. When we are talking about generic advice, we are talking really about pre-sales advice. Personally, I think we would be better building on the infrastructure that we have but recognising that it will need funding to do it. If you talk to members of the public about where they would like to go, what sort of place they would like to go to get general financial advice on the financial marketplace, they will all almost always say a Citizens' Advice Bureau or something like it. It is a brand that is known. It is a brand rather like Hoover that is used generically for any locally-based advice agency, so I think we should accept that. We are not just talking about the Citizens Advice Bureaux but other independent, generic, general advice centres. That infrastructure should be built on but it is perilously funded at present. Although we hear there are some high profile examples, the run-of-the-mill advice agency out there in the field it is struggling hand-to-mouth from one year to the next. I think it does offer an opportunity to build that sort of service and from an agency that people would trust. Trust is vital. People have very little trust in government or in financial services providers, or indeed with independent financial advisers. Trust levels are very low when it comes to finances.

  Q55  Mr Gauke: May I raise briefly the issue that I asked Mr Pomeroy, which is the need for some kind of campaign for Christmas savings, outlining the various options and so on. Do you share his views on the importance of that and the need for some urgency?

  Professor Kempson: I think it is important because people do need to be aware that there are dangers in putting their money into a hamper scheme. What Brian Pomeroy was saying was right about the Farepak customers. They have had their fingers burnt; they will not use it again. I would be prepared to wager that people who have used other such schemes will have forgotten about Farepak and will actually now be saving. I suspect that they will not have learnt the lesson because it did not hit them personally. I think it is urgent that people should be made aware, not at Christmas which is when there will be lots of publicity in the press but we need something now about where they are putting their money and whether it is safe.

  Q56  Mr Gauke: Do you have a concern that there is lack of urgency coming from the OFT on this?

  Professor Kempson: Like Brian Pomeroy, I do not quite know what the OFT is doing, so I cannot really comment on whether they have a sense of urgency but it is just taking time to put in place or no sense of urgency and nothing is happening. I am afraid, I honestly cannot answer that question. I would hope there is a sense of urgency because, as you say, we are now into May and people have already started saving for Christmas; they will have started in February.

  Chairman: As a consequence of your comments and Brian Pomeroy's, we will write to the OFT and see what they are doing and try to inject a bit of urgency into this.

  Q57  Peter Viggers: You spoke with sensitivity about the change of attitude and growth of confidence that individuals can gain from having some savings. Could I take you back into that area which my colleague David Gauke was asking about? Look at things Government can do: exhortation, education, legislation. Do you think that the Government's strategy on financial inclusion takes sufficient account of the importance of promoting savings by those who are in debt?

  Professor Kempson: It depends whether you take it in the broader sense or in the narrower sense of the Taskforce. The Taskforce of course has not looked formally at savings. Members of the Taskforce are well aware of this and have been saying for some time that we ought to be looking at savings. Whether or not we are asked to do so, I think there are pressures from members of the Taskforce that we should do so. I think we were right to look at banking initially because that is the entry point. That was really rather crucial to get right. People who are engaged with banking are more likely to become engaged with other types of financial services. If we look in the round, the Government has had the Saving Gateway. It is, I think, the best of its kind worldwide, there is no question. It is the most libertarian. It allows people to save for whatever purpose they choose. Left to their own devices, most people choose to keep the money in savings at the end of the Saving Gateway, which I think is very encouraging. Looked at in the round, there has been a wider perspective and short-term savings have not been entirely ignored. The general public debate on savings has been very much led by the need for the long term. You would be right in that sense. It is time for all these strands to come together and for the Taskforce now to begin to look at savings, alongside credit and banking.

  Q58  Peter Viggers: You also referred to simplicity and the lack of simplicity in some savings schemes for those who have less financial resources. It triggers the thought to me that occasionally when I see a means-tested form to be filled in, mercifully I think to myself: thank goodness I do not have to do that. Do you share the view that sometimes the greater the need, the greater the complexity of documentation, and of course we are dealing with people who are less capable of dealing with documentation anyway.

  Professor Kempson: That may be the case. The financial services marketplace is too complicated for most of us to cope with. The work that we did for the Financial Services Authority showed just how incapable the UK population is when it comes to choosing financial products. I think the Child Trust Fund, which was mentioned earlier, is a very good example of something that could have been a great deal simpler and could have made it much easier for parents: 29 providers, a hundred distributors, three different products is not a simple marketplace. The figures are showing now that a quarter of parents are leaving it to the Government to assign the money to the account, despite the fact that when we did the baseline survey for the Child Trust Fund, just about every parent said they wanted to invest the money themselves because they would make better decisions than the Government. We know that when we talked to the parents who had not deposited their vouchers about why they had not, and when we tried to do statistical modelling to predict who had banked the vouchers and who would still be holding on to them, the statistical work showed that none of the expected factors explained anything very much at all, in fact almost nothing, and that in fact the qualitative work showed that it was either that people were decisive or they were not, that they either thought early on "I will never be able to find my way around this marketplace, so I will just go to my bank and take whatever they offer", or they left it to the last minute and made exactly the same decision: "I still cannot decide, so I will just go to my bank". That was a very good example of something that should have been simple that was not. We have an amazing ability to make things more complicated than they need have been.

  Peter Viggers: If you can use your wider and specialised knowledge to campaign for simplicity, I certainly would encourage you. Thank you.

  Q59  Mr Fallon: Professor, could be come back to the round of the Saving Gateway pilots? How did Government get this wrong in going too far up the scale? I think you mentioned a figure of £50,000 per household.

  Professor Kempson: I wish I knew. I do not know. I did ask why we were going to a second pilot. I could see you might want to test it for a bit longer. I do not know. I can only tell you what I think might have happened, which may not be terribly helpful to you.

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