Examination of Witnesses (Questions 40-59)|
1 MAY 2007
Q40 Chairman: Professor Kempson, may
I welcome to you the committee. Would you introduce yourself,
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join up the various types of saving and money could be withdrawn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
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
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
Professor Kempson: Do you mean
the commercial sector or the not-for-profit sector?
Q50 Angela Eagle: I mean the not-for-profit
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
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
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
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
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
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
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.