Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 88-99)


1 MAY 2007

  Q88 Chairman: Welcome to our evidence session on this inquiry. Can I ask you to introduce yourselves for the shorthand writer, please?

  Ms Whyley: I am Claire Whyley; I am Deputy Director of Policy at the National Consumer Council. I lead our work on disadvantaged and financial inclusion and I am a member of the Financial Inclusion Taskforce.

  Mr Rhodes: I am John Rhodes; I am the Head of Financial Capability at Citizens Advice, which means that I lead the financial education work which we are encouraging bureaus to undertake across England and Wales.

  Q89  Chairman: John, you mentioned that savings should play a more central role in the Government's Financial Inclusion Strategy. Given that the Government will accept that, how do you expect the move of savings to a more central role in that strategy to be reflected in practice?

  Mr Rhodes: I think that the answer to that in a way lies in the Treasury's own March paper where it talks about the importance of a buffer for people. I think that a clear recognition by government that borrowing and saving are part and parcel of the same issues of financial capability and financial inclusion. Looking at the Treasury paper, it seems to me it has been fairly carefully drafted and I think we would like to see the Financial Inclusion Taskforce having a clearer and greater role for looking at savings. I think we would like decisions to be made on things like the Saving Gateway and I think we are very much in line with what Elaine was saying about that. We would like more work to be done on disincentives, the issues which I think we have already provided evidence about, so the capital rules on the benefit levels. We welcome initiatives like the OFT campaign, and hope to be involved in it, but, above all, I think that we want to be in a position where working with other organisations, some of which have been mentioned today—credit unions, housing associations—we can help promote saving through long-term financial education initiatives. At present we receive long-term funding from Prudential, and Barclaycard; for the rest we are usually scrabbling around, and bureaus are scrabbling around, with one year's money.

  Q90  Chairman: Claire, Brian Pomeroy's review of Christmas savings schemes stated that the hamper products in the Saving Gateway meet quite distinct savings needs. Do you agree with that and, secondly, is there any reason why the principle of match funding from the Treasury for private citizens could not be applied to Christmas savings products or other savings products with a short-term lifespan?

  Ms Whyley: I think the Christmas hampers industry in the Saving Gateway do serve different purposes. I think all the research shows that people on low incomes particularly like to save for a specific purpose. That is not to say they do not also aspire to save for general non-specific purposes as well, but it is much easier, and there are clearly much bigger incentives, to save for particular purposes, especially with savings products that are focused around events like Christmas, which are clearly predictable; but clearly families have a big emotional investment in making it right, making sure their kids have a good time and there is an added incentive for people to save. I think general saving is something that serves a slightly different purpose. It does not mean that they cannot run alongside, but they are definitely different. I would agree that match-saving so is simple and so powerful and the evidence shows that it really is successful, I think that principle could be applied to all kinds of savings products and, possibly, other financial products as well.

  Q91  Angela Eagle: Have you done any work on how much extending the Saving Gateway in its initial first phase form would actually cost if it were to be extended to working families' tax credit levels?

  Ms Whyley: We have not done work costing the Saving Gateway, I am afraid, no.

  Q92  Angela Eagle: Do you think, in principle, there is an argument for looking at some of the tax savings that are given at the top of the income stream and the income levels for saving, investment, ISAs, pensions and redistributing some of that to the bottom so that we could encourage a sort of Saving Gateway style approach for those that are on very low incomes who (as has been said earlier today) do not benefit from the tax incentives to save since they often do not pay tax?

  Ms Whyley: I think there is absolutely a need to look at that. If what we are really trying to do is incentivise new saving among people who previously have not saved or who find it very difficult to sustain saving behaviour, then, absolutely, we need to be looking at a different types of incentive and we need to look at where the current incentives are benefiting people. As we know, they are not benefiting people at the low income end of the spectrum and they are not necessarily benefiting people who are currently not saving. I think that the mismatch of these incentives actually comes from a failure among policy-makers principally to really understand the kind of behaviour that they are trying to incentivise. There is an assumption that if you make the same incentives or products available to people on low incomes as are available to people higher up the scale, that will automatically result in the behaviour you are looking for. What we really need to do is start with a means-based approach and we need to talk to people about what it is that makes a difference and what would work for them and then develop the right incentives. We have seen the success of things like that with credit union saving and with the Saving Gateway. That is an incentive that works for people; it makes sense to the people whose behaviour we are trying to change.

  Q93  Angela Eagle: If there were a shift of that kind, it being for 18 months or maybe two sets of 18 months or two years, as the professor was the suggesting in her evidence, do you see that as a kind of temporary issue to try to get them into mainstream saving or do you see it as something more fundamental. A more permanent sort of restructuring of the incentives that there are in society would actually give a lot more money to the voluntary institutions, credit unions, those kinds of saving institutions which are quite weak structurally at the moment. Do you see that there would be benefit from diverting tax money there in order to try to create a more robust infrastructure for those on low incomes?

  Ms Whyley: I think there could be. If credit unions are going to be the answer to encouraging people on low incomes to save, then we absolutely do need a bigger and more robust structure. I think anything that can encourage and facilitate that would be a good thing. Like Elaine, I would like to see all these things more joined up. Clearly, what you need to initially encourage people to start saving and then help them to sustain that saving behaviour may not be something that you need to sustain throughout that person's saving lifetime, but I do think that it should link into the infrastructure and the products that already exist so that at various times people have choices about what they do and the choices are relevant to what people want to achieve out of saving.

  Q94  Angela Eagle: Do you worry about the structure of the current financial services institutions which has meant that people have got into terrible trouble if they have been taken out of financial exclusion into inclusion and then hit with huge penalty charges that they cannot afford and driven back into debt?

  Ms Whyley: I think this is all part of a failure, which the taskforce has been trying to address, to really understand why people are financially excluded; and it does come down to this idea that if you make a product available and, if you incentivise industry to provide it, you provide a requirement on industry to provide it, that will lead to financial inclusion. Actually financial exclusion is grounded in a whole range of things, part of which is a lack of appropriate products, some of it is cultural, some of it is social that family traditions have perpetuated. Clearly, it has not been as simple as making a product available and people just being able to come in and use it. I think people have been hit very hard. Like Elaine, I think often they know that that is what is going to happen, it is why they have not used the products in the first place, it is often why they have often chosen to self-exclude, but I think there is a huge amount of work to be done to make banking products particularly suitable for people on very low incomes so that they can make their lives cheaper and easier. I think they are not always achieving that at the moment.

  Q95  Angela Eagle: John Rhodes, are you optimistic that that will happen given that people at the lower levels of income simply are not profitable from the models that our financial services industry has chosen to introduce to run itself with? They are not interested in people at the lower end of the income scale, are they?

  Mr Rhodes: In terms of the practice to date, the answer is, "No." I suppose one of the issues for me is when one can shift what the financial sector is doing in terms of financial education and working towards financial inclusion, when it shifts from being something where you are talking to the Corporate Social Responsibility Department and where you are actually dealing with the Marketing Department. First of all, as we were saying earlier, it should not be beyond the technological capability of the financial institutions to offer the kind of smoothed accounts that Elaine was talking about. I think there is a mindset issue there. It does seem to me that there may be a cost to banks, but if you look at banks' balance sheets and their reports recently, you cannot help feeling that they can afford to subsidise it a little bit.

  Q96  Angela Eagle: Banks have a few spare profits in there that they might reasonably think they might do some interesting work with, do not you think?

  Mr Rhodes: All organisations, whatever their size, have got an innovation fund these days is all I would say.

  Chairman: Very diplomatic.

  Q97  Mr Gauke: Can I ask the question again about generic financial advice and what role that has to play in improving people's understanding of both regulated products and also the informal savings market. How important is generic advice in this area?

  Mr Rhodes: We at Citizens Advice think it is very important. At the risk of sounding a bit like the Saving Gateway, we are undertaking a second pilot of generic financial advice which is involving 25 bureaus with IVAs working through those bureaus. It is based on a very positive experience first time round, so we want to test it a bit further. The first time round was essentially a smaller scoping project. We have made clear in our CSR submission to government that we reckon that for 25 to 35 million pounds a year we could offer generic financial advice through all bureaus, and I think that is important but, as I think was also suggested in earlier evidence, I do not think that is sufficient. Nor is financial education alone sufficient. That too helps, it contributes to it, but for the most part the kind of issues which we have been discussing this morning, and the kind of numbers, frankly, 750,000 hamper scheme clients are not all going to be reached through generic financial advice, they have got to be reached through the kind of awareness campaigns that we, other organisations, other agencies, are trying to promote, and I think it could be quite exciting as to what might be done through the OFT. That might itself be a pointer towards the kind of activity that might be rolled out more substantially in the future.

  Q98  Mr Gauke: Do you have anything to add to that?

  Ms Whyley: No. We would also agree that generic financial advice is key, particularly in helping individuals understand that balance between spending, saving and borrowing and what constitutes the right decision at any one time and the risks and consequences of any actions. We would also agree that, although there are networks in place that offer some elements of generic financial advice, they are very, very oversubscribed and money is insecure. So, what we actually need to see is a real, clear investment into a different form of advice than the remedial advice that we tend to have now.

  Q99  Mr Gauke: Mr Rhodes, when you talked about your submission for the CSR—£25-30 million—would that enable all your bureaus to provide advice on savings as well as debt?

  Mr Rhodes: Yes, that is right. All our bureaus at present, all 400 plus bureaus, offer debt advice, 80 bureaus offer financial education and, under this new scheme, 25 bureaus will be offering, on a two-year pilot, generic financial advice. The 25 to 35 millions pounds a year would buy a level of dedicated capacity within each of those 400 plus bureaus.

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