Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 300-319)


19 JUNE 2007

  Q300  Angela Eagle: In terms of the Saving Gateway itself, I think we agree, and I certainly agree, that low income saving and the ideas that have been piloted in the Saving Gateway are an essential part of trying to get some wealth benefit to lower income people who actually never qualify for tax reliefs. Why has it taken so long to pilot the Saving Gateway? This was begun at the same time as the child trust funds which have now been legislated for, and are up and running, and have been in existence for a couple of years. What have you learnt from the second pilot that is helpful and why is this process of piloting seemingly endless?

  Ed Balls: Well, I hope it is not endless and I think that the evidence which has emerged from the pilots is very strong. Clearly, there are public spending implications for choosing to move to a national Saving Gateway scheme, and that is properly a matter for chancellors in pre-budget reports and in budgets rather than for myself. Clearly the case of the child trust funds, given that it will take 18 years before anybody can get their hands on the money, if you decide that child trust funds is a good policy, it was sensible to move ahead quickly with that and that is what we did. I made a speech in Bristol at an institute linked with Elaine Kempson actually being launched just a few weeks ago on the evidence from the second pilot and actually we have learnt quite a lot from the second pilot about the way in which savings works for the kind of people who are our target audience. One thing we did in the second pilot was to extend qualification for the pilots further up the income scale and what we found was that, if you started going up the income scale above full benefit for child tax credit, around a £15-16,000 income, as you went up the income scale, savings started in the main to be reallocated from existing savings schemes into the Saving Gateway in order to benefit from the match, so there was a great deal of deadweight if you extended it up the income scale which was not true for the lower income savers. The second thing which I think we learned was that you can achieve the impact you want in terms of encouraging people to save without going all the way up to a pound-for-pound match and that you can get more bang for your buck, if you like, if you target it properly on low income savers with a lower than a pound-for-pound match, which is helpful to us in terms of calibrating a future scheme. We found that low income savers tend to want to save to the maximum and the maximum becomes a target, so I think we picked a range of monthly savings maximums and £25 tended to be the level at which most low income savers were saving, so that tells you that getting the target right is very important and £25 looks to be quite a good target. We learned that our attempts to package some wider financial education into the Saving Gateway did not work and we had a very low take-up indeed for financial education in the Saving Gateway and I do not think we fully understand why that is the case. I can speculate about that, but I do not know precisely the answer. Hopefully that tells you that there were some important things which we are learning from this which will help us to calibrate properly, effectively and in a value-for-money way when, rather than if, we can move to a national roll-out.

  Q301  Angela Eagle: So basically the eligibility criteria for the first pilot were right?

  Ed Balls: They were, but we probably only know that now.

  Q302  Angela Eagle: You perhaps can argue about the matching and your bang for your buck argument, but the evidence that we have received shows support for the fact that pound-for-pound matching and those eligibility criteria are simple and easy to understand and likely to be the most successful, so we can get on with the first pilot now?

  Ed Balls: Had we had the results of the second pilot at the end of the first pilot, we would not have needed the second pilot. We could have concluded at that point that actually the first pilot gave as much of the information which we needed, but we obviously did not know that at the time and we tested some wider differences and changes and concluded that actually, as you said, the first pilot was pretty good.

  Q303  Angela Eagle: Right first time, okay. Initially, when the Saving Gateway was discussed, the Treasury seemed to be of the view very much that a single provider was a good issue, that having competitive provision of the Saving Gateway would cause confusion and problems and that you could consolidate fragmented markets by having one provider, yet in a speech you recently made in Bristol, I think, you seemed to be going back and taking a more neutral view on whether there should be a single provider or many providers.

  Ed Balls: I think it is really important to understand, which we are trying to understand, exactly how the savings process works for the kinds of consumers we are talking about. I think one of the important findings from the Pomeroy review into low income savings is that there was a number of attributes in a Farepak-style savings scheme which actually were very attractive to low income savers, the fact that it is an easy way to save, very local and often through people who were trusted and who often actually had a friend or a relative at the school gate, and there are networks of institutions around the country and growing networks of institutions around the country, particularly credit unions, which I think have got a much bigger role to play in providing opportunities for low income families to save. I would not want at this stage to say that going for one provider, certainly one national provider, should be the route if that then excludes credit unions and other local providers from being able to benefit from the Saving Gateway, so I think the thing I was saying is that, following the Pomeroy review, we need to think hard about how we encourage local credit unions to play a role in local savings, including the Saving Gateway, and that may mean that we need to think again about it.

  Q304  Angela Eagle: So you are not worried about the complexity and confusion that is being caused by the many providers in the child trust fund example?

  Ed Balls: To be honest, I do not think so. Actually, the majority of providers of the child trust funds are mutuals and friendly societies and, if you go into a high street store, like Mothercare or Boots, you are not buying a Mothercare or a Boots provider, you are actually buying a friendly society, mutually provided account, so the administration and management of the accounts is a different matter from the front end, if you like. In the case of a child trust fund, clearly having big branded ways of saving going to Asda or to Mothercare has worked. I think in the Saving Gateway it may be that we may need to have more local routes in, but that does not necessarily mean that the actual administration of the scheme needs to be administered in a complex way, but actually there is clearly a balance to be struck between local and trusted and simple and known. My reading of the Pomeroy review into low income savings is that this is not something which should bias, for low income savers, in the direction of high street names.

  Q305  Angela Eagle: Finally, on the level of matching, do you agree that the level of matching, even if it is not a pound for a pound, should be at least as good as the level of subsidy available for the most-well-off through tax relief?

  Ed Balls: The pound-for-pound matching is considerably higher than that and, without wanting to make an ill-thought-through, principled statement, I would probably have quite a lot of sympathy with the question.

  Q306  Mr Love: You mentioned in a response to the Chairman the collapse of Farepak, that you had referred this matter to Brian Pomeroy. What were the main conclusions of his review in relation to informal savings?

  Ed Balls: The first thing to say is that, as you know, the responsibility for dealing with the consequences of Farepak, for raising the compensation money for the independent inquiries which are still ongoing and for the wider investigation into the regulatory regime were not for me and the Treasury, they were for Ian McCartney and the DTI, so I do not want to give the impression that I was taking responsibility or driving those matters, but I do have a responsibility for savings policy more generally, so, as you say, it was the lessons from the wider savings policy which we looked at. I think the things which Brian Pomeroy concluded were that actually, first of all, lock-in is actually attractive to low income savers and, if you remember, when we introduced the individual savings account, we abolished the five-year lock-in, which characterised a TESSA account, as a way of trying to get the savings down the income scale, and ISAs, which have no lock-in at all, have definitely encouraged more middle and low income families to save through an ISA, but the advantage of hamper schemes is that they do have a lock-in, but a lock-in which is considerably shorter than five years and tends to be six or seven months. Secondly, people tend to get to know about a savings opportunity through local contact, through word of mouth and they like saving in a regular way and in a trusted way, a bit like buying the Pools or saving in cancer and polio schemes through a local agent at the school gate rather than needing to go into a high street bank or establishing a Direct Debit. The conclusions Brian Pomeroy gave to us included that, if we are going to promote information campaigns to try and encourage people to do it in a way which is better value for money for them than a hamper scheme, you need to have, as far as you can, local sources of information, that there is a much bigger role for credit unions to play in this kind of saving than has been the case up to now and that we need to collect a lot more information to really understand exactly how these processes work. He also recommended, as you know, that there should be a ring-fence around hamper scheme payments to make sure that customers were properly protected, but that is an area which is more for the DTI than myself.

  Q307  Mr Love: Do you think we need to give more priority to this type of informal saving? Have we concentrated, as you indicated, on the changes from TESSAs and ISAs and back and forward to the more formal sector? Does the Treasury, do you think, need to be looking more carefully at informal savings?

  Ed Balls: I do. The reality is that we have a very good credit union network in our country which has much less coverage than in some other countries and that is an area where we can do a lot more. Before Farepak, on the basis of our information, there were three credit unions operating Christmas-style, lock-in accounts, Ipswich and Suffolk, Hull and East Yorkshire and, in particular, Leeds City Credit Union, which I think has been a model for a number of other societies and credit unions in recent months. In the last few months, we have actively been encouraging credit unions to establish these kinds of Christmas accounts and, just to give you a quick list, First Alliance, Glasgow, Grampian, ScotWest, Streetcled, Harlow Save, Cambridge City, Handsworth Breakthrough, Rainbow Saver, Anglia, North Lincolnshire and Toraen Secure, Yoker and Quids In Bolton. These are all credit unions which are established, Christmas-style, lock-in accounts, since Farepak and I think we need to see a lot more of that happening and a lot more information about the kinds of opportunities which are available. In the work which is being done by Otto Thoresen on generic advice, I think one thing which we would like him to do is to see how he can help move people into that kind of savings opportunity as well.

  Q308  Mr Love: You mentioned earlier that the DTI have some responsibilities here and they have reached agreement with the industry about setting up trust accounts. Are you convinced that trust accounts answer all of the concerns that have been expressed in relation to your responsibilities at the Treasury?

  Ed Balls: No.

  Q309  Mr Love: Will they provide the security or do we need to go further?

  Ed Balls: I do not think that they meet all of our concerns at all about ways to encourage more low income saving. I think that, for those people who choose to go for a hamper-style scheme, it will provide much greater security and my colleague, the Minister of State, announced a few weeks or a couple of months ago that an agreement in principle had been reached and the details are still being worked out and we really need, in particular, Park to get on with getting this sorted out. We hope that in the next weeks we can see a final, detailed resolution to that ring-fencing because we want to see people saving in hamper schemes properly protected, but, in addition to that, I would like to see people saving and getting some kind of return on their savings, which they do not have in hamper schemes, and having a bit more flexibility than you often have in a hamper scheme. I have to say that my presumption when I asked Brian to do this work was that hamper schemes were a bad deal for consumers and he said that for certain kinds of consumers in certain circumstances, if properly protected, they can play a role and they are popular, but there is a lot more that we can do to persuade other providers to provide alternatives and, as I said, credit unions and the Saving Gateway, these are all ways of trying to do that.

  Q310  Mr Love: How about regulation? Can you foresee circumstances where these types of scheme would be brought under the FSA to give that security that is necessary?

  Ed Balls: This is really a question which you need to put to Ian, but, as I understand it, this was looked at by the OFT. The conclusion which was reached was that to do that would essentially wipe them out, that their ability, given the kinds of margins they run on, to deal with FSA regulation would mean that it was a non-viable business model and, therefore, to regulate them was effectively to extinguish them. Pomeroy's recommendation was that there would be a cost to doing that, so, with the right kind of protection for consumers in a non-statutory form, as it would be, through this ring-fencing, they could still play an ongoing role and that was a judgment on the basis of the OFT recommendations that Ian reached, so I am not going to second-guess that judgment. What I do think is that we should do more to provide alternatives and to publicise them.

  Q311  Mr Fallon: Minister, Brian Pomeroy described the Christmas saving publicity campaign as "urgent" and the Treasury gave the OFT £1 million back in March. Are you aware that Sue Cook from the OFT told this Committee that national advertising would not begin until December this year and would be for people thinking of saving for Christmas 2008?

  Ed Balls: I was aware of that. I was told that by the OFT when they were drawing up their plans.

  Q312  Mr Fallon: Are you happy with that?

  Ed Balls: I think actually, on the basis of their expertise and the recommendations of Pomeroy, it was actually the right way to go. We asked Brian to do this work at the end of last year and we did a piece of research which did not complete until around Budget time, but I found the £1 million to resource the information campaign which he said was necessary. His advice was and all of the experts in the area say that, for the kind of people we are trying to reach, a standard, off-the-shelf, national advertising campaign has little impact and would not be effective and the way to get messages in is through existing networks of providers, through the kind of money advice local networks which currently exist, and that was a much more effective way to spend the money if you wanted to spend it urgently. In discussions, I, as the Minister allocating the money, said to the OFT that I thought there was a case also for seeing whether national advertising could play a role, and the conclusion which we reached was that we would need to do some more research and to understand how to do that in a way which was actually going to get through to the target audience, so these two stages, which was to get something on the ground quickly through existing networks now and then to think harder and to do more research so that for next year's hamper or Christmas savings scheme because, by the time we got to June, most people were obviously already into Christmas savings schemes for this year, if you were going to spend money through national routes, it was much better to do so around the time when people were starting to engage with Christmas saving which was not June. I understand that you had a robust exchange because I read the transcript, but personally I actually think this was good policy-making.

  Q313  Mr Fallon: That is a very long answer, but it does seem odd—

  Ed Balls: It was a full answer.

  Q314  Mr Fallon:— that you take the trouble to find £1 million, but it does not actually impact nationally on people starting to save this summer.

  Ed Balls: Hang on a sec. It depends what you mean, but there is no such thing as "national". All of the different local things we do add up to a national effort. There is £1 million for a national effort and we got the money in Budget time and they were up and running and spending the money within a couple of months and actually, through the launch of the campaign, got a very substantial amount of publicity which they did not have to pay for in the main, so I thought that was a pretty good outcome. The advice that I saw from Brian and others was that the best way to have a national reach quickly was by going through existing local, trusted networks and that is what we did, but, if there is to be a national message, it is something you need to think hard about before you do it and that is what we are doing.

  Q315  Mr Fallon: Presumably £1 million is not enough to have a desired impact right across the board of savings. Do you see the OFT coming back for more money next year or was this a one-off?

  Ed Balls: We are always under pressure to find more money.

  Q316  Mr Fallon: But is this a one-off?

  Ed Balls: Personally, I hear your representation, but I think it would be a good thing for us to spend more money on this and to spend money each year on it. Whether that is something which will be possible will depend upon the Chief Secretary rather than myself, but I think representations to spend more public money in this area sound to be very good representations to make.

  Q317  Peter Viggers: In November 2006, you announced a review of the legislation covering industry, provident societies and credit unions and those involved were led to believe in a promised consultation document in March and a full public consultation starting in April. Nothing has happened. What has gone wrong?

  Ed Balls: Nothing has gone wrong and the results of what has been a very extensive piece of work by the Treasury will be made public in weeks, days even. The fact is that we have an expert, but fairly small, resource in the Treasury and, as well as preparing for that consultation over the last six months, we have also been working in detail with John Butterfill on his Bill to modernise legislation as it impacts upon building societies and this is to save people doing the work and, in their supporting of the Butterfill Bill, including amendments at report stage and then in the Lords, we will make that piece of legislation really work for that part of the mutual sector. At the same time, we have been preparing the consultation through detailed discussions with the credit union sector and we will be moving forward very quickly in public with a detailed document which will allow us to frame exactly where our legislative priorities should be for the next session, if we can get a slot, so my reassurance to you is that we have been working very hard on this.

  Q318  Peter Viggers: Do you believe the credit unions can play a larger part in promoting savings and will your draft legislation reflect this?

  Ed Balls: I think they absolutely can and must, but it is dependent in part on updating the legislation because I think, in the case of building societies and some other forms of co-operative, the legislation has moved forward, but, in the case of credit unions, it is very clunky and out of date. It is a big task to modernise it, but we are setting out to do so. I think anybody in the credit union sector will tell you that this is quite an ambitious task and, to do it, we will have to use a number of different legislative vehicles. We are not going to get, in my guess, simply one big omnibus bill to sort this out, but we will have to use different routes as they present themselves and getting the consultation right, getting the priorities right, working up different ways in which you can do it through different instruments has been a big piece of work, but I think the credit union sector will see that we have done it very well.

  Q319  Peter Viggers: Will you be encouraging a rebranding of credit unions and do you accept that community banks play a large part in the United States, for instance? I know that historically the word "bank" has been defended very vigorously by the Bank of England and the authorities are anxious to avoid any institution using that word unless they satisfy very high criteria. What is the current thinking on that?

  Ed Balls: I have to say, I do not know the detail on that point. I have had no credit union put it to me in the last year that this was a major obstacle to moving forward, but I suspect I might get a few representations, having said that in front of the Committee. We now have a number of credit unions who are offering current accounts and one of the things I have been encouraging the banks to do, and in fact it is one of the work streams out of the financial inclusion report earlier in the year, is to see how we can get the high street banks doing more to support credit union current account banking. My sense though is that, for credit unions, the two main obstacles are legislation and capacity and I was down in Bristol a couple of weeks ago meeting the Bristol Credit Union which has merged four different credit unions into one, has gained money from the Growth Fund, is now about to offer a child trust fund, but that, in order to get to the kind of scale which it needs in order to be really sustainable, it needs to put a lot of resource into the staff it needs to get out into communities and collect the money to offer the loans, so the Growth Fund, by providing that sort of start-up capital or that start-up capacity and support for institutions to expand, is really, really important and my guess is that that is more important. Having the money to expand enough to become self-sustaining along with the legislation are probably the two biggest priorities, but I will have a look at this name issue.

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