Select Committee on Treasury First Report

2  Financial capability


7. Financial capability can be seen as the ability and confidence to choose and use appropriate financial services products. Improving financial capability is particularly important in the light of the increasingly complex financial decisions that people are required to make about credit, insurance and long-term saving products. Improving financial capability will contribute to a number of Government objectives, including minimising over-indebtedness and helping people plan for their retirement. The financial services industry would also benefit from increasingly capable and confident consumers who are better prepared to engage with the industry.

8. There was widespread recognition during our inquiry that, while the financial capability of the public had not got worse, it had not kept pace with the increasing sophistication of the financial products on offer. Rachel Lomax, Deputy Governor at the Bank of England, giving evidence on the work of the Monetary Policy Committee of the Bank of England, told us in March 2006 that

people's understanding of financial matters has not kept pace with the opportunities on offer. People do not have the grasp of financial issues that is necessary to cope with the financial products available to them.[5]

9. In March 2006, the FSA published Financial Capability in the UK: Establishing a Baseline, a survey which was commissioned to "describe and measure the state of financial capability in the UK, including consumers' knowledge and understanding, skills and confidence and attitude".[6] The survey's findings led the FSA to conclude that it had serious concerns about the public's financial capability and that, "unless steps are taken to improve levels of financial capability, we are storing up trouble for the future".[7] The FSA also concluded that there is "a clear need for the FSA and others to take action … The survey … tells us, in ever greater detail than ever previously available, where the problems lie".[8] The survey found that:

  • Large numbers of people, from all sections of society, are not taking basic steps to plan ahead.
  • Over-indebtedness does not affect a large proportion of the population, but that when it does occur it is often severe.
  • People do not take adequate steps to choose products that truly meet their needs.
  • The under-40s are typically much less financially capable that their elders.

10. Some of our witnesses argued that financial education and initiatives aimed at improving financial capability had a crucial role to play in promoting financial inclusion. Citizens Advice told us that, "for those people who are financially excluded and have limited practical experience of choosing and using financial products, equipping them to do so should be integral to an effective financial inclusion strategy".[9] Services Against Financial Exclusion (SAFE) believed that "action to achieve financial inclusion rests on two key fundamentals: providing access to affordable products and building financial capability … It is generally agreed that financial capability is lowest among those people experiencing social exclusion and deprivation."[10] However, Advice UK believed that there was "misplaced confidence in the benefits of financial education to eradicate financial exclusion, increase saving and pension contributions and to deliver greater public understanding of financial services".[11] Other witnesses noted that improvements to wider financial capability would take a generation to have effect, a point recognised by the FSA.[12]

The FSA's National Strategy for Financial Capability

11. Since 2003, the FSA has been leading and coordinating the National Strategy for Financial Capability. The strategy encompasses seven target areas or so-called workstreams: schools; young adults; the workplace; consumer communications; on-line tools; new parents; and money advice. The FSA stated:

In the three years since we launched the National Strategy for Financial Capability, many hundreds of thousands of people have received help, education and advice that was previously unavailable to them. With the sustained and relentless implementation of the programme, we will now extend this to reach millions of people across the UK.[13]

12. Mr John Tiner, the Chief Executive of the FSA, told us that "in all of the seven priorities which we have established [the FSA] had asked the teams to think about how they can include the financially excluded. There are specific proposals … to help reach those people", including a programme which was aimed at adults Not in Education, Employment or Training (NEET).[14] The FSA has also launched a Financial Capability Innovation Fund and a number of the organisations receiving assistance from this Fund provide support to people who have difficulty accessing financial services through mainstream channels.[15]

13. However, other witnesses felt that the FSA's strategy did not adequately address the needs of financially excluded individuals. SAFE believed that "Whilst the FSA has taken some responsibility for building financial capability, its future efforts are to focus on mainstream groups of people. There does not appear to be any clear attempt to promote financial inclusion".[16] Ms Teresa Perchard, Director of Policy at Citizens Advice, believed that the question that needed to be asked was "What does [the FSA's] strategy do for people who are financially excluded … Why are they bottom of priorities rather than the top?"[17] Professor Elaine Kempson believed that there was a danger that "attention will be focused on informing people on low-incomes about financial services, while the bigger barrier is in our opinion overcoming their resistance to use commercial financial services at all".[18] Claire Whyley, Director of Policy at the National Consumer Council, told us that, rather than attempting to pool resources into meeting the needs of the hardest to reach, the FSA had effectively concentrated on those who were easiest to reach, aiming to reach the most people with the least input, "and that is how we have ended up so far from anything that is aimed at people who are financially excluded".[19] We welcome the limited steps the FSA has taken to improve financial capability amongst the financially excluded, such as some of the projects funded by the Financial Capability Innovation Fund. However, we are concerned that the FSA's National Strategy for Financial Capability does not adequately address the needs of the financially excluded. We recommend that the FSA set and achieve targets to reach such individuals as part of its strategy. Reaching the financially excluded will require much more active engagement rather than just distributing leaflets or putting information on a web-site. We further recommend that the action undertaken by the FSA be coordinated with work by the Financial Inclusion Taskforce aimed at stimulating demand for financial services amongst previously excluded individuals.

14. The majority of consumer bodies and other witnesses continued to believe that the FSA was the organisation that ought to be coordinating the strategy for financial capability.[20] Ms Perchard thought that it was difficult to argue that the FSA should not be playing a very prominent role in improving financial capability due to their statutory objective to promote consumer understanding of the financial system. She told us that, although the FSA had not succeeded yet, this was not a reason to conclude that the FSA had failed or that the FSA was not the right agency. This was partly because she was "not sure who else could pick it up".[21] However, Mr McAteer, Principal Policy Adviser at Which?, disagreed, stating that he did not think the FSA was the best placed organisation to deliver the financial capability strategy and questioning whether it had the resources available. He believed that the only way that value for money could be obtained from action taken to improve financial capability was if the body responsible for the strategy was linked to the FSA, but operationally independent.[22] The Association of Investment Trust Companies called for the creation of a "Financial Education Agency" which would centralise the currently uncoordinated efforts of Government departments. Such an agency would fall under the "auspices of the FSA" but would have a "ring fenced budget and a separate board and management structure to the FSA" and would "take on responsibility for the FSA's statutory duty to promote public understanding and report annually on its progress".[23]

15. Some witnesses questioned the progress made by the FSA. Ms Perchard, who had been a member of one of the FSA's working groups on improving financial capability, told us that

What we have been doing in the FSA financial capability strategy is pushing around cold food about what we could do with no sense of where the resources might come from, which I think has ossified development [and] people's attention, when we are all actually wanting to do more in this area.[24]

16. Ms Whyley believed that

It was admirable to construct the strategy as part of a really wide consultation, but I think with a consultation that wide you need quite a clear remit and you need to keep a strong grip on it, and I think that is the bit that slipped. Then I think [the FSA] had lots of working groups all working to slightly different agendas, and there was not really much of a backbone to it.[25]

17. Other bodies felt that more progress had been made. The Financial Services Consumer Panel argued that "the FSA has made a difference in a difficult area, by bringing Government, industry, educational and not-for-profit groups together in an effective partnership".[26] Mr Tiner did not feel that it was the FSA's role to deliver the strategy:

That is not the best use of public funds or the best use of the FSA's levy funds … Our job is to lead this, corral people into participating … I do not want to build a delivery channel for Financial Capability, when there are numerous delivery channels that already exist which people trust.[27]

18. The key challenge identified by a number of witnesses was the lack of clarity about how the financial capability strategy would be funded.[28] In May 2004, the FSA stated that it "had identified around £35-40 million which is spent on financial capability work, funded by a combination of Government money, industry contributions, charitable trusts and the FSA. When the [seven] working groups report back with fully costed proposals it will be possible to estimate whether additional resources may be needed and if so, how much and who is best placed to provide the funding."[29] The FSA also indicated in May 2004 that, "in the meantime", the Steering Group would be "working to develop an appropriate funding strategy".[30]

19. The most recent document from the FSA on its work on financial capability did not give any further information about a funding strategy or an estimate of whether the total amount spent on financial capability work by industry, Government, charitable trusts and the FSA had increased from that identified in 2004. Several of the workstreams contain estimates of spending, but it is not clear whether this only represents spending by the FSA.[31] In 2006-07, the FSA will spend up to £10 million on financial capability, through around 40 staff, funded, like all FSA spending, by a general levy on the regulated financial services industry. This is an increase from £4 million in 2004-05 and £8 million in 2005-06.[32] Witnesses suggested a number of possible funding sources for the financial capability strategy including central Government budgets, a levy on the financial services industry, and Lottery funding. There were also calls for part of the money released from dormant accounts to be used to fund the strategy.[33]

20. The FSA's National Strategy for Financial Capability has been successful in bringing together the various Government, industry, consumer, voluntary and charitable organisations to discuss issues and improve coordination. We believe that the FSA is the right body to coordinate the national strategy for financial capability. We welcome the development of a baseline of overall financial capability and a pledge by the FSA to monitor overall progress in addition to the inputs and outcomes of individual projects. However, the FSA has made little progress in identifying and drawing in extra funding for financial capability work or developing a wider funding strategy. We recommend that the FSA accord a much higher priority to these areas.

21. On 13 July 2006, the Economic Secretary to the Treasury announced that in the Autumn of 2006 the Treasury would publish "a 10-year strategy on financial capability … setting out the Government's plans for action in that important area".[34] In October the Government and the FSA hosted the first ever UK National Conference on Financial Capability. In a speech at this conference the Economic Secretary to the Treasury provided more detail about how the Government would develop the 10-year strategy. He said that

I believe our first task as Government is to set out our long-term goals and ensure that they meet the scale of the challenge we have all identified … So as we prepare our long-term strategy for publication this autumn, I think these are the key questions we should answer: How ambitious should our goals be against the challenge? Once we have understood the challenge, can we set the right long-term, achievable objectives? Are we making best use of those opportunities and levers that we have at our disposal? How can we match the engagement of public services with the financial capability needs of the public at various key decision points—and how can both education and working age services play a role? Are the right resources in place more widely—what roles do the financial and voluntary sectors play at present and what roles must they play in the future? And what are the gaps in current provision, and how can they be filled?[35]

22. Improving financial capability will be a long-term project and we welcome the Government's announcement of a 10 year strategy for financial capability. This must establish a lead Department and improve coordination between the various Government departments involved and consider how much additional Government investment is required.

Linking financial education to specific events

23. We received evidence emphasising the importance and benefit of education programmes linked to specific events, for example, when a consumer takes up a financial services product for the first time, rather than providing generic information in a classroom setting unrelated to the purchase of a product. Some witnesses noted that it was unreasonable to expect people to discuss their private financial affairs at classes or groups. For example, the Chartered Institute Of Housing found that the DfES Community Finance and Learning Initiative (CFLI) "did not strike much of a chord with residents partly because they did not want to share information in a classroom setting".[36]

24. We received numerous examples of financial capability programmes delivered alongside efforts to promote financial inclusion. For example, SAFE told us that, as well helping people to open bank accounts, it provided educational support to help people understand how to use the account in addition to basic budgeting information.[37] Credit unions and other third sector lenders provide money advice when extending affordable credit to low income individuals.[38] Citizens Advice Bureaux provide financial education programmes alongside debt advice, helping people to sort out their problems through better budgeting.[39] The Financial Inclusion Taskforce found that in the USA, "financial education tied to specific financial products and events e.g. account opening is successful in promoting better financial management behaviour among customers".[40] HBOS told us about an education programme provided to some customers opening a basic bank account which covered "the benefits of having a bank account and [taught] basic financial management such as budgeting."[41]

25. The evidence we have received indicates that financial education linked to a specific event such as opening a bank account, obtaining credit or programmes of debt advice can be effective in promoting financial inclusion and deliver better value for money than the provision of generic information in a classroom setting. We recommend that the financial services industry explore the business case for providing education initiatives. We consider that it would be helpful if HBOS were to evaluate the success of their education programme by comparing the profitability and ability to manage their account of customers receiving this training against a sub-set of customers not participating in the programme.

Simplicity and clarity in marketing material and communications

26. In its Report on Restoring Confidence in Long-term Savings, the previous Treasury Committee concluded that it was "particularly important to see the work on improved customer understanding of financial issues as an addition to, rather than a replacement of, efforts to make the information available to consumers clearer and more accessible".[42] Ms Perchard thought that the financial services industry had "got a long way to go in terms of getting very simple language into information about financial products and also having the people on the front-line in firms … being able to explain things simply to consumers".[43] She noted the improvements that had resulted from the inquiry by the Treasury Committee in the previous Parliament into the transparency of credit card charges, including the introduction of a 'Summary Box', a standard, clear and concise method of presenting the key financial information of a credit card.[44] Citizens Advice told us that the inadequacy of information provided by the financial services industry was highlighted by the fact that in a recent pilot aimed at providing financial advice "many of the enquiries they dealt with involved the need for 'translation' to take place between the firm and the consumer who could not understand letters and contracts sent to them".[45]

27. The FSA survey on financial capability found that 40% of people who owned an equity ISA did not think that they had stock market exposure, and 15% of people who had a cash ISA thought that they did. We put it to the FSA that this level of knowledge indicated that there were major problems with the disclosure regime for product information and that it was failing to communicate simple messages to the majority of consumers. Mr Tiner agreed, saying that he

did not dispute that at all. The product disclosure regime has actually become too complex itself. The documents are too long; there is too much jargon.[46]

28. Mr Tiner added that the FSA was looking very closely at the disclosure regime, but had been held up by the potential implications for the FSA's implementation of new regulations arising from the Markets in Financial Instruments Directive (MiFID).[47] In October 2006 Mr Tiner told us that 11 mandated documents[48] appeared "in front of a consumer who wants to buy an investment product in addition to any marketing literature provided". He noted that "we have had terribly elaborate 'key features' documents, where companies have gone to great lengths to explain every single risk in great detail; it has not served the consumer at all because they do not understand what they are reading, by and large, and is simply a way for the financial services industry to offload risk onto the consumer." He indicated then that the FSA was proposing to simplify the information provided and change the emphasis from "a very prescriptive approach to putting the onus on the distributor and on the product provider to be very clear with the consumer in brief and simple terms [telling them] what they need to know".[49]

29. It is of vital importance that long-term work aimed at promoting financial capability takes place alongside efforts by the financial services industry to make their marketing and communication material clearer for consumers. The fact that over 40% of people with an equity ISA are not aware that its value fluctuates with stock market performance indicates that the current information disclosure regime is failing to get across key information to consumers. Consumers buying investment products are currently provided with 11 separate documents, in addition to the marketing material from the company selling the product. The current documentation, such as the 'Key features' document, is confusing for consumers. We recommend that the FSA attaches a greater priority to its work to simplify the disclosure regime and ensure that financial services companies provide consumers with simple and clear information. We further recommend that, the concept of Summary Boxes, giving clear and succinct information, should be expanded to more financial services products.

Financial education in schools

30. It was widely noted in evidence that schools had an important role to play in improving the financial capability of young people. The Personal Finance Education Group (PFEG) told us that

Schools are unique in having access to, and influence on, all young people across social, economic, ethnic and religious groups. If we can ensure that young people leave school as informed and independent consumers with the confidence to engage with the finance sector, this will provide a firm foundation and prevent many of them from getting into financial difficulties as adults.[50]

31. However they believed that "currently, personal finance education, if it happens at all, has a low status. It cannot be assumed to be happening in any given school at any time."[51] Professor Kempson told us that there was much more that needed to be done to promote financial education through schools and that "at present the situation regarding its place in the school curriculum varies across the four countries of the UK … and the work of [PFEG] and others has shown that provision is patchy, with most teachers lacking the skills and confidence to teach the subject".[52]

32. The FSA has recently undertaken a benchmark study on the existing provision of financial education within schools. This found that, while 48% of primary schools and 91% of secondary schools were delivering some form of personal financial education, in over 70% of cases it was in the form of occasional lessons, usually happening once or twice a term or less.[53] Only about half of schools in England had drawn on guidance from the Department for Education and Skills (DFES), but over two-thirds of schools in Scotland reported that they had drawn on guidance provided by Learning and Teaching Scotland. Only a minority of schools had received training in this area (9% of primary schools and 26% of secondary schools), but slightly more had received some other form of support (11% of primary and 40% of secondary schools). The proportion of schools which had received support was higher in Scotland than in England and Wales.[54] The Scottish Executive has supported the development of the Scottish Centre for Financial Education established by Learning and Teaching Scotland. The Welsh Assembly Government told us that they intended to emulate this approach in Wales and were working with the FSA and private sector investors to examine options for the establishment and funding of such a centre.[55]

33. DFES told us that, as part of the reforms to education for the 14-19 age group

financial capability education will be taught more explicitly in the curriculum by including it in the new functional mathematics component of GCSE mathematics. But we also recognise that a range of other subjects, such as Personal, Social and Health Education, Citizenship, Business Studies and Careers Education, offer good opportunities and contexts for exploring and improving young people's understanding of financial issues.[56]

34. The Ifs school of Finance, a registered charity which provides financial education, has indicated concern that the Standards for Functional Mathematics published by the Qualifications and Curriculum Authority were inadequate. The Ifs school of Finance told us that the only reference to 'finance' of any type appears in just the two lowest levels and that there was no mention of anything to do with finance in Entry level 3 or in Levels 1 and 2 (GCSE level). They feared that "the concentration is on mathematical concepts such as arithmetic and basic geometry. What is being masqueraded as financial capability is confined to recognising notes and coins and simple calculations using money."[57] Moreover, they noted that "naming the course 'mathematics' immediately alienates students who have a fear or dislike of the subject".[58]

35. PFEG told us that while "it is relatively easy to attract funding for modest projects that are discrete, branded and time-limited, it has proved difficulty to acquire the necessary funding to achieve the step change identified by the FSA's national strategy". They noted that "Government departments have indicated that [the additional funding for financial capability projects] is unlikely to come through the Department for Education and Skills".[59]

36. Providing financial education in schools is an essential part of the FSA's National Strategy for Financial Capability. We welcome the change to address financial capability more explicitly in the 14-19 curriculum in England by including it in the new functional mathematics element of GCSE mathematics, although we are concerned that the content of this element will not be sufficiently focused on financial education. In over 70% of schools, personal finance education is only provided in the form of occasional lessons happening once or twice a term or less. It should be a priority for the Department for Education and Skills to ensure that the Qualifications and Curriculum Authority and those responsible for delivering the school curriculum see financial education as a core issue. Improving financial education in schools needs to be a major objective of the Government's ten-year strategy for improving financial capability.

5   Treasury Committee, Bank of England February 2006 Inflation Report evidence, HC 973 Q 111 Back

6   Ev 308 Back

7   FSA, Financial capability in the UK, establishing a baseline, March 2006, p 1 Back

8   Ibid, p 5 Back

9   Ev 248  Back

10   Ev 466 Back

11   Ev 179 Back

12   Qq 95, 712 Back

13   FSA, Financial capability in the UK, establishing a baseline, March 2006, p 5 Back

14   Q 717 Back

15 Back

16   Ev 467 Back

17   Q 90 Back

18   Ev 427 Back

19   Q 93 Back

20   Qq 89-93 Back

21   Q 89 Back

22   Q 95-97 Back

23   Ev 199 Back

24   Q 93 Back

25   Q 93 Back

26   Financial Services Consumer Panel, 2005/06 Annual Report, p 23,  Back

27   Q 714 Back

28   Ev 400, 423-425, 248, 198 Back

29   FSA press release, The FSA sets out a path to build a National Strategy for Financial Capability, 27 May 2004 Back

30   FSA, Building Financial Capability in the UK, May 2004, p 12 Back

31   FSA, Financial Capability in the UK: Delivering Change, March 2006, pp 10-12  Back

32   HC Deb, 2 May 2006, col 1444W Back

33   Ev 199-200, 400 Back

34   HC Deb, 13 July 2006, col 1468 Back

35   Speech by the Economic Secretary to the Treasury, Ed Balls MP, at the Financial Capability Conference, 18 October 2006 Back

36   Chartered Institute of Housing, Life After Debt, February 2006, p 9 Back

37   Ev 464 Back

38   Ev 280 Back

39   Ev 248 Back

40   Not printed, Financial Inclusion Taskforce, report of visit to the USA Back

41   Ev 328  Back

42   Treasury Committee, Eighth Report of Session 2003-04, Restoring confidence in Long-term Savings, para 102 Back

43   Q 94 Back

44   Q 95 Back

45   Ev 248  Back

46   Q 716 Back

47   Q716 Back

48   These include: a business card; an Initial Disclosure Document (IDD); a menu of fees and commissions; a terms of business letter; a fee agreement; the terms and conditions of the product; a Key Features document / Simplified Prospectus; a personalised illustration (plus a consumer friendly Principles and Practices of Financial Management-CFPPFM-for with-profits business); a suitability letter or statement of demands and needs; a cancellation notice; and a post-sale Key Features document. Back

49   Evidence on the FSA's 2005/06 Annual Report, Q 154 Back

50   Ev 423 Back

51   Ibid  Back

52   Ev 427 Back

53   FSA, Personal finance education in schools: A UK benchmark study, June 2006, pp 3-4 Back

54   Ibid, p 5 Back

55   Ev 498 Back

56   Ev 273  Back

57   QCA Standards for Functional Mathematics - a response from the ifs School of Finance to the 'Standards', September 2006, p 1 Back

58   Ibid, p 3 Back

59   Ev 423 Back

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