Written evidence submitted by the Consumer
Financial Education Body
ABOUT CFEB
The Consumer Financial Education Body (CFEB) is an
independent body, created in April 2010 as a result of the Financial
Services Act 2010. Our mandate is to develop consumer financial
education in the UK, as well as to enhance the public's understanding
and knowledge of financial matters and their ability to manage
their finances.
CFEB welcomes the opportunity to submit written evidence.
SUMMARY OF
OUR RESPONSE
— The
main point of interest in this inquiry for CFEB is "whether
competition is inhibited by difficulties faced by customers in
accessing information about products".
— There
are barriers to accessing information and also barriers to acting
on that information.
Barriers to accessing information
— Product
disclosure has limitations. CFEB is happy to work with industry
and regulators to identify what works in adequately informing
consumers of risks and benefits.
— Transparency
is important and desired by consumers. We welcome the Government's
announcement around simple products.
— Packaged
accounts and different systems of overdraft charging create barriers
to comparability and transparency of accounts.
— Some
consumers have very limited choice - such as undischarged bankrupts
and people without conventional proof of identity.
— Our
impartial information and advice can help competition. Evidence
from the Money Guidance Pathfinder shows people using the service
to compare products and taking action afterwards.
Barriers to acting on information
— There
are several reasons why information and advice do not have a stronger
influence in the market.
— There
are clear differences between types of consumer, not least in
terms of their financial capability. People are less financially
capable when they are going through major life events, such as
unemployment and divorce.
— Financial
capability will have less impact in markets where consumers do
not feel powerful and where competition is limited.
— Evidence
from Centre for Competition Policy and from the FSA provides some
explanation for why switching of bank accounts is low, including
confidence and the perceived time needed.
— But
the difference between banking and other markets is not fully
explained. Behavioural science may have some explanations - we
welcome research and ideas from firms and others about changing
financial behaviour.
— Remedies
are needed on the demand and supply side, and at their interface.
CFEB has a role on the demand side and we are exploring interventions,
such as a Financial Health Check, at key financial decisions.
1. INTRODUCTION
1.1 This is a response to the Treasury Committee's
call for evidence to inform its inquiry into competition and choice
in the banking sector. A number of the issues the Committee is
addressing in this inquiry can ultimately impact on consumers'
ability to manage money, and it is clear that the financial crisis
has affected competition and choice in retail and wholesale markets.
For example, there is less scope and arguably less incentive to
switch in a highly consolidated market. But the main point of
interest in this inquiry for CFEB is "whether competition
is inhibited by difficulties faced by customers in accessing information
about products".
1.2 Our expertise is important to this inquiry
because the way consumers use information about products is central
to our statutory function. We were set up to enhance: public understanding
and knowledge of financial matters; and the ability of members
of the public to manage their own financial affairs. We consider
that there are barriers to accessing information and also barriers
to acting on that information. This submission considers each
of those issues in turn.
2. OUR RESPONSE
Barriers to accessing information
2.1 CFEB considers that there are barriers to
accessing information, which can partly be addressed by a better
process of providing information, and ensuring transparency.
2.2 The report by the Commission on the Future
of Banking, as well as research by the FSA and others, note the
limitations of product disclosure - both in its volume and the
extent to which consumers engage with it, remember it accurately
or recall seeing it at all.[28]
Previous Treasury Select Committee inquiries have also made very
helpful contributions to this debate. CFEB is happy to work with
the Government, industry and regulators to discover what works
best in terms of adequately informing consumers of the risks and
benefits of a particular product or service.
2.3 Central to the purpose and effectiveness
of disclosure is product transparency: the consumer should know
what they are buying. Research for the Treasury's Retail Financial
Services Forum found that transparent products with clearer labelling
were desired by consumers.[29]
The Government has announced its intention to consult on a new
range of simple products, into which CFEB will seek to input.
The sales process should also be transparent - one of the problems
identified with the Payment Protection Insurance market was that
many consumers did not know it was optional.[30]
2.4 Developments in the personal current
account market have meant that products are not necessarily transparent,
readily comparable or understandable. Firstly, increasingly available
packaged accounts and other products tied to current accounts
compete, by their nature, on a variety of features as well as
price. The FSA has flagged that this may not be of benefit to
all who use them.[31]
Consumers should be encouraged to consider whether the extra features
offered provide good value for money and, where insurance products
are included, the cover they need. Secondly, it is well documented
that overdraft charges are not consistently applied from firm
to firm, which limits transparency and comparability.[32]
Regardless of any developments in the market and regulation of
overdrawn bank accounts, it is important that efforts are made
to ensure consumers are able to understand and compare the costs
they may face when borrowing in this way, and better able to compare
the overall cost of different forms of credit.
2.5 The Committee should also give consideration
to the limited choice available for some consumers. Current accounts
increasingly have conditions attached, such as a minimum monthly
deposit. The features of basic bank accounts vary significantly
and, as highlighted by Citizens Advice in their recent report,
Called
to Account,[33]
the choice available to groups such as undischarged bankrupts
is very limited and not always clear. Those without conventional
forms of proof of identity, such as homeless people and recent
migrants, may also struggle to access a bank account and information
about it. The outcome is that many people remain unbanked, with
the individual and social costs that entails. Rural consumers
may have little meaningful choice if they wish to use face-to-face
banking - and the OFT found that branch location was the main
reason for choosing a bank account.[34]
An increasing number of accounts are only available online, which
restricts choice for those without internet access.
Barriers to acting on information
2.6 As we have noted above, consumers do face
difficulties in accessing clear information about products; but
perhaps more important is their ability and motivation to act
on that information.
2.7 Financially capable consumers can
drive competition. Our definition of financial capability is made
up of five domains: making ends meet, keeping track, planning
ahead, choosing financial products and staying informed. Choosing
products is clearly crucial, and the other domains are all relevant,
to a consumer's ability to exercise choice and encourage competition.
2.8 We believe CFEB's impartial information
and advice can help competition - shopping around for the best
deal and comparing products are among the main activities we help
people do. In the Money Guidance Pathfinder,[35]
users were helped to gather information on and compare products
in 30% of face-to-face and 47% of telephone sessions. Evaluation
found that 21% of users had applied for, bought or changed a product
within two months of a session. The Moneymadeclear
website contains information on bank accounts, including packaged
accounts, and our comparison tables can be used as a tool to inform
switching.[36]
In future, CFEB aims to make it easier for users to make informed
decisions about products.
2.9 However, there are several reasons
why information and advice do not currently have a stronger influence
on consumer behaviour in the market. It
is worth acknowledging that consumers are not one homogenous group.
There are clear differences between types of consumer, not least
in terms of their financial capability. Our research shows that
people are less financially capable when they are going through
major life events, such as unemployment and divorce, both of which
tend to increase in an economic downturn.[37]
This is likely to impact on their ability and inclination to exercise
choice.
2.10 In markets where consumers do not
feel powerful, the impact of financial capability will be limited.
In sectors that are not competitive, due to consolidation for
example, even active consumers may benefit less from switching
and are therefore less likely to be able to drive competition.
2.11 Research
by the Centre for Competition Policy shows that active consumers
are more likely to switch bank accounts: the best predictor of
whether someone will switch is whether they have switched in another
market. A person's confidence in predicting gains and costs was
a better predictor than what they estimated those gains or costs
to be. Consumers thought it would take much longer to search and
to switch bank accounts than other contracts. But even allowing
for consumer characteristics, experience and expectations, there
was an effect that meant that switching was lower in the current
account market[38].
This warrants further research and the CCP are following up this
study. This suggests that increasing knowledge and confidence
is an appropriate remedy but will not be the whole solution.
2.12 An omnibus survey of 2,000 adults in Britain
conducted on behalf of the FSA in January 2010 found that people
with only a bank account were less likely to have switched or
considered switching in the last year. Across all product holdings,
most consumers who considered switching in the past year did actually
switch; and the reasons given by those who switched were very
closely matched to the reasons given by those who only considered
switching. These reasons were predominantly financial: dissatisfaction
was not the main driver of switching.[39]
More research would be welcome into the reasons people do not
shop around when they are dissatisfied.
2.13 Behavioural science has some theories to
explain the low levels of switching in the current account market.[40]
We welcome the Government's commitment to make use of behavioural
economics and agree it is relevant to financial services. CFEB
recently published Transforming financial behaviour, which
identifies drivers for changing consumer behaviour and ways these
could be harnessed to improve financial capability.[41]
The report seeks the views and experiences of others in using
behavioural strategies and we would welcome the contribution of
retail firms and others to help inform our work.
2.14 To increase the number of financially capable
consumers who are able to exercise choice effectively, a range
of remedies will be needed on the demand and supply sides and
at their interface. On the demand side, CFEB is striving to enhance
the public's understanding and their ability to manage money.
We are exploring interventions such as the Financial Health Check
at key financial decisions.
September 2010
28 For example, Future of Banking Commission, 2010
[commission.bnbb.org]; Disclosure in the Prime Mortgage Market,
FSA 2009 [www.fsa.gov.uk/pubs/consumer-research/crpr82.pdf]; Warning:
Too much information can harm, Better Regulation Executive and
National Consumer Council 2007 [www.bis.gov.uk/files/file44588.pdf] Back
29
"Simple transparent products" research paper, HM Treasury
2010
[www.hm-treasury.gov.uk/fin_retail_finservices_forum.htm] Back
30
See, for example, The sale of PPI - results of thematic follow-up
work, FSA 2006
[www.fsa.gov.uk/pubs/other/ppi_thematic.pdf] Back
31
Financial Risk Outlook, FSA 2010
[www.fsa.gov.uk/Pages/Library/corporate/Outlook/fro_2010.shtml] Back
32
See, for example, Personal
Current Accounts in the UK - an OFT market study, OFT 2008
[www.oft.gov.uk/shared_oft/reports/financial_products/OFT1005.pdf];
Which? magazine September 2010 Back
33
Called to Account, Citizens Advice 2010 [www.citizensadvice.org.uk/called_to_account] Back
34
OFT ibid. Back
35
The Money Guidance Pathfinder provided information and guidance
by telephone, face-to-face and online. Money Guidance Pathfinder
evaluation, CFEB 2010
[www.cfebuk.org.uk/pdfs/20100709_pathfinder.pdf] Back
36
See www.moneymadeclear.org.uk. Back
37
The impact of life events on financial capability: evidence from
the BHPS
[www.fsa.gov.uk/pubs/consumer-research/crpr79.pdf] Back
38
Pain or gain: Does consumer activity reflect utility maximisation,
Centre for Competition Policy, University of East Anglia 2008
[www.uea.ac.uk/polopoly_fs/1.104668!ccp08-15.pdf] Back
39
Consumer awareness of the FSA and financial regulation, FSA, to
be published September 2010, copies available from the FSA on
request. Back
40
The psychology of personal current accounts, OFT 2008
[http://www.oft.gov.uk/shared_oft/reports/financial_products/oft1005e.pdf] Back
41
Transforming Financial behaviour, CFEB 2010
[www.cfebuk.org.uk/pdfs/20100713_transforming_financial_behaviour.pdf] Back
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