HC 271 Money Advice Service

Written evidence submitted by Sue Lewis, stl consultants

Executive Summary

1. This Memorandum sets out some of the background to the setting up of the Money Advice Service (MAS), and the international context for developing financial capability [1] strategies. It argues that it is too early to judge MAS’s performance against its statutory objectives, or its internal efficiency, but suggests that the future of MAS might be considered in the broader context of the financial capability needs of UK citizens.

Financial capability: the international context

2. Across the world, people are taking on more risk for managing their own financial futures – eg the shift from DB to DC pensions - and are doing so in an increasingly complex financial marketplace. Following the financial crisis of 2007-08, trust in financial institutions remains low, and people often ‘do nothing’ rather than risk losing their money. Against this background many Governments are concerned about the low levels of financial capability amongst their citizens. They recognise that better financial capability will not only benefit individuals and their families, but also contribute to more efficient financial markets and the economy as a whole. Many are responding by developing a national strategy for financial education [2] , often as part of wider consumer protection reform, or alongside financial inclusion measures.

3. The OECD has recently published a Working Paper [3] on national strategies for financial education. This names 15 countries [4] which have implemented a strategy, and a further 21 which have one in development. It defines a national strategy as a nationally coordinated approach to financial education which:

· Recognises the importance of financial education, and defines its meaning and scope in relation to identified national needs.

· Has an identified national leader or coordinating body and involves the cooperation of different stakeholders.

· Has a delivery plan to achieve specific objectives.

· Provides guidance to individual financial education programmes, to ensure they contribute efficiently to the whole.

4. The leadership role is generally taken by the finance ministry, financial services regulator, or the central bank. New Zealand has a dedicated independent body, the Commission for Financial Literacy and Retirement Income.

Financial capability in the UK – development of a national strategy

5. The UK was one of the first countries to recognise the importance of financial capability.

6. In 2005, the FSA produced "Financial Capability in the UK: Delivering Change", a five-year national strategy for improving the financial capability of UK citizens, and in 2006 it published a ‘baseline’ survey, which measured the financial capability of adults across the country. The survey defined five elements of financial capability: making ends meet, keeping track of personal money, planning ahead, choosing financial products and staying informed about financial matters.

7. The survey showed low levels of financial capability across the UK, particularly planning ahead and shopping around. In four out of the five elements, younger people (20s-30s) performed worse than older age groups. Those on low incomes were generally good at making ends meet, but particularly poor at planning ahead. Understanding of investment concepts was particularly poor. The FSA concluded that a large proportion of the population was storing up trouble by not planning adequately and investing for the future. The survey was due to be repeated in around 2010.

8. The FSA CEO chaired a Steering Group to ensure coordination of efforts to improve financial capability. This group included Ministers from the Treasury and Department for Education, as well as external stakeholders.

9. The previous Government recognised that it also had a role to play in improving financial capability and, in 2007, published "Financial Capability: the Government’s long-term approach". This set out the Government’s long-term aspirations for access to ‘generic’ (unregulated) financial advice, personal finance education for all schoolchildren, and a range of Government programmes to improve financial capability.

The Thoresen review of generic financial advice

10. The Government also said that it saw a gap in the market for affordable generic advice (which was not covered in the FSA national strategy) and commissioned Otto Thoresen, then CEO of Aegon UK, to carry out a review "examining the feasibility of delivering a national approach to generic financial advice". The aim was "to ensure greater access to high quality affordable financial advice for those most vulnerable to the consequences of poor financial decision-making".

11. The Thoresen Review reported in March 2008, concluding that there was a strong need for an impartial unregulated financial advice service, which could bring significant benefits to users, the Government, and the financial services industry. Thoresen said that around 19 million people, who were most vulnerable to the consequences of poor financial decision-making, could benefit. It is worth noting that Thoresen was not using the usual definition of ‘vulnerable’, but a more complex measure encompassing factors such as lack of access to advice, poor planning skills, low or no savings or protection products, difficulty in making ends meet and overindebtedness. While these factors are more often found amongst deprived individuals and families, this is not always the case, and people higher up the income scale can certainly be vulnerable under Thoresen’s definition.

12. Later in 2008, the Treasury/FSA published "Helping you make the most of your money: a joint action plan for financial capability", which announced public funding for personal finance education in schools and ‘pathfinders’ to test the approach recommended by Thoresen.

Creation of the Money Advice Service

13. In the 2010 Financial Services Bill, the Government included a measure empowering the FSA to set up an independent body (called, provisionally, the Consumer Financial Education Body - CFEB) which would take over the financial capability role of the FSA, including the national strategy, and providing generic advice as recommended by Thoresen. In winding up the Second Reading debate Treasury Minister Ian Pearson said: "It is important that the FSA can establish a new consumer financial education body to provide strategic leadership and increase the profile of the financial education and capability agenda ".

14. The CFEB proposal received cross-Party support during the passage of the Bill, albeit with some concerns about the FSA’s role and the precise remit of the new body . Again in Committee, the Minister was clear about expectations of CFEB: " The Government will expect the new body to prioritise the most financially vulnerable. There is no conflict between that and saying that it must have a wider role as well. As the hon. Gentleman will be aware, the FSA currently provides a broad range of information through the moneymadeclear website, which will transfer to the new consumer financial education body. That information is useful and welcome and will continue under the new body. As an aside, my understanding is that the hon. Gentleman referred to the money guidance service. The remit of the consumer financial education body will be wider, as I have indicated " .

Money Advice Service – TSC Inquiry

Turning to the questions posed by the TSC:

15. To what extent is the MAS meeting its core statutory objectives? It is probably too early to say. The MAS only launched in April last year and has not yet published an annual report in its current form. The MAS vision ("We enhance people’s lives because they take control of their money as a matter of course") appears consistent with its statutory objectives but it is not yet clear how this will be achieved.

16. At this stage, the MAS’s interpretation of its statutory objectives objectives appears to be different from that of the FSA’s interpretation of its, similar, FSMA ‘public awareness’ objective. The FSA used its statutory objective to develop a national strategy for financial capability: its approach was widely admired and is being imitated in many countries. In creating CFEB, the intention was to ‘lift and shift’ the work already being done by the FSA to an organisation which would be able to focus exclusively on the financial capability agenda, to provide leadership and coordination. This approach was endorsed by Parliament in the passage of the Bill. The implementation of money guidance was intended to be part of this agenda. The MAS has so far focussed almost exclusively on its advice service (and the healthcheck, which the current Government asked it to develop). The MAS 2012-13 business plan does promise a new UK national strategy.

17. Are these the right objectives for the MAS to have? MAS’s statutory objectives are vague and capable of different interpretations. They could be clearer and more outcome-focussed. The (non statutory) objective of the Australian national strategy for financial literacy is one example: "To enhance the financial wellbeing of all Australians by improving financial literacy levels". Another example is from the New Zealand Commission for Financial Literacy and Retirement Income: " New Zealanders are better educated and motivated to make informed financial decisions throughout their lives " .  

18. How effective is the MAS’s internal administration and expenditure on staff and other resources? This is difficult to answer without an annual report on the MAS’s activities. What one might expect to see in the annual report would be an account of how the MAS was meeting its statutory objectives in its first year of operation, how it has reached different segments of the population, particularly the most financially vulnerable, the outcomes it has achieved, and perhaps some benchmarking against international comparators (eg New Zealand’s ‘Sorted’ or similar websites). It would also be helpful to see an evaluation of the workstrands from the FSA strategy, to set the context for the new strategy promised in 2012-13. There is little outward sign of MAS learning from either the FSA or the rest of the world. The most recent evaluation on its website is from the Money Guidance pathfinders; the plan for a ‘new definition’ of financial capability and a new baseline survey both suggest the MAS may be reinventing wheels.

19. Assessing the effectiveness of MAS. The benefits of greater financial capability are many, and were set out in Thoresen’s report and the Impact Assessment for the 2010 Financial Services Bill. Research has established that more financially capable individuals plan ahead, save more and invest more in pensions. It is also likely that they would shop around more for products, use less revolving credit, or become overindebted, and be less likely to be vulnerable to product misselling. These factors are all relatively easy to measure, what is much harder to establish is the link between financial education activity and these outcomes. To do so requires a heavy investment in evaluation, to determine not just how many people were reached by the activity (website, say) but what difference it made to their financial behaviour, both in the immediate and the longer term. There are still few examples of robust evaluations around the world, those which do exist – notably for financial education associated with asset building schemes – show that financial education can make a real difference.

20. The role of the MAS in financial education in schools. The arguments for teaching personal finance education in schools are overwhelming, and were set out cogently in the December 2011 report of the All Party Parliamentary Group on Financial Education for Young People, "Financial Education and the Curriculum". The extent of MAS’s role in schools depends on whether it sees itself (and others see it) as the leader of a national strategy, or as the provider of a financial advice service. In common with other countries, the FSA’s national strategy had a schools element. The FSA funded Learning Money Matters, delivered by pfeg. For a time, an education Minister sat on the FSA’s Financial Capability Steering Group. The FSA commissioned a baseline survey in schools, and built up expertise. It saw itself as a strategic leader for this workstrand, but not a deliverer.

21. Whether the MAS will go down this route remains to be seen, but even if it retains a narrow remit financial education in schools would help the MAS to achieve its objectives. The MAS has a large advertising budget, which could potentially be reduced if young people left school with money skills and, in particular, knowing where to go to for advice and guidance and being motivated to do so. Thoresen commented in his final report (paragraph 5.30) that "Engaging potential users through the engagement of their children in the school system would be an excellent way of combining initiatives and helping to raise awareness and usage of a Money Guidance service".

22. Funding model . Using fees raised from financ ial services firms by the FSA appears to be an efficient funding model. Whether it is equitable is another matter. The benefits of better financial literacy accrue to individuals, the Government and financial services firms . It could be argued that the costs of the MAS should be borne by those who benefit , which would suggest a mixed funding model, including, possibly, a direct charge on users. Thoresen recommended mixed funding, and the legislation setting up the MAS was designed to allow it to accept public sector contributions (which the FSA could not do).

23. The previous Government left open a user charging option through using the phrase ‘affordable generic advice’ rather than ‘free generic advice ’. However, evidence shows that people are very reluctant to spend money on financial planning, even when they may save a lot of money by doing so. It will in practice be hard enough to get people to use a free service, so charging is not a realistic pro spect for the foreseeable future.

24. There is an alternative ‘polluter pays’ argument, which says that poor consumer outcomes are caused by bad financial products, confusing marketing, sales incentives, lack of due diligence, etc, so the industry should pick up the bill for the MAS . This is implicitly the Government’s policy. It makes the UK unusual – possibly unique – as other countries typically fund financial education initiatives (including websites) with a combination of public and private funding.

June 2012

[1] Broadly defined as the financial awareness, knowledge, skills, attitudes and behaviours needed to make sound financial decisions and achieve financial wellbeing. Called ‘financial literacy’ in some countries.

[2] Financial education is the process by which people become financially capable.

[3] Grifoni,A and Messy,F (2012), Current Status of National Strategies for Financial Education: A Comparative Analysis and Relevant Practices, OECD Working Papers on Finance, Insurance and Private Pensions, No. 16, OECD Publishing.

[4] Australia, Brazil, Czech Republic, Ghana, India, Ireland, Japan, Malaysia, Netherlands, New Zealand, Portugal, Slovenia, Spain, UK, US.

Prepared 15th June 2012