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Baroness Noakes: My Lords, I thank the Minister for that comprehensive response and I thank other noble Lords for their contributions, particularly those of my noble friends Lord Naseby and Lord MacGregor, who have so much practical experience to bring to debates of this kind.
The Minister raised a number of points. He spoke about the effect of the Government contribution on saving. The IPPR report has a lot of "mights". One of the problems with our discussion of how the child trust fund would operate in practice and what its effect would be is that it is a series of "mights". We have a concern that the child trust fund project will not have a dramatic effect on savings. Savings are important. We would not have invented the child trust fund ourselves.
Noble Lords should reflect that four out of five families do not save for their children. Is there anything in the Bill that would make those four out five families save for their children? The barrier is that parents will see a potential unfairness between different categories of child.
The Minister said that I had included the tax advantages. Indeed, I did, but not, I re-emphasise, because that would be a tax break for the wealthy. The Children's Mutual told me that for a savings product to be successful, it often has to have the label "tax free" or "tax advantage", even though there is no effective
advantage in investing in it, because that is the psychology of investment. That was one of the advantages.
Lord McIntosh of Haringey: My Lords, not with the approval of the Government or the FSA.
Baroness Noakes: My Lords, I did not say that it was with the approval of the Government or the FSA. That was relayed to me by somebody who is very experienced in the field of the psychology of investment.
Lord Naseby: My Lords, I assure my noble friend and the Minister on the Benches opposite that the rules are quite clear. Any literature must follow the rules laid down by the FSA. Nevertheless, where there is a tax advantage, it does act as a trigger in the mind of the saver. My noble friend is quite right in pointing that out.
Lord McIntosh of Haringey: My Lords, I am shocked.
Baroness Noakes: My Lords, I thank my noble friend for explaining that point more adequately than I had been able to do. The Minister has said that the scheme will be monitored and that work may be undertaken to meet gaps but that the scheme will start without child trust funds for children born before August 2002. In an ideal world, we would like to see parity at the outset. It would not be costly, as the Minister claimed, because the benefits in terms of savings would far outweigh the cost. We are, however, conscious that the Bill reserves a power to extend the child trust funds. We must assume that the Government will undertake their scrutiny comprehensively and rigorously. We certainly expect the savings industry to be loud and voluble if it believes that the way in which the child trust funds are being implemented is, as we postulated, to the disadvantage of their success. On that basis, I shall not press the amendment. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 3 [Requirements to be satisfied]:
Lord Newby moved Amendment No. 2:
- Page 2, line 33, at end insert—
The noble Lord said: The amendment would remove the obligation on child trust fund account providers to provide equity-based accounts. It is aimed in particular at those building societies that offer cash-based accounts, but that do not, as a matter of course, offer equity-based accounts.
The reason for the amendment is that the Government require all those who offer child trust funds to offer stakeholder, equity-based child trust funds. More than a quarter of all building societies, particularly the smaller ones, do not have authorisation from the FSA to offer regulated investment products. Therefore, as matters stand, they are not in a position to offer equity-based child trust
It has been suggested that this problem will be dealt with in the future by depolarisation, but that simply is not the view of the societies themselves. They believe that they would have to pay significant additional costs if they were to adopt the equity-based products and they simply cannot see financial sense in doing so.
Why does it matter if a small minority of financial services providers are not able to offer child trust funds? The reason is that these building societies are regionally based societies with a good reputation and, typically, a very substantial market share in their own area. They have a high proportion of lending to children and young people and a high proportion of accounts with people whose incomes are relatively modest. They are the obvious place where many well off families would go to open child trust funds. These families are not used to going to a plethora of financial services providers for a range of products. They often have a very limited range of accounts, very often just with their local building society, and very often they are cash-based.
When we discussed this matter in Committee the Minister said:
I believe that if these building societies do not offer child trust funds, many parents will not invest elsewhere, and therefore the Government's aim of extending savings, particularly down the income scale, will be to an extent frustrated. I therefore hope that the Government have had a chance to reconsider the issue since Committee stage and to be more flexible. I beg to move.
Lord Naseby: My Lords, I wish that I could support the noble Lord. It seems to me that this is a case of special pleading, as some small laggard building societies cannot get up to date and offer a product which is universally thought right. Another danger occurred to me as I reflected on the amendment over the weekend. How do we ensure that building societies offering the child trust fund offer the stakeholder child
Lord McIntosh of Haringey: My Lords, I shall have difficulty distinguishing Amendment No. 2 from Amendment No. 3. Although each has a slightly different approach, both are basically on the same subject. Amendment No. 2 deals with the requirement for all providers to offer a stakeholder account. The stakeholder account has been designed to provide good value to all consumers. It is to be equity-based, risk-controlled, charges are capped at 1.5 per cent of fund value, and a minimum contribution of £10 will apply. All of those issues were debated in Grand Committee, and I am glad that we have reduced them to perhaps the core ones.
In order to maximise accessibility and ensure that all savers can benefit from the good value of the stakeholder account, the draft child trust fund regulations have required all child trust fund account providers to include a stakeholder account as part of their product ranges. The Government want all savers to be able to benefit from the generally higher returns to equities over the longer term. This requirement would also avoid the problem of providers automatically offering low-income families cash accounts—which is I think what the noble Lord, Lord Naseby, was more than hinting at; I think he was actually suggesting it. Of course, any description of the services provided by the Children's Mutual society is of benefit to the House.
Risk controls required for stakeholder child trust fund accounts would reduce the risk of a loss in value. However, savers will be free to invest in cash deposits, including those offered by building societies, if they wish. I will not go into the argument any further about equities. There are things to be said about that which are perhaps better referred to in the debate on Amendment No. 3. However, I am aware of the concern of some building societies that the FSA permissions required to offer the stakeholder account will mean that they cannot offer the child trust fund. That is the point made by the noble Lord, Lord Newby. He raised the concern with my office in response to my offer of a meeting between Grand Committee and Report stage.
The Government's view is that the requirement to "offer" a stakeholder account means that a stakeholder account is always made available when an investor contacts a child trust fund provider. That does not mean that all providers have to manufacture their own stakeholder account. A firm could make arrangements with another firm to offer its products as the stakeholder investment provided that all products are available in a one-stop shop for the customer. We are keen to see a wide range of providers, including the
I hope that that indicates the work that is going on and the new thought that has gone into this issue since the matter was first raised in Committee.
"( ) Regulations shall not require account providers to provide equity-based accounts, and shall make provision for cash deposit accounts, including provision for such accounts provided by building societies."
"I think it is more important for parents to have choice than for providers to be marginally inconvenienced".—[Official Report, 18/3/04; col. GC151.]
The truth is that it is not a question of the providers being marginally inconvenienced; it is a question of these providers simply not making provision at all because they cannot afford to offer these products. It simply does not make any financial sense for them to do so. In those circumstances, I contend that many families will simply not invest in child trust funds. The only financial institution they trust themselves is their local building society.
7 p.m.
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