My Speech to the Resolution Foundation Conference, 14 March 2007
- It is an honour to be invited here today to talk to you about the Government’s ambitions for financial capability and financial inclusion. Let me start by thanking Clive Cowdery, and all the staff at the Resolution Foundation for their hard work in organising today’s event and also for their campaigning efforts over the past year.
- This conference comes at a very important time. Last autumn the Treasury and the FSA held our first national conference on financial capability, leading to the publication of the Government’s long-term strategy for financial capability in January. It was as part of this strategy that I asked Otto Thoresen to look at how to establish a national approach to generic advice – a subject I will return to later.
- And last week we held the first meeting of our new ministerial group that will prepare our Government action plan for financial capability. This group will look across the piece at how public services can be used to build financial capability, from the opportunity to bring financial education to life in schools with the Child Trust Fund, to the need to support pensions reform.
- Meanwhile, advised and spurred on by the Financial Inclusion taskforce, the Government’s £120 million Financial Inclusion Fund is supporting money advice, credit unions and tackling illegal loans sharks around the country. And in the next few weeks we will be publishing our financial inclusion strategy document in advance of this year’s spending review.
- So there is a lot happening – and the list of speakers and attendees at today’s conference shows how fast the issues of financial capability and financial inclusion are rising up the policy agenda.
- In my contribution today I want to talk, in particular, about the challenge of financial inclusion – and how financial capability can help us to tackle exclusion and deliver opportunity for all.
- As the Minister responsible for the UK financial services industry, let me start, though, by celebrating the success of this industry.
- The United Kingdom has one of the largest, most sophisticated and competitive financial services sectors in the world. It has responded quickly to the demands of a rapidly changing economy – new technologies, higher living standards and changes to the ways people live and work – providing a wide range of financial products to meet evolving needs.
- Our mortgage market, for example is the most competitive, diverse and innovative in Europe, with more people than ever able to have a mortgage and own their own home. And the UK has one of the highest rates of direct debit usage for bill payment in the European Union.
- As an industry, you have been working with us to ensure that more people have access to financial services. To give just one example, the introduction of the Child Trust Fund means that around 700,000 children every year are gaining their own savings and investment account. And as these children grow up, they will all reach adulthood with access to financial savings and will have benefited from financial education in school, using their Child Trust Fund as a learning tool. The industry has responded vigorously to this challenge – and it is a great achievement that 75 per cent of families are actively opening accounts for their children.
- But this very success also poses our society a growing challenge. Consumers are becoming more sophisticated, new products and opportunities are becoming available and we are expecting people to take a greater control of their own lives in managing their money and saving for the future.
- Yet there is growing evidence that the market does not meet everyone’s needs – and too many families are being left behind. While the majority of consumers enjoy access to a diverse range of financial products, a small but significant minority are unable to access even the most basic financial services and instead find themselves trapped outside the financial mainstream.
- The most recent public figures show that nearly 1 in 10 UK households had no access to a bank account. And it is estimated that at least 165,000 families in Britain today are forced to use illegal loan sharks instead of affordable mainstream credit.
- For these people, financial exclusion causes extra costs and real disadvantage in three ways.
- First, it makes day-to-day money management more difficult and expensive. Paying in a cheque at a bank branch rather than through a cheque casher saves a 10 per cent charge each time. And – as almost all employers now pay wages directly into a bank account, up from half in 1987 – increasingly financial exclusion can entrench exclusion from the workforce.
- Second, financial exclusion makes it harder for families to plan for the future and manage lumpy spending. Confronted with an exceptional financial burden – like Christmas, new school uniforms for the children, or a broken down car – the majority of us are able to use short-term credit or money we have saved to manage the financial pressure. And when we are affected by unexpected events and accidents, insurance helps us to manage the shock.
- But according to research carried out by the Financial Inclusion Taskforce, 55 per cent of low-income households have no savings. They are also less likely to use credit, and when they do it is likely to be high cost credit such as mail order catalogues or doorstep lenders which may charge effective interest of up to 200 per cent or even higher.
- And third, if things go wrong, financial exclusion makes people more vulnerable to financial distress and a spiral of debt, poverty and hardship.
- Managing debts, like a mortgage or a credit card, is part of our every day lives. But debt can quickly become unmanageable in the event of an unexpected drop in income – especially for low-income families with little or no savings. Research has shown that almost half of debt problems are caused by a surprise event such as the loss of a job, a long-term illness or family break up. And without access to mainstream financial support or advice, and with no savings to fall back on, families can find themselves forced to use extortionate illegal loans from criminals who use violence and intimidation to extort money from the poor.
- So we have a big challenge ahead of us. And it is an issue not only of economic prosperity but of social justice.
- The Government’s wants to see everyone have access to appropriate financial products, and the confidence and capability to use them to make a positive difference to their lives. Our aim is for a society in which everyone can plan for the future with a reasonable degree of security, using affordable credit, savings accounts and simple insurance products. And we want everyone to have the information, capability and confidence they need to prevent avoidable financial difficulty, and to know where to turn if they do find themselves in distress.
- We have made significant progress towards this goal since 1997. Following the publication of the Social Exclusion Unit’s Policy Action Team 14 report, we worked successfully with the banking industry to bring basic bank accounts to the market, and there are now seventeen of these accounts available. And in order to bring more people into saving and assets ownership we have piloted the Saving Gateway to encourage savings amongst those on low incomes.
- Building on these successes, the Government’s first financial inclusion strategy, Promoting financial inclusion, was published in December 2004. This:
- Announced the creation of a dedicated Financial Inclusion Fund of £120 million for the 2005-08 spending period:
- Prioritised access to banking, affordable credit and free face-to-face money advice; and
- Established an independent Financial Inclusion Taskforce to advise the Government and monitor progress – and I am delighted to see members of the Taskforce here today.
- This strategy has delivered real progress. The DTI has recruited almost 400 new money advisers who have helped over 18,000 people manage their debt in the last six months.
- The DWP is working with over 100 credit unions and Community Development Finance Institutions to make more than £30 million of lending capital available to financially excluded people. So far, over 12,000 loans totalling over £5 million have been made. And the Financial Inclusion Taskforce has reported to me that steady progress continues to be made with our goal, shared with the banks, to halve the number of adults without access to a bank account.
- These initiatives have made a real impact, but more needs to be done, to ensure that everyone has access to the full range of opportunities to participate in modern social and economic life. And I want today to set out how our new financial inclusion strategy, to be published around the time of the Budget alongside Brian Pomeroy’s review on the lessons of the Farepak scandal, will build on and extend our work to date.
- First, we will extend dedicated funding to tackle financial exclusion across the next spending review period. In the longer term, we want to see financial inclusion initiatives mainstreamed into core departmental activities. But we are currently at too early a stage in the implementation of existing initiatives to adopt this approach.
- Instead, I am delighted to announce today that I have agreed with the Chief Secretary that that there will be a new Financial Inclusion Fund for the next spending period to 2011. This will allow us to continue to support projects promoting access to affordable credit, providing money advice and helping to protect vulnerable people against illegal money lending.
- The new funding will enable us to maintain financial inclusion activity at the current level of intensity, and demonstrates the Government’s continued commitment to tackling financial exclusion head-on and for the long-term.
- At the same time, we will continue to assess the emerging evidence carefully, so that, in the following spending period from 2011 to 2014, financial inclusion initiatives can be mainstreamed into core departmental activities most effectively.
- Second, we will ensure that the Financial Inclusion Fund continues to be monitored and Government advised by independent experts. The Financial Inclusion Taskforce has played an invaluable role in monitoring progress with our existing initiatives, and advising the Government on new priorities and directions for policy. I am therefore pleased to announce that the Taskforce will continue to monitor progress against the Government’s financial inclusion objectives until 2011.
- And third, we will establish a new cross-Government Ministerial working group on Financial Inclusion that will develop a detailed financial inclusion action plan for implementation after the Comprehensive Spending Review. I will ensure that in developing our action plan, Government works closely with the private sector and the third sector and I value highly the work that has been done to date by organisations such as Citizens Advice and Transact, the national forum for financial inclusion.
The role of banks
- I spoke last year at the British Bankers Association about the special place banks have in our society, both as a fundamental part of our economy, and as leaders in corporate responsibility and good corporate citizenship.
- And as I have set out today, financial inclusion and financial capability are two areas where Government and the financial services industry must work closely together in the coming months.
- An engaged relationship with a bank is a valuable asset in helping customers avoid financial distress. A bank account is more than just a tool for managing money – it can be a stepping-stone to wider inclusion through credit, saving and insurance; and banks can help and support customers who find themselves in financial distress.
- With the contribution of the banks in recent years we have made progress in reducing the number of people without bank accounts, in bringing cheque clearing times for basic bank accounts into line with other current accounts, and through our agreement to increase the supply of free ATMs in deprived areas. This agreement committed the industry to install 600 new free ATMs, and nearly 400 of these are now either in place, or about to be installed.
- But there is more to do – and I am keen to explore with the banks how to develop options to most effectively engage with customers in financial difficulty, both before and after they find themselves in distress. The banks are already committed under the Banking Code to the principle that they will treat people in financial distress fairly and sympathetically. This is one of the priority areas that has been identified by Mike Young, who is leading the 2007 Banking Codes Review, and I look forward to the outcome of his work with interest.
- A close partnership between the Government and the financial services industry is also important in financial capability.
- Increasing access to generic advice is a vital part of Government’s long-term approach to financial capability and I believe that all stakeholders – Government, industry, the regulator and the third sector – can work together to meet this challenge.
- So when Ian McCartney and I recently announced that projects to tackle illegal loan sharks would be extended to every region of the country we recognised how important it is that we also provide the victims of loans sharks with more information on affordable and legal alternatives, and the support they need to access them. And I have asked Brian Pomeroy in his review of hamper schemes and savings clubs following the Farepak collapse to consider the options for improving consumer awareness and capability amongst groups likely to use these schemes.
- The Government believes there is an advice gap for those on middle and low incomes and for the financially excluded. The question is not whether we fill this gap, but how. That is why we have asked Otto Thoresen to conduct a feasibility study into generic financial advice. And I am delighted that yesterday Otto published both his call for evidence for the study and the membership of his reference group. I am sure Otto will tell us more about this later.
- I know that some of you have been concerned that a generic advice service might replace local, trusted, sources of money and debt advice. I would like to reassure you that I see generic advice as providing a first port of call. For some, that will be enough. For others, more specialist help will be needed, and existing advice services will have an important role to play here.
- Others in the IFA community fear that generic advice will act in competition to commercial advice. Again, this is not the intention. Indeed I would hope that generic advice will act as a signpost into the advice market, bringing many into contact with a service they had thought was ‘not for them’.
- But these are challenges for Otto to consider – and I look forward to the outcome of his review.
- In conclusion, we have made real progress on financial capability and financial inclusion but there is still a lot more to do.
- Tackling financial exclusion and spreading financial capability is essential for both our economic prosperity and for social justice. It is good both for individuals and for society and the economy as a whole. And I look forward to working with you all to drive this agenda forwards in the coming months.