Clause 6

Financial Services Bill – in a Public Bill Committee at 9:00 am on 7th January 2010.

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Enhancing Public Understanding of Financial Matters etc.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 40, in clause 6, page 4, line 15, leave out subsection (3).

Amendment 40 is one of a series that considers the work of the proposed consumer finance education body. Rather than have a stand part debate on the subject, I thought it might be helpful to make some general remarks on the clause and schedule 1 at the start of this debate.

We welcome the work that has been done to tackle financial education. A large number of bodies are involved, and that predates the involvement of the Financial Services Authority. A number of voluntary groups, including the National Association of Citizens Advice Bureaux, have done a great deal of work on the subject. A large number of private-sector organisations have funded work on financial education, supporting third-sector organisations or funding information packs, advice programmes and so on that can be made available to their customers or more generally. Indeed, at one point in the middle of last year we could barely move in the House for launches of various information packs by banks, building societies, insurers and others. I welcome the private sector’s recognition that it has an important role to play in improving the level of financial education among the population.

All of us, to a greater or lesser extent, support financial education; the premise is that if people have better levels of financial awareness and literacy, that will flow into improving financial outcomes for individuals. That principle is at the core of support for financial education. If people lack the confidence to engage with the financial services sector, and they do not have the savings or protection products that would provide support and security for their families in the short, medium or long term, they may face greater challenges in managing their finances, so we are talking about an important aspect of the work of the financial services sector.

As I say, a great deal of work has been devoted to raising levels of financial literacy. Prior to the introduction of a coherent strategy, much of that work was piecemeal; it was not done consistently throughout the country. However, in trying to bring some coherence to the process, we must ensure that the good work that is taking place is not squeezed out of the system.

We should be sanguine about the extent to which financial education will solve the problems that we see in society—the low savings ratio and the number of people without protection products. We want a move from information to action, but there are many barriers in the middle, which means that no matter how much financial education there is, there will be some limitations on people acting on the information that they receive.

All sorts of aspects of human behaviour can be a barrier to acting on that information, including inertia and the trade-off between short-term gratification and meeting longer-term needs. For instance, many people put off saving for a pension, using money that they would have put aside for a pension to meet other needs. Although I am very supportive of choice in many aspects of activity, for some consumers the huge choice on offer is so bewildering that it inhibits them from taking action. Some good studies in other jurisdictions have shown that restricting the amount of choice has led to an increase in take-up of financial services products. We should not be under any illusion that providing education will solve the problems of financial illiteracy and of people being ill-prepared to face some of the financial challenges faced by their families.

So where are we at the moment, in terms of people’s financial awareness? In 2006, the FSA published its baseline survey on financial capability. It was a helpful piece of work that demonstrated how financially illiterate we are as a nation. The problem can be broken down into two components—how little we know, and what impact the lack of knowledge has. I can give three stats from the report showing how little some people know. Some 40 per cent. of people who own an equity individual savings account are not aware that its value fluctuates with stock market performance, and 15 per cent. think that it does. It is a major savings vehicle. The fact that people are so unaware of its components should be a concern. The finding that I like most is that 50 per cent. of people surveyed did not know what 50 per cent. means. That reflects a failure of the education system, with regard to people’s ability to deal with percentages and understand what percentages mean.

I came across another survey finding recently; I think it was in a conversation I had in Gateshead, which I will come back to. Teachers were comparing credit cards and assumed that the higher the annual percentage rate, the better the card was. There is some way to go in explaining the basic concepts of finance to people. If they understood those concepts more easily, they would be in a better position to manage their finances.

The lack of knowledge means that many people cannot or do not act on what they know. The baseline survey found that 81 per cent. of pre-retired people think that a state pension will not provide them with the standard of living that they hope for in retirement. Nevertheless, 37 per cent. of those people have not made any additional pension provision.

Despite the wealth of advertising for comparison websites, 33 per cent. of people who hold no more complex products than general insurance bought their policy without comparing it to even one other product. They are not shopping around for the best deal. One of the financial benefits that the impact assessment seeks to quantify is people shopping around for a better deal for products by using comparison websites.

According to the baseline survey, in 2006 there was a great deal of work to be done to raise levels of financial literacy and to increase people’s preparedness for the financial issues that they face in future. The FSA is just one of the bodies that has collected data. More recent data demonstrate that the magnitude of the task has not diminished. According to the Scottish Widows savings and investment survey, 27 per cent. of 18 to 24-year-olds have no awareness of ISAs or their functions. In October last year, the Association of British Insurers savings and protection survey found that 27 per cent. of working people save nothing at all in a pension.

We also know that the savings ratio has dropped from about 9.6 per cent. in 1997 to about 1.8 per cent., although it is creeping up again because of the economic recession. The Government's own impact assessment states:

“Levels of financial capability among the UK population are low and over-indebtedness is a major problem. Around 19m people in the UK are especially vulnerable to the consequences of poor financial decision making but are least likely to seek out financial advice.”

The importance of the issue should not be understated. Personal debt has boomed as the savings rate has collapsed, exacerbating the impact of the economic cycle rather than dampening it. We need to make sure that we get the policy responses right.

The evidence is clear that there are low levels of financial literacy and of take-up of financial products. The principle underpinning support for the initiative is that boosting education will boost take-up and preparedness. As I said earlier, however, we should be careful about drawing a direct causal link, assuming that better financial literacy will automatically flow through to better preparedness.

Photo of John Howell John Howell Conservative, Henley

I am aware of some of the surveys mentioned by my hon. Friend. We know about the extent of the lack of financial awareness, and have done for some time. However, I am concerned by the comments made in some of the witness sessions, and I wonder whether my hon. Friend shares that concern. It was commented that part of the problem was that although the FSA knew about the issue, it was not providing feedback to the organisations providing the training, including those in the private sector. As a result, there is no learning loop among the trainers that would lead to action and improved financial knowledge among those who receive the education.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My hon. Friend makes an important point. There has been widespread awareness of the problem for some time. Part of the challenge is to understand the best way of tackling it.

The FSA has been working over a prolonged period to identify ways of raising financial awareness. Its workplace programme attracts a certain group of people, and it has considered innovative ways of getting financial information to people at the various points in their lives when they will need it. Indeed, there was discussion in the evidence sessions about the packs that are given to expectant mothers. The hon. Member for South Derbyshire and I expressed a degree of scepticism about that. However, having pursued this point with the FSA and Chris Pond, its director of financial capability—he was once Member of the House and a Minister—I understand that it is welcome and effective.

Part of the challenge is trying to find points in people’s lives when they will be receptive, and discovering the best way of getting that information across. We need also to know how big the problem is. We want to encourage people to save. We talk about percentages and interest rates on credit cards and so on, but if 50 per cent. of people do not know what 50 per cent. means, there is an underlying problem with numeracy. That needs to be tackled if we are to move on to the next stage, which is trying to get people to engage with financial services, as many features of products are expressed numerically.

There is a strand of scepticism out there that says that we are trying to patch up the outcome of the education system, but we are trying to improve financial literacy more generally. There has been a lot of debate about how effective that can be, and what the best approach is. To an extent, it is relatively new territory. That is probably why there has been a disconnect. It is also why a number of organisations have been going off in various directions, taking different routes and often reinventing the wheel in the process.

That may not be the most effective use of business resources, but it is seen by a number of financial services organisations as an important part of their corporate social responsibility programmes. They also see it as a tool to help their business, as it is about ensuring that people are better prepared to understand credit cards, overdrafts, bank accounts or debt products, and may act as a route to encouraging people to buy more savings products. That takes us back to the core of the argument, which is that increasing financial education should have a knock-on effect on the extent to which people are able to manage their finances to save both for short-term, rainy-day needs and for the long term. However, we need to be careful about that.

The FSA commissioned research in 2008 to examine behavioural issues relating to financial services. It was entitled “Financial Capability: A Behavioural Economics Perspective” and the opening statement was this:

Financial capability involves knowledge and skills, but attempts to improve these may not lead to better outcomes. What people choose to know and what they do with their knowledge may primarily depend on their intrinsic psychological attributes ...Psychological rather than informational differences may explain much of the variation in financial capability reported in the FSA (2006) Baseline Survey...If poor financial capability is mainly a matter of psychology, the information-based approach of the National Strategy for Financial Capability is likely to have only a modest effect in improving outcomes.”

There is a note of caution to be sounded. People are well aware that financial education is not a universal panacea; it is not a silver bullet to tackle some of the issues about people’s financial outcomes. We should be wary of overselling it as the solution to all our problems. However, rather than saying, “The strategy is doomed to failure and we should not proceed beyond this point,” I would argue that we need to be aware of its limitations and look to other ways to improve people’s financial outcomes.

A good example is auto-enrolment for personal accounts. Underpinning that is the sense that, although we may give people information to enable them to make the right decision about whether to enrol, inertia may mean that they do not. Even for pension schemes with no  requirement for employee contribution, the take-up rate is not 100 per cent., which is rather odd. Auto-enrolment gets people to do the right thing automatically, recognising that, behaviourally, that is the best way to boost take-up. It reflects the fact that there may be occasions on which, despite all the information being given and people understanding it, there is still a barrier to the next step. The transition from information to action can be quite a long process.

Part of the concern—I shall touch on this later under one of my amendments—is where we draw the boundary on what is advice. How do we try to minimise the gap as far as possible between information and action? The wider that gap is, the lower the likelihood is of someone acting on the information that they have received and on what they have found, because it is simply too difficult to get them from where they are now to the point of making a decision and purchasing a product.

To tackle the issue of financial capability, we need to ensure that there is long-term sustained support, that the information and advice that people receive is consistent and that, where possible, the gap between information or advice and action is narrowed. It is a multi-generational challenge; the issue will not be tackled overnight. The Government re-announced last week their plans to make financial education a core part of the personal, social, health and economic education curriculum. A lot of work has been going on in schools, led by PFEG—the Personal Finance Education Group—and supported by a number of private-sector organisations. However, we should recognise that that is rolled out bottom-up; we need to ensure that it is implemented properly across all schools.

A 2008 Ofsted report said that less than a quarter of schools monitored or assessed the impact of the provision of financial education, so we need to ensure that where we see financial education playing an important role, there is consistency in its roll-out, and that high-quality materials are used, whether in schools, colleges or workplaces. It is important to ensure that there is a proper, well thought out approach under which people are getting the right information that will lead to the right decisions being taken.

The plethora of initiatives suggests the need for a proper strategy, and the consumer financial education body is ideally placed to ensure that there is consistency of messaging and co-ordination of coverage. I welcome the fact that its remit under the Bill enables it to subcontract some of its responsibility to others; there is a partnership model, and I think that that is the right approach to take. I think that that body will try to ensure that none of the existing provision is squeezed out of the market, but it will also try to ensure that, where funding is available for provision, that funding is used in a way that maximises its benefit.

The model that the Government have adopted requires a number of different channels to be used, including telephone, face-to-face and online communication. The approach that the Government have adopted and set out in the impact assessment is one where the emphasis is very much on face-to-face advice; that is seen as the best way to help the people who are most vulnerable to deal with their financial issues.

I will just flag a concern about that focus on the vulnerable. There are a large number of people across the income divide who have problems managing their  finances. We will all have experience from our own constituencies of people who are on reasonable incomes but who still find it very difficult to manage their money. We need to ensure that the service has wide appeal, is not narrowly targeted, and is not seen as developing a brand that is solely aimed at helping people who are in vulnerable situations. It must not be seen as a service for “that group over there”’; it must have wide appeal. There is a broader benefit to that approach: if the service is seen as having wide appeal, it is more likely to receive industry funding and the support of industry, and money will be given willingly, rather than reluctantly.

That partnership element is very important. I just want to reflect on a visit that I made in December, when I went to Gateshead to see how the roll-out of the national money guidance service in the north-east was working in practice. I visited the Help the Aged and Age Concern office in Gateshead, which is one of the partners of the FSA in the roll-out programme.

That visit illustrated the importance of working together. One of the points made to me by the people providing support was that, in terms of what they were permitted to do under their contract with the FSA, they gave some good advice, but through the other services that they offer, they are able to move people further down the track of taking action. They provided a casework facility as well, which fell outside the remit of their contract with the FSA. So there was a synergistic benefit in the FSA working with existing partners on the ground, who effectively were able to supplement what was being offered through the FSA. That was a very powerful message about how we can harness the existing skills and talents of organisations and leverage off them to improve people’s financial outcomes.

Of course, the other advantage of using partners such as Help the Aged or Age Concern is that they can market the service to their existing—I hate the phrase, but I will use it—“client base”, the people who come to one of their centres, perhaps for advice on welfare benefits. With the resources that are available to those people from the money guidance scheme, they are able to look at other aspects of their financial affairs, too. So there is a benefit there. Not only can we leverage off the existing support and advice that such partners give, but we can attract new people to using the service.

Of course, as I have already said, it is not just the third sector that is involved in the process. Angela Knight gave evidence on behalf of the British Bankers Association, and when she was questioned about financial capability, she said this about the contribution of the private sector:

“what is being done at the moment is actually pretty significant. There are individual programmes done by individual banks, both in schools and in areas, and various other initiatives provided through a number of organisations, such as Moneymadeclear and the Personal Finance Education Group...There is a plethora of different programmes and initiatives focusing on the business of financial education both in and out of schools.”——[Official Report, Financial Services Public Bill Committee, 10 December 2009; c. 76, Q11.]

One challenge that the new consumer finance education body will face is developing a clear idea of where it sits in that landscape. The Minister might want to expand on that. Does it see itself as an umbrella body co-ordinating the different streams of activity, or as a provider? How does it judge where it sits on the continuum between  being simply a commissioner and being a provider? The closer it is to being a provider, the more it will squeeze out some of the current voluntary efforts; the closer it is to being a commissioner, the greater the risk of inconsistent coverage and messaging. There is a delicate balance to be struck, but getting it right is important if we are to maintain the current richness of provision and ensure that we maximise the chances of people acting on information.

We support financial education. We said some time ago, before the Government made a similar commitment, that we would support a national roll-out of the money guidance project within a year of the next general election, because we see the importance of tackling the high levels of financial illiteracy and improving people’s skills in order to try to improve outcomes. The FSA has happily done that under its remit on public awareness, which brings me to amendment 40.

Clause 6(3) omits section 4 of the Financial Services and Markets Act 2000, which deals with public awareness. That creates the assumption that the FSA does not need to do anything else relating to public awareness. If that objective is removed, does the FSA lose that need? At the start of this Committee, we discussed raising awareness of the regulatory process, penalties and fines and making information available. Although public awareness has been used as an objective under which financial education sits, public awareness is far broader than financial education alone. People need to know the limits of what a regulator can do and understand the broader regulatory issues. I am concerned that the omission of the public awareness objective will allow the FSA to wash its hands of its role in improving awareness of how it operates.

If the FSA loses that objective, what does the Minister think its role will be in terms of informing consumers about its objectives, what it does and how it performs its tasks? I am just probing. Having moved the responsibility for financial education away from the FSA in the Bill, are we really saying that it has no further public awareness responsibilities? Consumers will wonder what the FSA does. Do the Government expect the new consumer financial education body to undertake that role?

Photo of Andrew Love Andrew Love Labour, Edmonton 9:15 am, 7th January 2010

I do not wish to encroach on my own speech, which will follow the hon. Gentleman’s, but one concern about public awareness is that

“the provision of appropriate information and advice” will be removed from the FSA’s remit. There is considerable concern among consumer advocate bodies about that, so I will be interested to hear the Minister’s reply.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

In the recent financial crisis, people’s awareness of the compensation limits increased significantly. Does the task, in relation to awareness of the limits of the Financial Services Compensation Scheme, fall to the consumer financial education body or to the FSA, which devises the rules for the scheme? We need to clarify some of the issues on the margin about what the FSA is still responsible for doing, and what responsibilities the new consumer financial education body has. There is a danger that in the transfer of responsibility the FSA may lose sight of its remit to make sure that people are aware of its activities and we need to understand exactly what the consumer financial education body sees as its parameters.

Photo of Mark Todd Mark Todd Labour, South Derbyshire 9:30 am, 7th January 2010

I have not previously welcomed you to the Chair, Mr. Benton, and I do so now.

The hon. Member for Fareham has made a rather thoughtful speech, and that is not unusual; most of what he says is well worth listening to. I shall reinforce some of his points and add one or two additional dimensions. Reflecting on my adult lifetime, which I think is that of everyone in this Room—or not quite—the range of financial products available to us, and the complexity of choice for consumers, is by a quantum much larger than it was when I was 18. Then it was a matter of sorting out a bank account—I do not think credit cards existed, and I certainly could not get one—or worrying about some of the more complex areas: insurance and investment products. Savings were very straightforward. It is a world that has utterly changed.

That shows one of the strange things about this subject: poor financial education, leading to poor decision making, is not necessarily related to education. There are significant generational issues involved. Like most hon. Members I have had highly intelligent constituents of a certain age coming to see me after moving into an area of financial products completely outside their experience. It is nothing to do with how they were originally educated. Often they were educated to degree standard. It is simply that the matters were outside their compass, and they had trod waters far too deep for them.

Neither, as the hon. Member for Fareham has said, is the problem always related to income. It may concern people with significant sums of money—I have, for example, dealt with some of those who have, sadly, put substantial sums at risk by investing in the Isle of Man—who have not done the necessary research to understand the risk they might be taking, and who have given themselves much greater exposure than they imagined.

This is a far more complex subject than it is often portrayed to be. It is not about helping poor, ill-educated people to deal with the crises in their lives; that is part of it, but quite often poor people make sharp and necessary judgments and are instinctively cautious about some of the more foolish things that one can get into. It is much more nuanced.

The hon. Gentleman also said, rightly, that the response to the challenge—perhaps understandably, bearing in mind what I have said—has been disparate, incoherent and confused, with a large number of initiatives in the private and voluntary sectors and, latterly, sponsored by the public sector, to address the problem. That has meant often patchy coverage and extraordinarily little quality analysis of what is being done.

My biggest anxiety, therefore, is that we, collectively as a society—some of the money comes from the private sector, but an increasingly large sum is from the taxpayer purse—are distributing a large amount of material without a great deal of understanding about its effectiveness in addressing the problems that we think we are seeking to tackle. We all know that there are problems there, and the response I am afraid in some cases has been to turn on a hose of money and point it vaguely at what we think the problem is, without attempting to work out what tools might work best, then testing and applying them to the rather different audience sets that are undoubtedly there for what we are seeking to offer.

I want to illustrate that. Two members of the Treasury Committee are here today and they will know that I questioned the FSA at its last appearance before us. In the FSA annual report is an evaluation of what it has been doing on financial education. There was quite an impressive list of statistics at the back of the report, saying, “We have done this, this and this.” I picked out one example of the FSA approach, in which it said, “We have got a target to reach this number of pupils in schools.” The FSA had exceeded that target, because the method used to count how it had done so was the number of schools that materials had been sent to and the number of pupils in those schools. I pointed out that that did not tell us a great deal.

I shall come back to why I think such an approach of simply sending large packs of materials into schools is unhelpful, but those of us who know schools well, know that they receive a lot of material for free, from Government and from other well-intentioned agencies. Some of the materials end up in the round filing cabinet and others, more commonly, end up in store rooms or teachers’ bookshelves. There was no attempt to work out whether pupils had been reached by the initiative, as opposed to the post room of the school being reached by the initiative.

That was one example and there were, sadly, many. When I went through the list of achievements, I think there were only four occasions when there was any sign of an evaluation of what had actually been done. Otherwise, all of the work was quantitative—“We have sent all of this stuff out, so we have reached the target.”

That is a worrying state of mind which, I am afraid, applies not just to the FSA. I have had a number of discussions with PFEG—acknowledged in the speech of the hon. Member for Fareham—which was the distributor of the packs. PFEG took a somewhat similar view. When I used in evidence the constituency that I serve and the schools in it, saying, “Well, there is precious little evidence that what you are sending out has actually produced an outcome,” it had to concede that that was true, because the test done on engagement with schools showed that in the entirety of my constituency, the actual engagement of any solidity beyond sending a piece of paper to the school was virtually nil. We are in a position in which we appear to be doing rather a lot—it is certainly costing quite a lot of money—but without any evidence that it is actually producing substantial outcomes.

Another worrying thing, again focusing on the school environment, is that the quality of material, to the untrained eye, would appear excellent. It often looks impressive; it is a well-presented pack of apparently good teaching materials. I have the advantage—or disadvantage, depending on how you look at it—of having worked in the educational publishing industry for a large chunk of my life. Therefore, I can view the material from the perspective of how it would work in the school environment, as that was how the business I worked in survived or failed. Many of these materials have a strong resonance with some of the products that, sadly, led the part of the company that attempted to sell to schools into steady decline during the time that I worked there. I moved out of the school section fairly early in my career towards other parts of what was a large business. We declined from being No. 1 in the  school marketplace when I first joined the company in the mid-70s, to being about No. 4—which in those terms meant nowhere—by the time I left at the end of 1996.

The materials that we produced were often excellent and sold extremely well at the top end of the school market, which was relatively small. If someone sought to provide materials for a more harassed school environment with a harder-to-persuade pupil clientele, that was often regarded as inappropriate. We tended to get lots of plaudits, and people saying “Marvellous”, from grammar schools—where they existed—public schools, and the top end of the comprehensive system. It was the same for some of the primary materials. Often, however, such materials were not the product of choice for those at the coal face of education. A quick look through some of those materials indicated that we were in the ballpark of producing what appeared to be excellent materials, but as soon as they were tested in the school environment it became harder to see whether they would work.

My knowledge of this is out of date, but I have some experience from some time back, which is probably greater than that of other members of the Committee. However, it worried me that we were in that mode, which led me to think about our approach.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am following what the hon. Gentleman says carefully. Is his argument that the content is not geared to the full range of schools that this material is for? This initiative goes across the board to all schools, but the level of engagement with financial services and knowledge of budgeting may well differ from school to school. Is the material aimed at too high a level?

Photo of Mark Todd Mark Todd Labour, South Derbyshire

That is broadly what I am saying. The generic material that I saw would have been suitable in some schools but not in many others, and that would have been a barrier to its wider use and adoption. That is why my approach is fundamentally different from what is being done now because I wish to use the market. At the moment, we wholly fund free materials that are provided to the educational system or, more broadly, to the voluntary sector so as to provide support for financial education. In my experience, having worked in a pedagogic marketplace environment, we will not get the highest quality materials with that approach. We need greater competition between providers in the marketplace, and we should produce price indicators among consumers, and some measure of choice between the various products available. As I have said, those products will vary in how they fit the communities that they serve.

Therefore, to take up a point raised by the hon. Gentleman, I would wish for the body that we are seeking to set up, which I welcome, to be very much a commissioner of services rather than a provider of products, and a commissioner in a competitive environment. It should provide an opportunity to tender for the products that it seeks to make available, and one assumption in distributing those products should be that they might not always be free. I take the somewhat old-fashioned view that if one sends people free things, quite often they do not attach as much value to them as one does oneself. By introducing some market tools into the provision, we will create a sharper, better-informed marketplace with more providers who are more incentivised to make a substantial difference to the education landscape with which we are contending.

I hope that that is what the new body will do, so I hope that it will evaluate with a sharp focus what has been done until now. The hon. Gentleman referred to the pack given to expectant mothers. That falls exactly into the category that I described. It is a beautiful thing—I dread to think how much it cost to produce and distribute to all expectant mothers—but it most strongly resembles an extraordinarily impressive doorstop. It is bulky, it contains a large amount of information that is not necessarily attuned directly to its recipient and it is unvariegated. The only commonality among the recipients is that the circumstances of the birth of their children will vary dramatically, as will their need for information.

I have been a harsh and relentless critic of that and other FSA products—I am sure that if I was ever on Chris Pond’s Christmas list he has removed me—but one must be tough about such things. In answer to my evaluation questions during the question and answer session at the start of this Committee, the FSA produced statistics as evidence that at least sometimes, the pack appears to have some use and people make something of it. However, I would be interested to see the evidence base and data that produced that information. I suspect that the sample might be rather small and might not represent the entire community of those who received that extraordinarily impressive package. My unscientific survey of women who had been through that experience indicates that they made little or no use of it. The FSA’s survey was more robust than mine, but I would like to know more about the evidence.

I have spoken at some length because, although clause 1 might appear to be the most significant and certainly deserves significant debate, clause 6 will probably be the Bill’s major initiative, in terms of its lasting implications, if we get it right. As with many things, because it is consensual—we all think that it is a good thing to do—it risks not being evaluated sharply enough or subjected to proper test. I look forward with interest to the Minister’s response. While I continue in the House, which will not be for long, I will continue to take an active interest in how the matter is pursued.

Photo of John Howell John Howell Conservative, Henley 9:45 am, 7th January 2010

It is a great pleasure to follow the speech from the hon. Member for South Derbyshire, which was very informed. I found myself agreeing with most of what he said, because the big issue here is not the need for financial education—the Committee has no doubt that there is such a need—but whether the Bill takes it forward in the right way and delivers it so as to produce a lasting effect.

I start by picking up a point made by my hon. Friend the Member for Fareham and, indeed, picked up by the hon. Gentleman, about the confusion over the role of the new body. That was summed up admirably in the terms of whether the body was a commissioner, an umbrella organisation or, as one of the witness submissions said, nothing more than another financial watchdog, or whether it is actually going to do things. It is instructive that not just members of the Committee are confused, but the witnesses themselves. Their interpretations were very different, a few of which I want to tease out as we go along.

The Bill definitely contains power for the new body to delegate—to commission—although, practically, the only thing in the clause amounting to any concrete  activity is the issuing and production of publications. Everything else is much more general promotion. I completely concur with the hon. Gentleman’s concerns about that being one of the key things to be done if we do not understand what is going to happen.

Also missing, which was picked up by the CBI for example, is any mention of tackling the issue of risk. We seem to have a number of different levels for which education is provided; our baseline is the educational need. It would be interesting to know whether the hon. Gentleman, with his experience, has seen that level of general baseline ignorance—if I can use that term—change over the period. Has the gulf between that level of ignorance and the difficulty of coping with ever more complicated specific instruments grown wider or narrower? However, we certainly have a general level of financial ignorance with which to cope. Overriding the specific education about individual products—the example of ISAs, given by my hon. Friend, was a good one—is the understanding of what risk is within financial services and individual instruments, and how to appreciate and manage that risk. As many of the witnesses said, it is a great regret that there is no mention of that—certainly nothing in the Bill.

The lack of clarity about what the new body will do and how it will do it, I found to be one of the determining factors in our questions in the evidence sessions. A number of us tried to tease out of various witnesses what success would look like to the new organisation. I am not sure that any of us got a very good answer to that or that the additional memorandum by the FSA takes us much further along the way.

I appreciate the difficulty of measuring success with such a wide audience and when the idea of success in such an environment is, inevitably, somewhat intangible. However, for the ultimate test of success—certainly from the FSA’s point of view—not to be known until a new base survey is done, which could be 2016 at the earliest, is not an acceptable way of assessing the success of a body that is going to play a major and important role in taking us forward in the financial services area. The Committee may recall what Angela Knight said was needed: careful scoping of what the body is going to do; clarity at the start; a review process; proper understanding of what the targets are; and measurement of the outcomes.

If one of the issues is about the internal structure of what the new body will do, the second issue created is that of boundaries with a number of other organisations, in order to maintain confidence in the financial system. I was fascinated by Andrew Whittaker’s view that the new body would not have told people to pull out of Northern Rock even if it had known that there was a problem there, because of the effect that that would have had on financial stability overall. We may argue about whether that would have been a sensible and right thing for the new body to do, but it goes to the heart of a debate that needs to take place about the extent to which the new body will be able to take action and provide information on an event-by-event basis.

That also raises questions about the level of detail that the new body will get into. As was suggested in the evidence sessions, will it be simply reduced to what I think one witness described as issuing pamphlets and telling banks how quickly they should reply to customers’  complaints? If that is the ultimate outcome for this new body, we need to think carefully about whether it is worthwhile.

Another boundary issue relates to the question that has been raised by some hon. Members about what is already being done in this area. I seem to recall from an evidence session that Angela Knight tried to put a figure on how much is being done in the private sector compared with what is being done with Government money. She thought that the amount being spent by the private sector was certainly no less than the amount of Government money being spent and I seem to recall that she thought that it was several times larger.

As others have pointed out, that creates huge potential for duplication. I would never like to see duplication and a waste of resources in the whole of the system, but there is actually a much greater risk than duplication. That is that the banks and building societies involved in the current programmes simply say, “We are duplicating our costs and therefore we will pull out.” I do not think that that would be useful for the market or open it up to the type of products that we need there.

In some ways, the FSA’s additional memorandum makes matters worse. Paragraph 6 lists the number of Government Departments that will consult on the FSA’s budget, but we are left with the clear indication that that is not an exhaustive list and that the FSA will continue to discuss its budget with others. That opens up a number of boundary disputes with those organisations, particularly with the OFT. Again, that was an issue that was raised by many witnesses.

As I mentioned earlier, that confusion can be seen in some of the submissions by witnesses from organisations. Many of the organisations, such as Catch-22, Citizens Advice and Age Concern, raised questions about targeting and the need to target the vulnerable, which is another issue that we have already touched on. However, there are questions to be asked about the extent to which what is being delivered is actually providing real help and whether help is reaching vulnerable people deliberately or by accident. There is confusion over whether we are giving advice and what that advice would be. There is also a big issue about establishing the boundaries of what will be covered.

I recognise that organisations involved in this process will be pulled in several directions. There will be a need to focus, to justify the use of what is a finite amount of money. However, there is a desire, which we saw in many of the submissions that we received, not to focus and reduce the scope of this new body but to widen the focus and include benefits advice, tax advice and advice on general financial well-being. That advice certainly needs to be given within the educational framework for the financial services system, but the question is whether it is appropriate for this new body to give that advice specifically.

Of course, we can see from the witness statement of Adrian Coles that 38 per cent. of people are getting face-to-face contact and that those people are dealing with tax and benefit issues, not issues relating to financial services. Given that situation, he asked why banks and building societies should pay to provide that information rather than something more specific. That is a question that needs to be answered.

Matthew Fell of the CBI said that he was not sure who derives the benefit from providing the information and therefore who should pick up the tab. He also admitted that there is a broader public interest in improving financial literacy among the public, but his view was that that aim does not come across in the Bill and therefore it was very difficult to establish a balance. Age Concern also picked up on that issue, asking questions about whose interest the new body would act in. There are several boundaries that need to be clarified in order to find out how it will work and what it will do.

There is also a question of credibility. We saw from the comments of Adam Phillips that the FSA has a history of over-claiming its successes. It is essential that whatever staff it takes on will overcome that. However, although we were told that the new body will choose its staff, that will happen only after the existing staff have been TUPE’d over from the FSA to the new body. It will start with a group of people who, over the years, have clearly developed an expertise; the question is whether that expertise will be delivered in the right way.

We do not want the new body to find that whatever it does is blighted by the FSA’s track record. As I said in an intervention on my hon. Friend the Member for Fareham, a big gap in the FSA’s activities has been providing feedback on what has been found during its educational activities. As a result, there has been a cut in the loop that would normally allow the education system to move on. Feedback means learning from mistakes and being able to target better.

The FSA’s additional memorandum gave a number of examples of the educational activities that have been undertaken. It also set out an overall approach to assessing them, based on four key criteria—reach, content, process and impact. I have no difficulty with those criteria being considered as reasonable indications of success, but I would be worried if all four were given equal weighting. It would have been interesting to know whether a weighting had been given to them so that some were above others. To my mind, the most important is impact—whether we see any real change in behaviour—as that will be the most lasting effect and the one with the most benefit to the financial services sector.

I have great enthusiasm for the idea of continuing and ramping up the educational aspect needed by the financial services sector, but I am less convinced that it is set up in a way that will deliver it in an enduring manner or deliver the success required to take things forward.

Photo of Joe Benton Joe Benton Labour, Bootle 10:00 am, 7th January 2010

Before I call the Minister to respond, I take this opportunity to say that although we have two further amendments to debate I am already of the opinion that we have adequately discussed the clause in general terms. I draw that to the attention of those Members who have not yet spoken because they will have the opportunity to refer to the clause. I do not propose to allow a clause stand part debate.

While I am on my feet, I am happy to say that this afternoon’s sitting will take place in Committee Room 11; it might be a bit warmer.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am glad that the debate has demonstrated cross-party support for work on financial education. It is an important area, and a lot is going on.

I begin by acknowledging the contribution of my hon. Friend the Member for South Derbyshire. He has a lot of experience in this area, and he was right to point out that as work has developed in the field of financial capability, many lessons have been learned. Not all initiatives have been fully or properly evaluated, and not all have been successful, but there has been a lot of learning. I believe that the body that we seek to establish will take the game to the next level. I hope to say a little more on that.

I also welcome the Opposition’s acknowledgment of the work that the Government have done in putting financial education into the school curriculum, which is an important initiative. The Government have done more in the area of literacy and numeracy than any Government since the one that produced the Education Act 1944. Greater financial literacy is an unalloyed good thing. It may lead to better financial decisions, but I accept that it will not always do so. I take the point made by the hon. Member for Fareham, which I think is widely accepted in the financial advice community, that this is not a panacea, but it is an important area of work for the future.

The hon. Gentleman set out at some length the context for the establishment of a financial body, quoting a variety of statistics. I do not need to do that in my contribution. However, I note that there is widespread support for the principle of establishing a consumer financial education body. I can confirm that its remit is not only to help the financially vulnerable but to improve financial capability.

There has been a lot of discussion about what the new body will do. Will it have a co-ordinating role? Will it be a commissioner? Will it be a direct provider?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I want to clarify the Minister’s view on whether the service is aimed at a broad base or targeted at the vulnerable. Three approaches are set out in the impact assessment. Approach 1 aims to reach those most vulnerable to the consequences of poor financial decision-making. Approach 2 aims to maximise take-up, reaching the highest number of people. Approach 3 aims to reduce overall costs by reducing marketing or narrowing engagement. Page 19 of the impact assessment says:

“The preferred option is Approach 1”, which is aimed at the most vulnerable, so there seems to be a slight disconnect between the Minister’s statement that it is aimed at a broad base and what is in the impact assessment.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

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.

My hon. Friend the Member for South Derbyshire made an interesting contribution. We all remember the plain vanilla world of the financial products of our  youth. We have moved to a Ben & Jerry’s era of complicated financial products, which makes it all the more difficult when individuals are making the important choices that they do not make on a regular basis. The hon. Member for Fareham made an interesting contribution when he talked about auto-enrolment and the extent to which choices can be edited. That area has been developed in other fields and we should take account of that as part of policy development. It will also be an issue for the new consumer financial education body.

My hon. Friend mentioned the different approaches that have been taken on financial capability. As I indicated, I have some sympathy with his view that some initiatives were not properly thought through in the first place or properly evaluated afterwards. The Government welcome the shift in the FSA’s evaluation approach from output measures to outcome measures. We expect the establishment of the new body and the requirement for new, clear, outcome-based success measures to act as a catalyst for improved devaluation of financial education.

The hon. Member for Henley said that there is confusion about the role of the consumer financial education body. I do not see it that way. As the hon. Gentleman will know from the detail of the legislation, we are establishing a new body that will have a chairman, chief executive and board. It will have clear aims and objectives and will produce an annual plan and budget, and an annual report that will provide all the evaluative information that my hon. Friend wants to see.

As part of producing its annual plan, the body will want to review the landscape of existing activity and make decisions about how it can best deploy its resources to meet its stated objectives. I expect that to involve making decisions and working closely with those organisations that already operate successfully in the field. That will undoubtedly involve the commissioning of new activities, and also carrying on with some existing activities and with the programme of work that has been developed in response to the Thoresen review, with which we are familiar.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

My point is about who this body is for. Who will it act on behalf of? Is it an independent, neutral body that will act impartially in the interests of the industry and of consumers, or is it a consumer champion? If it decided that a product on sale was not in the consumer interest, would it be able to say that, or should it avoid commenting on products in that context?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

We will discuss some of those issues shortly when we discuss the hon. Gentleman’s amendment about whether the consumer financial education body can give regulated financial advice. We will come on to that, but our view is strongly that it will provide information and general advice, but that it will not give regulated financial advice.

During my previous experience as a Science Minister, I spent a lot of time having discussions with professionals in the field who were looking to promote science and engineering as careers. There were—and indeed still are—a wide variety of initiatives in that policy space, some of which come from different Departments and some of which come from the private sector. The development of work on financial capability has a lot of similarities in terms of what has happened. There are many private sector initiatives. My hon. Friend wants to  encourage those, and the Government want to see a strong private sector role in this area. As in science and engineering, co-ordination is needed, and the new consumer financial education body is ideally placed to try to bring greater coherence to the wide range of initiatives already in place. That will be a major benefit of it. My hon. Friend is right to say that what we propose in the Bill could be a very important and enduring initiative.

Photo of Andrew Love Andrew Love Labour, Edmonton 10:15 am, 7th January 2010

May I take my hon. Friend back to a remark that he made in relation to the Thoresen review and the activities that have been going on in the north-west of England? Clearly, as has already been indicated, Thoresen will be involved in generic financial advice, not the giving of specific product advice. Some of the concerns relating to clause 6 are about the publicising of information and advice that is currently carried on by the Financial Services Authority. Can the Minister confirm that the new education body will be able to publicise widely information and advice about the financial services sector?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

My hon. Friend raises an important point. As he knows, the money guidance pilots operate in both the north-west and the north-east. The hon. Member for Fareham mentioned that he had been to see some of the initiatives taking place in the north-east. I have seen some of them in the north-west. These are important areas. The other thing that I stress in response to my hon. Friend’s point is that the consumer financial education body will want to work closely with the Financial Services Authority. We need to ensure that there is proper and adequate provision of information in the marketplace more widely.

I think that that is one of the points behind amendment 40, which seems to seek to probe the Government’s thinking in that area. I would not want to encourage hon. Members to support the amendment. I think that it has been tabled as a probing measure. As the hon. Gentleman will know, it would be duplicative and likely to lead to confusion. However, I support the intention behind the amendment if the intention is to ensure that the FSA’s responsibility to consumers is not diminished, which is the concern that my hon. Friend the Member for Edmonton has. I assure him and other Committee members that that is certainly not the intention.

The FSA retains its regulatory objective to protect consumers. As part of that, it must consider the risks for the consumer associated with financial products and dealings; consumers’ experience, expertise and responsibilities in regulated matters; and what information and advice they might need. The Government are convinced that that puts sufficient statutory obligation on the FSA to ensure that the consumer’s interest is considered and safeguarded, and that it provides an appropriate counterbalance to the FSA’s other regulatory objectives.

The establishment of the consumer financial education body will give the FSA more scope to focus on protecting consumers through its market-facing activities and to ensure that firms are treating their customers fairly. It will make it all the more important that there is a wide range of information channels through which the FSA can communicate where consumers face undue risk and intervention is required. One way it will do that is through collaboration with the consumer panel.

The consumer financial education body will be expected to raise with the regulator potential risks to consumers. That is made clear in proposed new section 6A(2)(c), which states that the function of promoting the benefits and risks of different kinds of financial dealing includes highlighting such risks to the FSA and other bodies. A constructive link between the proposed new body and the FSA’s consumer protection work is built in through the legislation. That is an important point to recognise. I do not believe that amendment 40 is necessary or helpful, but it has been helpful in prompting this wide-ranging debate.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for his comments on amendment 40. They have helped clarify that there is a role for the FSA to undertake in terms of public awareness. The amendment might be deficient; I take on board his comments that it is duplicative. Some tailoring might get around that. The FSA must recognise that it has a continuing role to play in providing information to consumers that is not linked to financial education.

In terms of the broader debate, there is one point to which we will return often during debate on later amendments. Will the consumer finance education body be impartial between consumers and the industry, or will it be a consumer champion? I will return to the questions of who will be on the board and its responsibilities in terms of financial stability, market confidence and advice. Who will it exist to work for and represent? We will also return later to the issue of measuring the body’s outcomes. After it has set its objectives, how will we know whether it has achieved them? A lot of input-based measurement is going on at the moment; we will talk more about that in the context of the additional memorandum lodged by the FSA and related issues.

The hon. Member for South Derbyshire made a point about differentiation and reach. There is a challenge. To use the Minister’s analogy, which I rather liked—it worked more effectively than the football team analogy that he used during the evidence session—we are moving from a plain vanilla world to a Ben & Jerry’s world. How do we ensure that the material that people access reflects equally that complexity and the nature of their circumstances?

When the hon. Member for South Derbyshire discussed whom the material was aimed at, I thought about some areas of my constituency where the choice in terms of consumer credit is between the Provvy and the credit union, not between a credit card and a bank loan. If the material is aimed at a middle-class market, there is a danger that it will miss out some of the most vulnerable. On his comments about the information supplied to expectant mothers, producing a printed document is an attempt to reach as many people as possible. Extending reach is one of the four objectives by which the FSA measures its effectiveness. To the extent that we can use web-based services to help tailor information to different circumstances, we might be able to get people to engage more with that information.

However, differentiation requires a series of different channels for reaching the population. For some of the most vulnerable people, the face-to-face channel is effective. That is certainly my experience from my visit to Gateshead, where face-to-face communication was very important, as the people involved did not trust financial services as many people do, were not familiar with the complexities  and needed a guide to help them through the process. A variety of different means of engagement are needed. The effectiveness of that engagement is not measured by how many people are engaged with but by how that engagement affects their lives. We will return to that  later during our discussion of objectives, but I beg to ask leave to withdraw the amendment.

The Chairman adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at One o’clock.