Financial Inclusion Forum
Speech by Callum McCarthy,
Chairman, Financial Services Authority
The London Chamber of Commerce & Industry 27 June 2005
Welcome to the Financial Inclusion Forum which is chaired jointly by SAFE (Services Against Financial Exclusion) of Toynbee Hall and the Royal Bank of Scotland – in itself an example of the charitable and the commercial worlds working together, a subject which will be a recurring theme today. On behalf of the FSA, I thank them both for their work in preparing for today's event.
This morning I want to do three things: first, to put financial inclusion in the context of the related but wider question of financial capability – how do we equip people to make informed decisions on their finances?; second, to set out the FSA's approach to this, and set it in the context of the responsibilities of others – what can and should you expect of the FSA, as distinct from those who provide financial services, or the voluntary sector or government, or employers?; third, to describe a particular initiative we are launching, namely the FSA's innovation fund.
Let me start with the wider question of financial capability. The ability to understand one's personal and family finances is central to anyone's well being – in any society. But it is particularly so in a society where the individual is being asked to take personal responsibility for decisions which used to be taken for him or her: for decisions on pensions which used to be taken by employers, but which are more and more the responsibility of individuals; for decisions on student education, where the student will in future incur debts rather than receive a grant; and for decisions on health care. This move to require the individual to take responsibility for his or her financial decisions places growing strain on the need for basic financial capability – the ability of individuals, as customers of financial services firms, to make informed decisions between the many choices available to them. I should add that the range of choice has become wider. We no longer live in a world where a mortgage comes only from a building society, insurance from an insurance company, or loans from an overdraft. The breaking down of cartels which has led to this increased choice, and the fact of increased choice, are welcome developments. But they put all the more weight on the ability of the individual to make informed choices.
It is however an unfortunate but undeniable fact that too many who are required to make these choices are ill-equipped to do so. Among the adult population in the UK, 23 per cent, if presented with the Yellow Pages and asked to name a plumber, cannot do so. More than 20 per cent, if asked to choose between receiving £30 or 10 per cent of £350, choose the lower figure. Put in another way, more than one in five of adults would not have understood either of the last two sentences. When we look not at basic literacy or numeracy but at the specifics of finance, the picture is comparable: a study by the Institute of Financial Services showed that eight from ten people did not correctly identify the term APR as describing the interest rate and other costs of a loan; five from ten people admit to not understanding financial products such as mortgages or ISAs.
This gives rise to great strains. We at the FSA have been much concerned to address these strains – insofar as we are able to do so. I make that caveat clear. The principal responsibility for a society with literate and numerate citizens clearly lies with government, and with the education system, not with the financial services regulator. The government's spend on primary and secondary education runs at some £32 billion annually. The FSA's total expenditure on all our responsibilities is some £260 million. But within that figure we are taking our responsibilities for financial capability seriously. Our annual plan for 2005-06 shows that our spend on financial capability this year will be approximately double that which we spent last year – which was in turn twice that which we spent in the previous year. For all that increase, this year's spend of £8 million is insignificant in comparison with the government's spend on education at £32 billion, or in comparison with the financial services industry's spend on marketing at £1.4 billion. The challenge for the FSA is to identify where our efforts can have most effect, and where our expenditure has most leverage.
We have been tackling these questions as a priority for the FSA for more than a year, in a group chaired by the FSA's Chief Executive John Tiner which brings together representatives of government, employers, providers of financial services, those who use financial services, those who comment in the media about them, and those from the voluntary sector who have such direct experience of the problem. Our aim is to co ordinate the resources that exist on a much greater scale than in the FSA to tackle the problem of financial capability; to act as a catalyst for action by those who have substantial resources; and to identify and finance seed corn activities where others will perform the harvest. We have tackled the issues in what I believe to be an entirely practical way: to see how we can use the work place more to encourage understanding of financial needs and opportunities; to encourage better integration of financial issues in the curriculum for schools; to identify what is needed by way of generic advice, and what is the best way of achieving this. It is an essential but necessarily long-term task if we are to obtain an effective and fair market for retail financial products.
It's essential, but not enough: a necessary, not a sufficient, condition. Alongside this raising of consumer capability and hence confidence we need greater clarity in information about financial products, and improved consistent performance by the providers of financial products and services. We are working on both those aspects – through for example our work on key facts (the key facts about a product or service which will make it easier for customers to choose the best offer available); or through our work on treating customers fairly (the distilling out from the various practices of firms what works best, and which practices have been problematic). These actions have opened up real opportunities for consumers. Under the new mortgage regime, for example, it should be much easier for consumers to compare competing offers by comparing the key facts about each. The key facts information should also help consumers understand better specific mortgage products, especially the cost over the lifetime of the mortgage, not just the first few years. The benefits of being able to compare different mortgages are clear: there is often nearly a whole percentage point difference in cost between mortgages from comparable firms. But our facilitation of the market through easier and compulsory information and our encouragement of good practice through the treating of customers fairly programme will count for little unless the consumer can take advantage of it. We will work on better, clearer information and on better, more responsible sales practices. But neither will be effective without more capable customers.
I have been speaking about the need to help those with a low level of financial capability. Let me speak in particular about those who are more directly excluded from financial services: those two million without a bank account; those three million who rely on expensive alternative credit facilities; those – typically in receipt of benefit, in socially rented accommodation, on low incomes, often single parents – who are outside mainstream financial services.
In this context let me make an observation as to the FSA's duties: at no point in the statute which gives us our powers, duties and responsibilities is there a special mention of either social exclusion or the special problems of those on low incomes. On coming to the FSA from my previous job as energy regulator, I was struck by the fact that the FSA had no statutory duty comparable to that placed upon Ofgem to have special regard for those on low incomes – an odd absence given the importance of financial services in our society. You will, I hope, be relieved to know that, despite the absence of any specific duty, we have consistently tried to be thoughtful about and sensitive to the special requirements of those who find it difficult to access financial services. Special concern for those suffering from social exclusion has been a common theme across all our work on financial capability. And indeed we expect that as we carry out our statutory responsibilities we will have a positive impact on financial inclusion. Let me give you examples of where we have been able to make a difference.
A problem for the financially excluded is having few or none of the normal tokens of identity required for account opening: a gas or electricity bill, a council tax demand or comparable document. At a time when anti-terrorist concerns have led to an emphasis on documents for account opening as a means of combating money laundering, this has become a particularly acute obstacle. The specific rules are drawn up by the banks, not by the FSA, but we have encouraged the banks to show greater flexibility: to accept just one document and to use identity checks already carried out by others. The single document which should in future be accepted would include an official letter of offer of benefit from a benefit agency such as the Child Benefit Agency, or from a government department such as the Home Office for an asylum seeker. We hope this will lift one obstacle to financial inclusion.
A major channel for providing financial services to those who are not well served by traditional providers are the credit unions. We have been acutely aware that we at the FSA needed to strike a correct balance between on the one hand the necessary supervision of new institutions, often run by people without extensive experience of financial services, who would benefit from our guidance and help, and on the other the recognition of the special contribution that credit unions can make to combating social exclusion. I think we have struck that balance. The assets and membership of credit unions are rising: credit union assets now total over £427 million, nearly double on 2000, and membership stands at 473,000, nearly 50% up on 2000. Meanwhile, the consolidation among credit unions to produce fewer but better resourced and I would hope better run credit unions is a helpful development. A challenge remains for all concerned in the movement to publicise better the services credit unions can provide relative to other, often more expensive, sources of credit.
We have also been concerned about the financial exclusion of those who wish to practice their religion and who find themselves, for that reason, without access to the financial products and services which would meet their needs. One of the successes of the FSA in 2004 was our authorisation of the first purely Islamic bank in Europe, the Islamic Bank of Britain which will, for the first time, offer Shariah-compliant financial products to the UK's 1.8 million Muslims. I am glad to say that the Chief Executive of the Bank said the FSA had made a helpful contribution to setting up the Bank. His words (not mine) were: "an incredibly constructive approach was taken by the regulator ….. the FSA clearly desired finding a way to make it work". I wish the new bank and its customers well. Going forward we are continuing to work actively with providers of Islamic products such as 'murabaha' which are economically equivalent to a permanent fixed rate mortgage. We are working with the firms involved to ensure that our rules about these products, including the key facts illustration which helps consumers compare products, are consistent with Shariah law and provide the protections of FSA regulation.
Within the general work on financial capability, two of the seven workstreams have a particular relevance for those who are marginalised, or threatened to be marginalised, from mainstream financial services. The first is our work on young adults, where last week we published a guide "Helping Young Adults become Financially Capable", the work of the group chaired by Trevor Phillips. The work of this group covers all young adults, but it plays particular attention to the needs of those who are unemployed, or not receiving education or training. This draws together experience from schemes across the country: Northamptonshire, North Somerset CAB, South Denbighshire CAB, Speke – all designed to help vulnerable young adults come to grips with the fundamentals of organising their own finances: assessing income and outgoings; how to get a tenancy; how to manage debt; how to open a bank account. There are various pilot studies which build on this: in Scotland, the pilot appropriately named "Young Scot" specifically aimed at young people threatened with financial exclusion; the Barefoot Project of Citizens Advice Bureaux nationwide; or the work being done at Fairbridge based in Bristol. Each represents a particular approach to solving the problem of financial capability amongst especially vulnerable young people.
The second workstream specifically relevant to financial exclusion among our work on financial capability is that dealing with families. We hope soon to begin work with Toynbee Hall and Stepney Children's Fund to look at financial capability and the threat of financial exclusion for families – for example, how to use mother and toddler groups to get basic financial advice to those who need it most. A second project, run by the Scottish Executive, has examined why financial advice does not reach particular family groups, and how to fill this gap: for example, how to help single parent families budget. The lessons learnt from this project will be fed into the families workstream.
These are examples of the sort of pilot project which we have already established within our work on financial capability. But we are keen to build on this, and I am therefore happy to announce that we are today establishing a Financial Capability Innovation Fund, designed to provide the financing for experiments by those in the voluntary sector aimed at tackling financial capability issues. It is dedicated to new ideas aimed at improving financial capability; it is designed for the voluntary sector; it is specially aimed to support practical, grass roots projects; we want to find what does, and does not, work in practice. We have set aside £100,000 in the first place. As we expect most of the experiments we will support to require funding of between £5,000 and £20,000, this should provide an opportunity to support a range of initiatives. Applications should be made by 15 September, and we will make the decision on which to finance by the end of this calendar year. Application packs are available today.
The FSA's scheme is accompanied by two others. The Royal Bank of Scotland is putting up £100,000 in a special fund, aimed like the FSA's Innovation Fund, at encouraging grass roots, practical pilots in the voluntary sector although this fund is to tackle financial inclusion issues directly. The Department for Work and Pensions has already launched a £3 million fund, the Pensions Education Fund, aimed at financing projects from non profit organisations to deliver new ways of giving employees and the self employed the information they need to make decisions about pensions and retirement.
All these are aimed at helping those such as yourselves in the voluntary sector (amongst others), with your practical knowledge of the problems as they occur day to day, find solutions; and then to share best practice learnt in one place across the country. In a way, we are tackling the easiest part: seed corn is cheap, whereas harvesting is expensive; laboratory experiment is low cost relative to the expense of plant development. The bigger challenge we face is how to engage the resources of industry and government in meeting those larger costs. I hope that the initiatives discussed today will prove successful, and pose those larger questions of development in the future. But that is a subject for another day.