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Speech by Vernon Everitt, Director, Retail Themes, FSA
Credit Risk and Debt Conference
16 November 2006

Good morning and thank you for giving me the opportunity to discuss the National Strategy for Financial Capability with you today.

This conference asks whether we - by which I mean the industry, regulators and public - can handle the challenges posed by increasing levels of personal debt. Recent work we have done to examine levels of financial capability sheds light in this area, which I will cover in a moment.

More generally, we don’t think that it is an overstatement to say that among the biggest issues facing our society are the environment, obesity and financial capability. And, I suggest, something very significant is happening here. The issue has now gained a real foothold on the social and political agenda, not just in the UK but internationally too. And, moreover, people aren't just talking about it; things are actually happening on the ground that today are making a real difference in helping people manage their money well, with long - term benefits for them, the industry and society more generally. But let's not kid ourselves - this will be a long haul. All of us involved will need to be relentless in our efforts over a period of many years if we are to bring about the scale of change in capability that is necessary – and there are no silver bullets.

So we now have a strategy that focuses on the areas of greatest need and which reaches into schools, universities, colleges, the workplace and through working with well-established intermediary organisations such as housing associations.

Before explaining the challenge and programme in more detail, a quick word about where raising levels of financial capability fits in to our overall aim of helping consumers achieve a fair deal.

We think that there are four things that need to be in place for there to be an efficient and effective market in retail financial services:

• helping consumers to become more capable and confident in the decisions they are required to make;
• ensuring that consumers receive, and use, clear, simple and understandable information;
• ensuring that firms are soundly managed, well capitalised and that they treat their customers fairly; and
• delivering a regulatory regime that is proportionate and risk-based.

Tackling low-levels of financial capability among the population is absolutely central to the first and second of these – capable and confident consumers and clear, simple and understandable information that people actually read.

The challenge facing all of us in getting there has been underlined by the findings of our ground-breaking survey of financial capability in the UK published in March this year. It makes concrete the concerns held by many about the current level of financial capability, especially among the young, and provides ample evidence that policymakers, firms, regulators and consumers must act now if we are to avoid storing up big trouble for the future.

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The survey looked at five dimensions of financial capability: making ends meet; keeping track of finances; planning ahead; choosing financial products; and staying informed about financial matters. For us, four main themes stand out:

• Planning ahead: people from all sections of society are not taking the most basic steps to plan ahead adequately, whether for retirement or to guard against an unexpected expense or a drop in income. This is not always because they simply lack the money to do so; many know they have issues to address, but often are simply daunted by them and just don't know where to start. We also found that some of the most capable consumers are those on low incomes given that they need to manage money very effectively just to get by. So no one should assume that low income equals low capability.
• Many people do not take adequate steps to choose financial products that meet their needs. There is a lack of shopping around for the right products and people take risks without realising they are doing so by making poor product choices or by lacking awareness of the risks they face. Quite simply, people find engagement with the industry difficult and confusing. And confidence isn't helped by stories around the latest difficulties to hit the industry, payment protection insurance being the latest episode.
• The greatest demands are placed on those least equipped to deal with them. The under-40s face a considerably more demanding environment than their parents and are generally less capable than their elders. For example, the costs of higher education and retirement are increasingly being borne by individuals rather than the state or employers. This means that the price tag for not having the necessary skills to make financial decisions is becoming increasingly significant and why there is a particularly pressing need to equip the young with greater financial capability.
• And, of central relevance to the theme of this conference, although only a small proportion of the population is experiencing severe problem debt – around half a million people – they are often very severely affected indeed. A further one million have fallen behind with their commitments at some time. In addition, a further two million households are exposed to change in their personal circumstances since they are currently struggling to keep up with their commitments.

Viewed alongside this, some of the statistics look particularly worrying:

• £1.2 trillion of consumer debt;
• £212 billion of unsecured debt;
• bankruptcies and IVAs doubling in last 2 years;
• banks reporting steeply higher bad debt write-offs; and
• advice agencies seeing higher volumes of problem debt among their clients.

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However, whilst we and others have been monitoring and identifying the risks inherent in the rise in consumer indebtedness for some time – see our Financial Risk Outlooks over the last three years for example – the majority of UK citizens appear to be finding their debt manageable, at least for now. Recent analysis by Professor Elaine Kempson and her team at Bristol University found that almost 60 per cent of the UK population seem 'financially sound' and a further 25 per cent are 'managing reasonably well'.

And, in general, people in our survey expressed rather cautious attitudes towards debt. In terms of unsecured debt, 84% agreed that they would rather cut back on spending than accumulate debt on a credit card. The great majority of the population do not regularly sign up to new credit cards - only 20% had taken out a new credit card in the last 5 years - although over 20% hold cards on which they do not pay off the full balance each month. However, in terms of planning ahead, 39% agreed with the statement 'I tend to live for today and let tomorrow take care of itself'. The worry, of course, is that some people will find this approach serves them poorly in the future.

As mentioned earlier, we do not underestimate the scale of the challenges. Indeed, just a couple of further examples illustrate it. Over 80% of those under 65 thought the state pension will not provide enough income in their retirement. But two fifths of them are making no provision for their own pension. And 40% of people who own an equity ISA are not aware that its value fluctuates with stock market performance, while 15% of people with a cash ISA think its value does.

In a way, that’s the easy part – defining the nature and scale of the problem. The question then is how to turn this knowledge into action capable of making a real difference in people's lives.

Part of the solution is moving further towards a more principles-based approach to regulation. Key initiatives such as Treating Customers Fairly and removing many highly prescriptive regulatory rules which have grown up over time should enable firms to develop better approaches, to the benefit of consumers. For example, it will allow firms greater scope for developing consumer information that genuinely tells people what the product does in a straightforward and understandable way.

But if that approach is to be successful, it must be matched by a significant increase in consumer capability. So, in March this year, we set out a programme of priority projects, all fully costed with well-formed plans for implementation and evaluation, to help bring this about. This will see financial capability education, information and advice reaching further into schools, universities, colleges, organisations that help young, and often excluded, adults and in the workplace. These activities are being supported by shorter-term measures and a range of on-line resources designed to help consumers start to make better decisions right now, including on managing debt.

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To achieve this, the FSA will be spending £15 - £20 million per annum in the period to 2010/11 to deliver the programme and our target is to reach at least ten million people over this period. It will take a long time for the benefits to flow through, but we need to start now and pursue our objectives energetically to make up the lost ground.

I'd now like to give you a brief overview of the main elements of the programme and the outcomes we are seeking to deliver before showcasing a couple in a little more detail.

• Through our increased funding of the Personal Finance Education Group (pfeg), school teachers are being provided with the support they need to deliver high quality financial education in the classroom. This will help to capitalise on the Government's commitment that personal finance will be given a more prominent place in the National Curriculum from 2008. This programme, called Learning Money Matters, will reach 1.8 million children in 4000 schools by 2010/11. Already 350 schools have been signed up against a target of 500 for this financial year.
• For young adults, programmes are being delivered in higher and further education and for young people who are not in employment, education or training (NEET) –through various avenues including youth workers. These organisations can now access high quality training materials to help them use creative techniques to overcome the barriers to communicating with young people about their money. Our goal is that by 2008, most universities (2.3 million students), and a majority of organisations working with NEET young people (1.1 million people) will be using these tools and training. Already programmes are in delivery at around 20 universities, from St. Andrews to Leeds to Swansea to Portsmouth, increasing student confidence in dealing with their finances. This will also help universities themselves widen participation and improve student retention rates – financial issues are often the key reason why students drop out.
• A revised FSA consumer communication strategy will deliver a new and much more accessible consumer website later this year. Already, we have some 2 million visits to our consumer website every year and we intend to raise this to 4 million visits a year over the next 3 years. We want it to be a major information hub for straight-talking financial information. No selling. No jargon. Just the facts. And next year we will continue with our programme of campaigns to help consumers engage more effectively with the industry. This will include campaigns on general insurance products and on preparing for retirement.
• On-line tools such as the Financial Healthcheck and the Debt Test are available through the FSA and BBC websites and, increasingly, through advice agencies and regulated firms – so we are also taking these tools to the traffic and not simply waiting for people to come to us. Reach is highly encouraging: the Debt Test and Healthcheck have received almost 1.4 million visits, delivering practical and common sense information to those who need it. The Debt Test takes about 5 minutes to complete and you don't need lots of documentation or information to hand before you take it. It offers straightforward and highly practical advice on sorting out debt problems, thinking about how changing circumstances might impact on borrowing and where to go to get further help, including repairing credit history where things have gone wrong in the past.
• One point our pilot work found is that expectant parents tend to be particuarly receptive to receiving advice on money matters. So we are well advanced in developing resources for expectant and new parents - what we term the Parents' Guide to Money. This is a highly practical tool that informs and educates about personal finance at a time of immense change in someone's life. A pilot of the guide is underway at eight employers and we will evaluate the outcome of this in due course. Reaction from government departments and family support organisations has been very positive and we are convinced that it could make a real difference if we can get the distribution right.

I'd now like to talk about two further elements of the programme in more detail – the wider provsion of simple and straightforward money advice, including as a way of preventing people getting into difficulty in the first place, and financial education in the workplace.

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Money Advice

Perhaps the most difficult and least developed element of the strategy to date has been widening the availability of basic level money advice – including, but much broader than, simply advice on dealing with problem debt. The programmes in schools, the workplace and our revised consumer communications strategy are providing benefits in this area but there is clearly much more that needs to be done.

The key thing we have learned through extensive piloting of what does and doesn't work is that people respond positively to dealing with existing organisations that they already know and trust. Therefore, we have been pressing ahead, forging alliances with existing organisations to help deliver financial education to their clients by adapting the extensive training and education materials we already have on the stocks.

We have already held preliminary discussions with key intermediary organisations in target sectors, such as Citizens Advice, Age Concern, Help the Aged, One Parent Families and Gingerbread. And we will be looking to make rapid progress on helping them deliver benefits to their millions of clients.

As part of accelerating progress here, we plan to build on the successful model we created with the FSA Financial Capability Innovation Fund. This is an initiative that we launched last year to offer seed funding to new and innovative programmes run by existing organisations, aimed at increasing the financial capability of priority audiences. And very often, the financial outlay required to deliver initiatives on a national scale is quite modest – we can prove that you don’t have to throw millions of pounds at this to deliver real benefits quickly.

So we will leverage existing networks and resources and build on the replicability and sustainability of the Innovation Fund projects.

The original Innovation Fund provided twelve projects with seed-funding in 2006, several of which are now reaching maturity and look like being taken up nationally. For example:

• work with London Quadrant Housing Association has resulted in a Chartered Institute of Housing good practice guide which will reach around 30,000 housing officers and affiliated professionals, helping them to help their clients with day-to-day money and benefits decisions; and
• in Northern Ireland, a new self-help booklet and website for cancer sufferers and their carers has been created by the Omagh Independent Advice Services project, and we'll be looking to create opportunities for other cancer charities to piggy back on the initiative.

And all of the 12 projects seek to address credit and debt to varying degrees. For example:

• Lincolnshire Action Trust – financial awareness for prisoners and ex-offenders;
• Change Partnership (London) – providing social housing tenants with practical help on making a personal action plan; and
• East Surret Domestic Violence Forum – helping clients with money issues so that they regain independence.

We are convinced that this strategy, using small, well targeted projects to drive and spread change, provides an economically efficient means to deliver rapid successes.

It may be, in time, that there will be a need for a national, centrally designed "money advice" service in this area, but a scheme of that kind would need to establish a brand and infrastructure and then stimulate the necessary demand for its services. The time to market could therefore be lengthy and this, as well as the high cost involved, gives us cause for concern about that kind of centralised approach.

As a result of the targeted work I've outlined and the introduction of personal accounts for pensions from 2012, we expect demand for more intensive money advice amongst consumers to rise. So strategy in this area will need to evolve over time to take account of this.

Money advice is a tricky area where progress has not been as fast as we would have liked. But I am confident that the renewed energy we and our partners are putting into bringing practical benefits to many marks a step change in this element of the strategy. We are particularly keen to explore how Government can contribute to successful outcomes here as part of the 10 year strategy they are working up on their contribution to raising financial capability. This strategy will be complementary to the FSA-led programme and is a very welcome development.

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The Workplace

Now, financial education being delivered through the workplace. To me, this epitomises what is possible when the public and private sectors collaborate effectively and delivering financial capability through the workplace is a key element of our strategy.

The 'Make the Most of Your Money' programme was successfully trialled in 2005 and showed how to successfully deliver financial education to employees through the provision of materials, generic advice seminars, and access to one-to-one consultations with an adviser. It showed that the workplace – whether an office, a factory floor or school staff room - is an effective channel for improving financial capability. Both employers and employees benefit and it allows us to reach a very large and diverse range of people, including some on low incomes, who may not have had access to any other form of money advice before.

We are now delivering an ambitious programme of financial capability education for delivery through the workplace across the UK. The programme involves a trained presenter visiting a worksite, free of charge, to deliver seminars to employees. All employees at the worksite receive an information pack covering budgeting, managing debt and long-term planning for the future, including savings of course, and all are invited to attend a seminar.

As you can see from these example slides from the seminar, this is basic information allowing attendees to consider their own needs and priorities - from tips on how to make short-term savings on utilities to choosing the right type of mortgage or savings plan. In the area of debt, we explain about APRs (our experience is that many consumers think that a higher APR is actually a good thing), credit and store cards, overdrafts and credit ratings. In terms of secured lending, we explain the different types of loan (e.g repayment and interest only) and the need to think about whether you can afford things if circumstances change. So no rocket science, but it really is staggering that many very bright people seriously struggle with these concepts. The financial capability survey I mentioned earlier suggested that we should pitch things at this level since many people actually need only a little help and encouragement to prompt them into taking action.

And most importantly, there is no sales pressure – employees come along and spend an hour or less listening to an informed and approachable presenter. He or she explains the core elements of personal finance – some things that people may never have understood before and some things they will have forgotten - but also helps them to clarify their own thinking on their financial situation, employee benefits and priorities for the future.

Then, at the end of the presentation, people can ask the presenter questions or can request a one to one meeting at a later date to ask for advice on specific issues. And people are given a list of useful contacts in case they need to talk to someone about benefits or problem debt for example.

So a very simple idea – yet it addresses a clear need and so far it's been well received and had a successful start.

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We have set ourselves ambitious targets. It is early days, but we have delivered seminars or materials for 28 employers and have a further 24 employers already signed up for this financial year. Already 50,000 information packs have been distributed and we plan to reach 200,000 employees with written material by March next year and 4 million by 2011. We also aim to deliver workplace seminars to 15,000 employees by March next year and 500,000 by 2011. We are in discussions with over 150 further employers, including from national and local government, education, the media, manufacturing, retail and financial services. Those involved include BBC Manchester, EMI, Lloyds TSB, Scottish Power, pharmaceutical manufacturer, SSL International and B Sky B – along with the Treasury and FSA of course.

We have a pool of more than 150 seminar presenters, each of whom will have been through a training programme before they present a seminar.

The high level feedback from employees (and where relevant, their union representatives) and employers is positive. Of the employees attending a seminar:

• 85 per cent said they were likely to take some form of action as a result of a seminar.
• In the follow-up research conducted three months later, 56 per cent of those we contacted had actually taken that intended action, whilst the remaining 44 per cent still intended to do so.

The most popular actions taken (in order of preference) were:

• reviewing their financial affairs;
• shopping around for financial products or services;
• seeking advice using the contacts provided; and
• discussing their money with their partner.

And interestingly, of those that have taken action, women have tended to be the ones who have carried out their intended actions whilst men are the ones who still intend to act. I leave you to draw your own conclusions.

Of course, we are delighted with the results so far, though as I have said it is early days. It is particularly encouraging that our evaluation confirms that so many attendees plan to, or have already, taken some form of action to take control of their finances.

The challenge now – and one that we've already begun to address – is to scale up the Make the Most of Your Money programme to reach more employers and employees across the UK. And this is where you and your organisation can both help and benefit.

If your organisation is in the financial services industry, you could make a difference to levels of financial capability in the UK by putting forward members of staff to be trained as seminar presenters or to work with our workplace team on secondment.

And wherever you work, your employees would benefit, as would your firm, from helping your colleagues to take control of their money and to understand their employee benefits. So why not contact us about the possibility of running seminars at your organisation.

So that completes a quick fire tour of the programme.

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Conclusion

The theme of this conference is over-indebtedness. I think there is common agreement that a key element in helping people avoid serious problems here is improving the financial capability of the population. I hope that I have persuaded you that we must take this issue as seriously as some of the other major challenges faced by our society.

Thank you again for the opportunity to discuss this issue with you today.