22 June 2005
Speech by the Economic Secretary, Ivan Lewis at the Cicero Financial Summit
Opening Comments
Thanks. I’m pleased to be here this morning. Let me thank both Cicero Consulting and Money Marketing for bringing this event together – an opportunity for us to share ideas, and to engage with the real issues beyond Westminster and Whitehall.
I certainly hope that we can have an excellent discussion about our services, and how we can make them even better as we enter this new parliament.
For me – and for my colleagues in the government – it is vital that we match economic success with delivering social justice. It is not a trade-off between one or the other.
On the contrary, our mission is to support individuals reach their potential – to gain dignity through success. Britain can – and is – doing better as a result. By taking on these twin challenges we are ensuring that Britain is the best place to do business, and not at the expense of our citizens.
Promoting Asset Based Welfare
This is why, since 1997, we have pushed for greater savings and wider asset ownership. We have done this because our macroeconomic stability depends in part on long-term planning, and this is assisted by encouraging and supporting saving and asset building for all for the future.
And today we are well positioned to continue to further promote asset ownership through informed saving decisions.
Yet these are decisions that affect citizens and consumers who have become far more sophisticated than in the past. People whose expectations and aspirations are growing, demanding more from government and seeking an industry that offers greater choice at all stages of their lives.
Child Trust Fund
This means that we must respond with policies that help shape a more modern, flexible financial services sector – a sector that reflects the demands of modern society.
So let me give you an example of this. The Child Trust Fund. This is a groundbreaking initiative that will strengthen the saving habit of future generations.
Just think. When our kids turn eighteen, they will all – for the first time in our history – have access to a financial asset.
In the early part of this year around 1.7 million vouchers were sent to the parents of eligible children which they can use to open Child Trust Fund accounts.
The scheme went live on the 6th April and, since then, government payments go into the accounts – and contributions of up to £1,200 a year can be made by family and friends. And of course, there is no tax to pay on money earned in the account.
With half a million Child Trust Fund accounts already opened I am really encouraged that parents have seized the initiative on savings.
It is pretty tremendous that nearly one third of vouchers have already been used. That awareness of the Fund is virtually universal and that many parents now see the Child Trust Fund as the primary savings vehicle for their child.
So this is positive action that will help us to achieve our goal that every child – regardless of background – gets the best start in life.
Tax Simplification for Pensions
At the other end of the age spectrum, we have also supported pensions simplification. We have sought to create a simpler tax regime, that tidies up and clarifies tax incentives to save within pension products.
This is a straightforward rationalisation, which will be implemented in early April next year. Simplification will sweep away the many existing tax regimes and replace them with a single universal regime for tax-privileged pension savings.
What this means in practice is greater flexibility for some 15 million pension savers. Tax simplification will benefit individuals – through greater choice and flexibility concerning when and how they save for their retirement. In being able to pay more towards their retirement if they so wish. And in being in a scheme that is easily understood.
Simplification will help pension providers – through reduced administration costs and a reduction in the current burden caused by expensive administration checks.
And simplification will benefit employers – also through lower administration costs, but more importantly by freeing up tax rules to enable design of pension schemes that best fit business needs.
Saving Gateway Pilots
From children to pensioners, the aim of our financial services policies have been to support hard working citizens live a better life in a fairer society.
This follows through to the wider ‘Saving Gateway’ pilots we have set up. These involve eligible participants who are invited to apply for a specially designed savings account.
Every time they save some money the Government matches it with a contribution. It is simple and easy to understand and is designed to help those on low incomes start saving.
But this matching of individual saving by low-income groups is an important new dimension to government support, and can encourage genuinely new saving. It works by creating greater incentives for those on low incomes who often cannot benefit from tax relief.
Tailored financial information and education is provided alongside Saving Gateway accounts to help individuals make informed saving choices.
So by creating genuinely new saving for people who did not do so before, the evidence suggests transparent incentives can establish savings habits.
Building on this – and as we announced in this year’s Budget – a new, larger, £15 million pilot is now up and running, using Halifax banking facilities in Cambridgeshire, Cumbria, East and South Yorkshire, Manchester and East London.
These accounts will run for eighteen months – the first of which are already open. And crucially, this pilot will test alternative match rates and contribution limits, as well as an initial endowment to kick-start saving. It also incorporates a wider range of income groups and financial education support bodies.
Incentives for Saving
Yet we also need to provide targeted incentives and support for saving throughout peoples’ lives – as seen with ISAs. They are our primary vehicle for tax-free saving outside pensions, and we remain fully committed to them.
And the facts speak for themselves. Over 16 million people have an ISA, with over £160 billion subscribed, supported by around £1.6 billion in tax relief for savers.
They have attracted more low-income and young savers than TESSAs and PEPs – with over double the number of young savers. And one in five ISA holders are from lower income groups compared with one in seven who had either a TESSA or PEP.
And we haven’t stood still. Since April this year, stakeholder medium-term products and existing life insurance products have been available through stocks and shares ISAs. And as we set out in the Budget, we are extending the existing higher investment limits for five years through to 2010.
Since 1999 people using their full ISA allowance will, by 2010, have been able to amass £77,000 of tax-free savings and investments in ISAs.
But let me also flag up next year’s review of ISAs, considering how to build on their success.
I want to urge you all to start thinking and engaging with us ahead of that review.
We want to know what you think about ISAs and how to improve them. We want to hear your ideas for encouraging savings and investment – I know for sure that Treasury officials will be keen to hear from you.
Combating Financial Exclusion
Of course, while ISAs, Child Trust Funds and the wider components of asset accumulation are key to financial service provision in the UK – for many citizens, being able to save is not always so straightforward.
That is why we have also concentrated on combating financial exclusion – which on the ground means involving more people in our day to day, financial system.
After all, in 2003/04 1.5 million households, containing 2.3 million adults, were without a bank account or a Post Office Card Account. Two thirds of them were in the lowest three income deciles.
More starkly, households that operate solely on a cash basis lose out on savings that others can make through direct debits to pay utility bills.
They pay more for other things – for example, pre-pay mobile which costs more. And they are more vulnerable to loss or theft. In some cases they may well be unable to get a job because they don’t have an account for wages to be paid into.
Worse still, they are far more likely to use the alternative credit market, which means paying interest far beyond that on a standard personal loan.
For many this can lead to spiralling debt. And for those who do get into such debt – for people who struggle to make payments – the supply of free face-to-face money advice falls far short of demand. It is a vicious circle that we are working to break.
Let there be no doubt – we are committed to tackling financial exclusion and are committed for the long haul. The Policy Action Team Report made recommendations back in 1999 on basic banking, credit unions and insurance with rent – many of which are now in place.
And in December last year we set out the next steps in tackling financial exclusion, establishing a framework to ensure delivery through a Financial Inclusion Fund of £120 million over three years, combined with Brian Pomeroy’s Financial Inclusion Taskforce that will oversee progress.
Next Steps
So we are taking an holistic approach to financial services. From children to pensioners, from hard working families trying to save, to the financially excluded. We are determined to see this greater success continue in the coming parliament.
And this is success in a context of change. It is success for a sector determined to make the most of today’s global economic opportunities.
Our companies are now global, and our brands are not restricted to Europe but are worldwide products. This is why our wider activities – like extending the EU-US dialogue on financial services regulation and building genuine transatlantic economic integration – are so important.
It is why working through WTO negotiations to secure a global trade deal that genuinely enhances the integration of global financial markets cannot be forgotten.
So let me also take this opportunity to praise the financial services sector in Britain for the immense professionalism and quality of services provided.
Let me reflect the importance of London in this, as a centre of global excellence. After all, London’s regulatory environment is regarded as the best internationally – ahead of New York and well ahead of Frankfurt and Paris.
I have no doubt that to support this environment, we must continue to work closely together – both government and industry – in partnership as an alternative to regulation or legislation, where possible.
Regulation
Through the recent FSMA Two-Year Review, we have reduced the scope of regulation in many places, making it easier for employers to promote the uptake of pensions by employees or for advice centres to help people manage debts.
This has also made it easier for small firms to attract finance, for business angels to invest, and for occupational pension fund trustees to manage their funds.
Let me be clear. Our aim is simple. Where regulation is needed it must be proportionate. Where regulation is needed it must be risk-based. And where regulation is needed it must be well-balanced.
Closing Words
So, we recognise there is a great deal still to be done to ensure Britain has financial services fit for purpose, and fit for society. We have come far already, and have services the envy of our EU and G8 peers. But still we can do more.
We will continue to pursue policies which make Britain a great place to do business. We will continue to improve financial capability and to assist people who lack confidence in dealing with financial matters.
We will ensure that both children and pensioners receive a fair deal that is easily understood and properly laid out.
And we will include more people and households in our financial system, tackling poverty and exclusion from all angles. Ultimately, both myself and my colleagues are determined to see Britain – and our financial services sector – remain at the forefront of the world as we go further forward into the 21st century.
Your engagement on this is vital – and I look forward to hearing your views, especially on matters like the forthcoming ISA review.
Thank you.
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