18 October 2006

Speech by Economic Secretary to the Treasury, Ed Balls MP, at the Financial Capability Conference

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Opening Comments

1. I am very pleased to be here to open this afternoon’s event – the first national conference on financial capability, jointly hosted by the Treasury and FSA – on what has already been a busy day for me, the FSA and senior financial services leaders.

2. Because this morning we had another first: the first meeting of the Chancellor’s High Level Group - senior City practitioners who will be working with us over the coming months to build on the City’s and the UK’s considerable strengths as a leading financial services centre.

3. We agreed a number of things this morning: to modernise the wholesale insurance market, where we face increasing competition; to develop the UK’s position for asset management where we face challenges from other parts of Europe; to ensure that the financial services sector has the sufficient skills to face global challenges; and that we work closely together on reforming tax administration and regulation. But round the table, I know that the participants also agree that financial capability is crucial to maintaining the UK’s world-class retail financial services markets.

Financial Services and the importance of Capability

4. People today are living longer than ever before. In 1950, a man aged 65 could expect to live on average to the age of 76. Today, he can expect to live to 85. By 2050, to 89. Longer lives are one of the great achievements of modern society. But it is also clear that today’s young people will have to plan for potentially longer and more variable working lives and retirements. Already people are taking more responsibility for planning their financial lives. 44 per cent of households now have a mortgage, compared to 34 per cent 20 years ago – the number of mortgages outstanding has increased by 3.9 million over the same period. And we are asking more of them. From 2012, when we introduce personal accounts, most people in work will have to make a decision about their pension. Ten years ahead 16 year olds will be able to manage their Child Trust Fund.

5. So more than ever before we need consumers who can engage with, understand, and be able to rely on their financial services. Consumers who are knowledgeable about what is available, who can shop around, and who demand better products and services, to drive innovation and competition.

6. But we know too that many financial products are inherently complex. It can take decades to find out how a pension or long-term savings will perform and whether it meets expectations. The long term nature of these products means that people don’t get very many chances to make repeat purchases, to ‘learn by doing’, as you would, say, with a car.

7. And at the same time, competition, technological advances and product innovation mean that as the range of financial services offered has increased and become much more complex.

8. There are 7000 or so different mortgages on the market, for example, and over 2000 different retail investment funds.

9. What this means is that, at a time when we are asking people to do more, to take on more responsibility with inherently difficult products, the market is becoming more complex and difficult to navigate – the degree of choice can be overwhelming.

10. Financial issues have traditionally been seen as ‘too difficult’, even intimidating, to many. But for everyone to participate fully in our modern economy, we must enable easy access and confident use of financial products across the board.

11. That is why we are here today, at the first FSA/HMT joint conference on Financial Capability. Greater capability will contribute to all our shared objectives – helping citizens plan for the future, reducing the risk of over-indebtedness and supporting a competitive financial services industry that better meets the needs of its customers in an efficient and fair way.

12. So let me thank my co-hosts the FSA – John Tiner and Vernon Everitt – and give a special welcome to our overseas guests from France, Italy, Russia, China and Japan.

FSA-led National Strategy

13. In recent years, with the leadership of the FSA, we have taken important strides forward on the Financial Capability agenda in the UK. I want to take this opportunity to thank John Tiner and his colleagues for all their hard work over the last three years, culminating in the ‘Delivering Change’ plan launched earlier this year. The FSA have put capability on the map, and this is a major reason why we can hold an event like this today.

14. I was at a meeting of the FSA national strategy steering group earlier this month. We talked about the excellent progress the being made, and what more Government must do – what we must all do together.

But still challenges ahead

15. The scale of the challenge that we face is formidable. I am sure you have all seen the FSA’s excellent baseline survey. Some of the statistics bear repeating. 40% of people sometimes or always run out of money at the end of the week or month. 10% say they make no provision for planned expenditure, for example quarterly or annual bills. Some findings were even more worrying: 70% had made no personal provision to cover an unexpected drop in income and over 90% of individuals who had recently purchased stocks and shares perceived them to be ‘no risk’ or ‘low-to-moderate risk’ purchases.

16. Not all groups are equally capable (or incapable). The survey found that 18-30 year olds were the least capable in most areas, which is particularly worrying as we ask our young people to take on a lot of responsibility. While todays over 70s have also been highlighted as a vulnerable group, performing below average in terms of capacity for choosing financial products and for staying informed about financial matters.

Government Action so far

17. We are taking steps to address the problem. First, on education. We are l addressing financial capability more explicitly in the curriculum by embedding it in the new functional mathematics component of GCSE maths. And we have provided funding for the charity PfEG, and for the Basic Skills Agency to help adults too.

18. The Government has also introduced the Child Trust Fund, which I see importantly as a tool to promote financial education. The Child Trust Fund will bring financial education in schools to life. By building their confidence as they use the account and deal with financial providers, children will learn the value of savings and how to manage their personal finances. We are working with financial education bodies and the devolved administrations to identify appropriate opportunities for learning - for example, with a focused Schools Money Week, and tailored CTF supporting materials.

19. For lower income families, we are piloting the Saving Gateway - to encourage saving among those who do not usually save, to promote engagement with mainstream financial services, and to develop capability through learning-by-doing. Evidence from the first pilot suggested that participants found this type of education support valuable. The second pilot was launched in the spring last year and the final evaluation is due to be published in Spring 2007.

20. In addition to these policies, many of you will be aware of the Government’s Financial Inclusion agenda. We have a strategy for achieving greater financial inclusion, focusing on three priority areas – access to banking, access to affordable credit and access to free face-to-face money advice.

21. And we have established a framework for delivery – including a Financial Inclusion Fund of £120 million over three years and the Financial Inclusion Taskforce, to oversee progress. The programme includes the £45 million DTI face-to-face money advice projects, providing around 450 new, trained advisers to provide help on debt and other financial matters with the Citizen’s Advice Bureau playing an important role.

10 year strategy – principles, themes and questions

22. But there is much more to do. And at the recent FSA Steering Group we agreed that it was essential for the Government to play a fuller role by articulating our long-term ambition, complementing the ongoing work of the FSA, and enhancing it where necessary.

23. I believe our first task as Government is to set out our long-term goals and ensure that they meet the scale of the challenge we have all identified. This itself is no easy task, it is clear from the baseline survey that we have a complex problem to address that crosses ages and incomes – so clarity on our long-term vision is essential.

24. Second, Government must use all the levers at our disposal. The public sector engages with people at important stages of their lives, not just in childhood – but when they go to College or University, take a job, start a family or plan for retirement. These key life-stages or decision points are opportunities to engage individuals and families with information and advice. Government itself must be more co-ordinated to take advantage of these opportunities.

25. Third, Government has a particular responsibility to reach those who are especially vulnerable to the consequences of poor financial skills. Those already in debt, the socially excluded, lone parents, families on benefits. Government is uniquely placed, and has a particular responsibility to reach out to these groups, working with the voluntary sector and existing, trusted channels.

26. Fourth, I strongly believe that Financial Capability is about more than just understanding financial services. It provides essential skills for employment, and supports the advance of a wider culture of enterprise and ambition. Enterprise education, with a strong emphasis on independence and financial capability, can encourage young people to become critical and creative thinkers – and to fulfil their dreams. We can do more to build greater financial and enterprise capability into our curriculum.

27. So as we prepare our long-term strategy for publication this autumn, I think these are the key questions we must answer:

How ambitious should our goals be against the challenge? Once we have understood the challenge, can we set the right long-term, achievable objectives?
Are we making best use of those opportunities and levers that we have at our disposal? How can we match the engagement of public services with the financial capability needs of the public at various key decision points – and how can both education and working age services play a role?
Are the right resources in place more widely – what roles do the financial and voluntary sectors play at present and what roles must they play in the future?
And what are the gaps in current provision, and how can they be filled?

28. On this last question, one area I am keen to explore is how we can widen access to unregulated or ‘generic’ financial advice – also often referred to as ‘Money Advice’ - to help people manage and plan their finances. I’d like to outline our thinking here a bit more.

29. Generic Money advice is about finding ways to give people the kind of tailored, individual support that raises their awareness, helps them to understand their own financial needs and points them toward the relevant options to meet those needs.

30. Sources of advice are expanding, including the interactive tools available on the FSA’s website and the excellent support available through CABX and others, particularly in the specific area of ‘debt advice. John Tiner will outline the FSA’s next steps on Money Advice in a moment.

31. But too often at present financial planning remains the preserve of the better off – as the Resolution Foundation has highlighted. I believe there is a growing consensus that there is a gap here, needing to be filled - and that we should be aiming for a more comprehensive and preventative approach to advice. There are key questions that need to addressed and considered more widely:

How can we increase access to Generic Advice?
How can we encourage take up?
Who is best placed to deliver it, taking into account the resources and experience available and the need to engage people in ways that genuinely build long-term confidence and trust?
Who should determine and monitor standards?

32. The ten-year strategy must move this debate forward and identify clear options that would allow all players – industry and the voluntary sector in partnership with government - to make the right contributions to filling the advice gap.

33. At the same time, we must acknowledge that raising capability, on its own, is not enough. Financial products will always be complex, producers will always know more than the average consumer. We need full financial advice that is transparent, trusted, and affordable. Callum McCarthy’s speech at Gleneagles last month noted that there are clear problems with the current distribution model that work against everyone’s long-run interest, especially the consumer. I welcome the review of distribution launched by the FSA.

34. Finally, to achieve ambitious goals, we will need sustainable long-term resources. That is a task for next year’s Comprehensive Spending Review.

35. First we must agree our long-term ambitions, and build a consensus for how to get there. This conference highlights the excellent work that is already taking place – and our desire to go further. So I hope that you all enjoy the afternoon and we can all agree on how to advance our shared agenda for the future.

36. Thank you.