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Newsroom & speeches
23 November 2004
I’m delighted to be here today. I’m grateful to PIMA for the invitation. We are very appreciative of the role that PIMA plays, as a trade body spanning many different parts of the financial services industry and for us a valuable and important partner. We are very appreciative of the association’s engagement with us, and its advice on the issues that most affect the industry – marked always by a willingness and ability to reflect the wider picture as well.
And you have worked closely with us on a range of issues over the last few years, including Sandler products proposals, Property Investment Funds, UCITs, the simplification of the pension regulations and ISAs. We need you to continue to do so, as we take our savings policy work forward.
I would like at the outset of your conference to outline recent Government work in the retail savings industry – and to set out how we see this developing in the future.
We want people from every walk of life to be able to save and accumulate assets, to enjoy the benefits of independence and security that result, to be customers of this industry. We want saving and investment to be activities of the many and not just the few.
It is a fundamental obligation of Government to achieve and to lock in the stability that businesses and individuals need to be confident about investing for the future. So the Treasury’s priority will continue to be stability and steady growth. Throughout the whole of the nineteenth and twentieth centuries, we have never had a period of uninterrupted growth in the economy which has lasted as long as the current one has. Since 1997, we have had the most stable economy in the whole of the G7 – bar none.
Promoting savings and asset ownership are priorities for us, and macroeconomic stability represents the best platform for people to make sound decisions.
We have also taken steps to ensure that the financial services market is effectively regulated, through an overhaul of the regulatory framework and the creation of the Financial Services Authority – helping to address trust and confidence in the sector.
And we have recognised the need to do more to encourage saving, and to promote the benefits of saving and asset accumulation to more people than have participated in these activities in the past.
The issues are complex. The wave of demutualisations that changed the financial services industry in the 1990s led to individuals building up assets in ways not measured by the saving ratio. For many people, housing is an important asset – around half of household wealth is in housing. So while it is the case that household debt has reached one trillion pounds, household assets have risen faster, to seven trillion pounds. Overall net wealth has grown by 50% in real terms since 1997. The question is whether the people holding the debt are the same as those holding the assets, and whether those assets will be sufficient for people’s needs?
Consumers are far more sophisticated than they were in the past. They are demanding more from the government, and demanding from the industry greater choice for the full range of consumers at every stage of their lives.
We shouldn’t overstate the problems of indebtedness, but neither should we fail to recognise that there are real challenges that we need to tackle. The majority of consumers do use credit effectively without getting into difficulty, but a significant minority do suffer because of debt. We are working across government to address the problems, with our approach set out in the action plan on over-indebtedness published by the DWP and DTI in July.
In going forward, and to inform a constructive debate, we need to improve both our understanding and our evidence base. I am already very grateful for the research undertaken by bodies such as the IMA, ABI and others. For our part, we have commissioned the Office for National Statistics to undertake a comprehensive survey of households’ wealth and assets, to give us a far richer source of data on which to base our policies and I hope a much more sophisticated understanding of the true position across the country.
At the foundation of our strategy to promote saving and asset accumulation, is the recognition that they provide long-term independence and opportunity, insurance against unforeseen setbacks and security in retirement. Assets are important for everyone – so our approach combines:
I would like to talk about each of these areas in turn, and describe the wider vision underpinning the separate initiatives and steps we have taken.
First, improving financial inclusion.
I feel very strongly about this. Every day I travel in from my constituency in East London to Westminster, and come past Canary Wharf. It has become the base for a fantastic concentration of expertise and skill, for employment opportunities for thousands of people, and the heart of one of the most competitive and sophisticated financial service sectors in the world.
But for too many of my constituents, and far too many of those living in East London within sight of Canary Wharf, that superb industry does nothing for them. Access to financial services for them still means loan sharks and cheque cashing shops. It is not in the interests of this industry that this gulf should remain, or that the market it is addressing should be constrained in this way either.
Financial exclusion means having to pay out more than everybody else, through for example high cost credit and cheque cashers and the inability to enjoy discounts via direct debits on utility bills. It can lead to over indebtedness and further social exclusion. It means having to pay more for pre-pay mobile calls than the terms available with contracts. Together we need to do more to assist those who have been underserved by financial services until now.
The Spending Review in July, reinforced the commitment we made in the Budget to tackle financial exclusion. We will establish a new Financial Inclusion Fund to support initiatives to tackle financial exclusion. We will also set up a Financial Inclusion Taskforce, to monitor progress towards tackling financial exclusion, improving access to banking services, affordable credit and face-to-face debt advice.
Our policy on savings and pensions must address issues for those with low or no savings, as well as those with a wide range of savings, pensions and wealth. We want to challenge entrenched attitudes to saving, and to make the opportunities created by saving accessible to everyone. We need to do more to assist those who are traditionally underserved.
Choice and good decision-making comes down to being informed and knowledgeable. Education helps to empower consumers to make good choices and manage their finances better. Better informed customers will also lead to more competition in financial services markets and in turn encourage innovation, better quality and better value for money.
The Sandler review drew attention to the lack of confidence and understanding among consumers in the decisions they make about their financial circumstances – leading to a low level of engagement on the part of many with the financial services sector. So raising levels of financial capability has become a key element of our wider commitment to promote the holding of assets and savings.
We are also developing measures to improve the financial capability among children. Three years ago, we introduced personal finance education in schools – as a non-statutory part of the national curriculum in England. While high numbers of schools are now delivering personal finance education, it has become clear – and Mike Tomlinson’s recent review of the 14-19 curriculum recognizes – that there is scope for more work to develop it as a robust subject, and to support those who teach it.
We are supporting the efforts of the FSA and other organisations here. The FSA has established under its leadership the Financial Capability Steering Group that will develop and implement a national strategy for financial capability. The objective is to provide consumers with the education, information and generic advice to make financial decisions with confidence. And to engage with a wider range of organisations in doing this – fully utilizing the range of knowledge and experience within the industry.
The second stream to the Government’s approach to assets and savings is to promote simpler, fairer and more trusted savings and pensions products. It’s a challenge for the industry as well as for the Government. Ron Sandler pointed out in his review that many people lack confidence when it comes to making decisions about how to save – or are confused by the sheer range of products and services on offer.
So we are pioneering new approaches, like the stakeholder suite of savings and investment products from April 2005, which will provide consumers with more simple, risk-controlled, low-cost products for short, medium and long term savings. We have recently introduced the legislation to create the stakeholder suite.
The Department for Work and Pensions has also launched this month its consultation on amendments to the stakeholder pension. The FSA has introduced regulations on the basic advice process through which stakeholder products may be distributed. The stakeholder initiative will be implemented in April 2005.
The existing tax rules for pensions are complex, with eight different tax regimes with their own distinct sets of rules. Our new tax simplification proposals, enacted in the Finance Act earlier this year will sweep away, from April 2006, these eight regimes and replace them with a single universal regime for tax-privileged pension savings.
The result will be greater flexibility for 15 million pension savers. It will provide them with greater flexibility and choice over their retirement savings, and also benefit employers and pension providers through lower administrative costs.
We regard that initiative as a success, and we will be examining the scope for simplifying and modernising the taxation of pooled investment schemes, such as unit trusts and life assurance.
This year’s Finance Act also modernised the tax treatment of offshore funds to bring them more in line with equivalent UK funds. In light of the FSA’s revised regulatory framework for authorised investment funds, the Inland Revenue recently published a technical discussion paper focusing on possible changes to the tax regime for them. It is intended that a package of measures will be introduced in next year’s Finance Bill to streamline the regime further.
The Investment Management Association recently published its ideas for a new approach to the taxation of collective investment schemes. We welcome that paper and we would like to encourage further ideas from all sectors of the pooled investments industry and their customers, to identify whether radical reform similar to that currently under way for pensions could create a simple and transparent framework of taxation.
The third and final strand to our approach is providing targeted incentives and support for saving throughout people’s lives, particularly for those sections of society who need them the most.
ISAs have been successful – with over £150 billion subscribed since their introduction five years ago. They are a flexible, accessible product, and they are popular – around 16 million accounts opened so far. Relative to the products that preceded them, they have been more widely taken up by younger and less well off people, as we had hoped.
Many here will be interested in the future of ISAs – as we approach the review in 2006. All I can say at the moment is that we are keen to get people to understand better why and how they should save, and to move beyond simply providing incentives through the tax system. I would welcome ideas from the industry on how to improve saving. With the Child Trust Fund, the industry was closely involved and provided invaluable input. We are particularly keen now to develop new ways to target incentives more effectively at those who need them most.
This is the principle behind our Saving Gateway pilots. They provide an account targeted at individuals from lower income groups, and we match the amounts saved, so using cash as an incentive rather than tax-relief. In the five pilot areas, each account holder’s money has been matched pound for pound up to a limit of £25 a month since August 2002. Tailored financial information and education is also provided to help people make informed saving choices.
The last of the pilots end this month, and they have been providing valuable information on saving behaviour, on the effectiveness of matching as a tool and on the role of financial education in helping people to save. The final evaluation report will be completed early next year.
We are also introducing the Child Trust Fund next year, to build a saving culture from birth, and to widen asset ownership. It is a ground breaking and optimistic initiative, a partnership between Government and the financial services industry, to boost opportunities for a future generation of young people; to develop financial capability and a responsible culture of saving from childhood; and an opportunity too, for the industry, to build a relationship with individuals from infancy – and a relationship with their extended family as well.
We are currently implementing the Child Trust Fund. Vouchers and information packs start to go out to parents in January, and accounts will go live in April. There will be a major advertising campaign, including adverts on TV and elsewhere, and that will commence in January.
What I wanted to do this afternoon was to convey the wider vision and ambitions behind the steps we have been taking:
We want to encourage people from all backgrounds to save and to accumulate assets, including those who would never have dreamt of making an investment before, and we see education, accessibility and trust in the financial sector as key factors.
We have become the first country with the beginnings of a universal, progressive, asset-based approach to welfare. We think it has a great deal of potential. But turning that into reality – actually delivering the improved prospects we want for people’s future – that will depend on you. And we will need you to tell us what more we need to do – to point out the opportunities to us – to give us your insights about how we can do more for people currently underserved by the financial services industry.
We have greatly appreciated all the help we have received already from this association and from others in the industry. I am looking forward to that continuing in the months ahead and to us continuing to work closely together.
