Ever since Peter Mandelson remarked that he was ‘intensely relaxed about people getting filthy rich’, New Labour has sought to reconcile its conversion to unleashing market forces with its more instinctive pursuit of social goals.
One minister who appears more adept than most at squaring this circle is Ed Balls, the chancellor’s trusted lieutenant at the Treasury. On the one hand, as Minister for the City, he has declared himself comfortable with the sky-high profits of the major banks and at ease with private equity. On the other, as the minister responsible for financial exclusion, he leads efforts to persuade the financial services industry to engage with the poorest members of the community.
In doing so, his inclination, like that of his predecessors, has been to work with the industry to achieve the government’s goals. On the face of it, the evidence suggests that this approach is working, with over one million people previously without bank accounts having opened a ‘basic’ account since June 2003. However, as MPs on the Treasury Select Committee found recently, some of the banks are continuing to drag their feet. At a time when the ‘big five’ have just announced collective profits of £36bn, this prompts a question: should Balls be asking them to do more to support the government’s objectives?
This is one of the issues that will exercise Otto Thoresen, one of the luminaries of the insurance industry, over the next few months. Faced with evidence of a growing ‘advice gap’ among people on low incomes, Balls has commissioned him to head up the latest Treasury review, to develop a blueprint for a national financial advice service, an initiative that is intended to be the jewel in the crown of the government’s financial capability strategy.
‘Financial capability’ may be jargon that means little to people outside the policy-making community. Yet it masks a significant political challenge – how to get people to take responsibility for their finances when the evidence suggests that most of them have neither the skills nor the inclination to do so. Make no mistake, the UK is in a poor state of financial health. For example, although eight out of 10 people think that the state pension will be inadequate to fund their retirement, nearly 40 per cent are not making any savings to address this.
With consumer debt at eye-watering levels and the government’s pension reforms placing the onus on people to take individual responsibility for planning their retirement, Balls realises that the government needs to act sooner rather than later. The brief for Thoresen is therefore not ‘if’ the UK needs a national financial advice service, but ‘how’ it should be delivered. This, of course, raises the question of how to pay for it and the thorny issue of whether the financial services industry should make a contribution.
The Resolution Foundation’s research shows that access to such a service would improve financial decision-making, leaving low-income consumers considerably better off. It also highlights potential public expenditure savings as better financial decisions lift many people clear of the threshold for receiving pension credit in retirement. But what impact will this have on the financial services industry?
The research shows that the overall effect on the industry will be positive, with increased take up of some types of product. In the long term, access to financial advice will prompt people to switch away from expensive debt and credit, towards long-term savings and insurance products. As many in the industry have recognised, this will help create a more sustainable financial services market, which is more closely aligned with the government’s objectives of promoting saving and reducing over-indebtedness.
The banks may argue that they stand to gain less from this than other parts of the industry and will take a short term hit, as people move away from some of the credit products that have proved so profitable in recent years. But, as more than one chief executive made clear when announcing their results recently, with the big five set to write off around £6.5bn in bad debts this year, the fall out from the debt explosion is already forcing them to adjust their plans. This reflects a growing recognition that the status quo, with ill-informed consumers making poor financial decisions, is not sustainable.
As the Thoresen Review gathers pace over the coming months, the banks, alongside the rest of the financial services industry, will have an opportunity to contribute to an initiative with the potential to transform the financial health of the nation. By embracing it, they would also help Balls to continue to square the circle between promoting a highly profitable financial services sector and fulfilling the government’s social goals.
Whilst there is certainly an argument that banks and building socities should be doing more to assist the financially excluded, Government could itself reduce the number of financially excluded individuals by ensuring all school children leave school with the basic ability to manage their own finances.
As Adrian Coles of the Building Societies Association repeatedly states, compulsory financial education for all would be the most effective means of addressing the issue. Any commentator who has looked at this issue in any depth is likely to agree.
Sadly it seems we are lacking the political will to do this, instead policy is focusing on an hour or two in functional maths, pshe and citizenship – on elements vaguely related to personal finance – and setting up a few web sites here and there. This tokenism will achieve nothing.
Perhaps Balls, as the next chancellor under a Brown leadership, could announce a compulsory gcse in personal finance during the first 100 days?A truly radical step that would dramatically reduce the number of people who find themselves in unmanageable debt and shrink the numbers of financially excluded individuals in our society today.
Couldn’t agree more. The Government and QCA keep talking about revising the curriculum to ensure it is “more relevant” to the needs of individuals. What could be more relevant or more important than teaching young people how to look after their own money? Making personal finance a compulsory GCSE would ensure that all children, no matter what their families financial background, have the opportunity to make their financial decisions in an informed manner – and it will teach them to read through the marketing speak of banks. Those on low incomes, if educated to understand finance, will not need to rely on the most untrusted organisations (motley fool research published this week) i.e. banks for advice, they will be able to make financial decisions for themselves. Its time to stop blaming the lenders and equip consumers to take responsibility for themselves – and educating them about finance is frankly a “no brainer”
While agreeing with the view that the current steps in tackling financial literacy through the curriculum give tokenism a bad name it is also clear that a national curriculum that taught everything we wanted children to know would probably mean them staying in school 14 hours a day for 25 years, overegged I know but I’m sure you see the point.
In the absence of that the ability of a free-to-access national financial advice service, delivered through channels such as the phone and internet that people are comfortable with, to create a step change in the financial capability of UK plc is huge. The points made on the attitude of the financial services industry are extremely valid, but at a time when the growth of our banks and insurers is overwhelmingly coming from overseas and investment banking rather than what is seen as a pretty stodgy UK retail market there is potential to drive change in the market that will benefit them too, and they need to be involved. In terms of funding such a service will begin to rebuild damaged confidence and trust in the market and that has value to the industry that could be worth the investment.
Two final points; in a lot of modern consumer sectors there is increasing fragmentation of provider and demand away from monolithic organisations (think of the media) if the industry doesn’t adapt might it happen to them also? and secondly this whole debate tells me to back anything the Resolution Foundation does as they have been instrumental in propelling this agenda thus far, awesome.