Personal Debt (Advice and Regulation) Bill

The Personal Debt Bill was introduced by Sandra Gidley (Lib Dem,Romsey) as a private members Bill. Gidley’s Bill would requireschools to provide education on personal money management. Althoughfinancial education forms part of the national curriculum, itcovers only the role of business and financial services. HenceGidley’s demand for children to be taught lessons in budgeting andmoney management. Currently the government is funding the personalfinance education group, to undertake learning money matters ascheme that will teach debt education through maths and citizenshipclasses.

An additional tool suggested by Gidley to tackle the nation’sdebt problem is to give people access to free independent adviceand assistance. This concurs with the Treasury funded, Thoresenreview, which looked into the availability of generic financialadvice. Otto Thoresen recommended that financial advice should bedelivered using a multi-channel approach, telephone, face-to-faceand web-based service. With a focus on giving people informationand guidance on budgeting, saving and borrowing, protection,retirement planning, tax and welfare benefits, and jargon busting.It should stop short of recommending specific products.

The Bill also wishes to impose conditions on the activities ofmoney-lending companies, Gidley highlights the need fortransparency from credit card makers with a need for tighterguidelines by the Financial Services Authority over non-incomeverified mortgages. This follows on from a campaign by Which? Whoseek the reduction of credit card charges.

Summary of Responses

Association of Credit Professionals

Understands schools are totally unprepared to deliver financialeducation as part of the curriculum.

Believes schools have not been given the resource or the toolsto deliver financial education.

Says PFEG, which was funded by the government to assist schoolshas had little or no impact.

Believes the government needs to spearhead a cohesive planbringing together all stakeholders and rather than pay lip serviceto this critical life skill, they need to drive it forward.

Chartered Insurance Institute

Believes the creation of an accessible and workable genericfinancial advice service would be a vital first step towardstackling financial inequality

Strongly believes that the issue of financial inequality can beaddressed by appropriate support systems such as ‘Money Guidance’(MG).

Believes the quality of training is key to instilling confidencein the service itself and the financial services sector as awhole

Understands the issue of follow-up is also critical and shouldbe seen as a key performance measure for MG as a concept.

Credit Action

Understands we live in a world where tackling low levels offinancial capability is a must, and we must begin in schools.

Points out a study by The Association of Investment Companies(2006), which found that 54% of parents think they would be in abetter position today had they received personal financialeducation in schools. Parents also would rather their children weretaught personal finance than a range of the more traditionalsubjects.

Consumer Credit Counselling Service

Understands the credit crunch has shown that government mustintervene more actively.

Believes the government should make free third party advice moreavailable and better known as a way of keeping people in theirhomes.

Believes unbiased advice is increasingly important in light ofthe proliferation of private money management organisations.

Finance and Leasing Association

Welcomes the Bill's call for practical personal money managementlessons in schools

Believes store cards can be a good way for a young people toborrow responsibly

Understands data sharing is at the heart of responsible lending.Calls for the sharing of data on student loans and utility bills toenable lenders to build up a better picture of a consumer’s credithistory.

Full Responses

Association of Credit Professionals

As a Volunteer Educator as well as a School Governor, my firsthand experience is that schools are totally unprepared to deliverfinancial education as part of the curriculum. They know that theyshould be delivering it, but have not been given the resource orthe tools to deliver it. PFEG was funded by the Government toassist schools but have had little or no impact. PFEG have nowpartnered with HSBC to deliver financial education from volunteersbut parents are suspicious that this is purely a brand awarenessexercise.

The Government needs to spearhead a cohesive plan bringingtogether all stakeholders and rather than play lip service to thiscritical life skill, they need to drive it forward.

Should you wish to discuss any of the above issues, please donot hesitate to contact Teresa Crossley on tel: 01727 731104 email:teresa.crossley@transcom.com

Chartered Insurance Institute

Addressing financial inequality: money guidance

The creation of an accessible and workable generic financialadvice service would be a vital first step towards tacklingfinancial inequality and is something that he Chartered InsuranceInstitute Group (CII Group) is a strong believer in. We have been along-term supporter of such a concept, now known as ‘MoneyGuidance’ (MG) and played an active role in the ThoresenReview.

It is very likely some form of MG will be implemented and theCII Group feels this to be both good for the industry and societyas a whole. However, it is crucial that appropriate measures aretaken to ensure the training and accreditation is of the highestquality.

What is ‘money guidance’?

The term ‘money guidance’ (MG), formerly known as genericfinancial advice, can be applied to a wide range of services, fromthe giving of very basic information such as how to open a bankaccount, to more detailed knowledge in pensions and long-terminvestment.
A major challenge for implementing any system of providingfinancial advice is how to make it both generic, yet personallyrelevant. The Thoresen Review outlined the following keyprinciples:

• impartial from government and industry;
• supportive and informative, but also persuasive in getting peopleto act when necessary;
• preventative;
• available to all; and
• give guidance without specifically endorsing a product orprovider.

Background to the Thoresen Review

In March 2008, the Government published its final report of thereview led by Otto Thoresen (Chief Executive of AEGON UK). TheThoresen Review was established in early 2007 to examine thefeasibility of delivering MG nationally at low/no cost to theconsumer. It put forth the following recommendations:

• A national, impartial and “sales-free” Money Guidance serviceshould be established;
• MG should focus on giving people information and guidance onbudgeting, saving and borrowing, protection, retirement planning,tax and welfare benefits, and jargon-busting;
• A UK-wide approach to MG should be delivered using amulti-channel approach – telephone, face-to-face and web-basedservice;
• The marketing strategy for MG should be multi-faceted, to appealto the different groups the service needs to reach;
• To ensure that the national MG service is established in the mostefficient manner, the Government should roll out a two-yearregional Pathfinder service as soon as possible; finally
• The Review recommends that the Financial Services Authority (FSA)should be responsible for taking MG forward.

The cost of implementing such a system is estimated to be around£49 million per year, with alternate high/low scenarios rangingfrom £36 million to £64 million. Funding for the pathfinder servicewill be about £12 million. It recommended that the cost ofproviding the service should be equally split between theGovernment and the financial services industry, with industry’sshare raised via the FSA Levy (on regulated companies), as well aslevies on firms regulated by the OFT, and National Savings andInvestment.

What role has the CII Group played in promoting financialadvice?

The CII Group has taken a consistent view that a quality servicein some form of money guidance is needed that would help bothconsumers and society. Our work in this area has strongly suggestedthat any MG adviser must have the necessary levels of training andcompetence. We have always believed in the highest level ofprofessionalism in the financial services industry, and through ourAccreditation Services, we have substantial experience of workingwith many high profile organisations providing support in enhancingtheir training provisions and benchmarking their trainingprogrammes against industry standards.

Since 2005 we have also undertaken our own Money Guidance-typeactivities in cooperation with Citizens’ Advice (CitA). Theseinvolved Personal Finance Society (part of the CII group) financialadviser members providing basic entry-level financial advice (alongthe lines of what is proposed under Money Guidance) on a pro-bonobasis to consumers referred to them by their local Citizens AdviceBureaux.

• The first such pilot took place over six months in 2005 ineight towns across the UK. Members provided pro-bono face-to-faceadvice to 376 people of which over 29% had dependent children.Nearly 90% of the consumers reached thought the advice theyreceived was "very helpful"; and most importantly nearlyfour-fifths (79%) acted on the advice they were given.

• The success of the first pilot has since led to a moresubstantial two-year scheme by CitA-PFS known as Moneyplan, whichstarted in May 2007. Funded by Barclays and AEGON, this involves 75PFS advisers providing pro-bono work to consumers referred to byCitizens Advice Bureaux, and by March 2008 had helped over 500consumers. It started in 18 towns across England, and has nowextended to 40 involving Scotland as well. The interim results havebeen published by CitA and were shared with the Thoresen Reviewteam.

We remained active during the Thoresen Review process, providingcomment and views on training and accreditation issues. We wereinvited to observe and comment on the Review pilots inBarrow-in-Furness, and review call centre calls. We also publisheda detailed response to the Review’s interim report, met withstakeholders such as CitA and Resolution Foundation to exploreareas of mutual concern, and hosted the Review team fact-find atthe CII to discuss technical training and accreditation issues.

Benefits of a money guidance service?

A national MG service might have the following benefits:

• Consumers who receive financial advice are more likely tomanage their affairs better and will be less concerned over moneyworries;
• MG will help people manage life risks, such as unemployment ordisability. At present, UK households are likely to beunderprepared for such events;
• It will help address the existing £27 billion savings gap;
• It will help address the 32 per cent of the UK working populationnot saving for retirement; finally
• Such a service has been estimated to cost anywhere from £40million to £80 million—however, the long-term benefits areestimated to outweigh the immediate cost by 3.5 to 1.

Based on these issues, we strongly believe that the issue offinancial inequality can be addressed significantly by appropriatesupport systems such as MG.

Potential implications

For a MG service to be effective, we believe that:

• advisers at all three channels (face-to-face, telephone andinternet) must meet minimum standards of training andcompetence;
• the service must be well-funded to make an impact;
• the language must be clear to the consumer: what is not“regulated advice”;
• there must be clear protocols in place to link MG with regulatedadvice given by advisers;
• consumers must be encouraged to act on the advice they are give;finally
• political consensus is needed: industry must be confident thiswill be a long-term project.

Of the above criteria, the first two are of paramountimportance. The quality of training is key to instil confidence notonly for the service itself but the financial services sector as awhile. In addition to a host of technical knowledge on financialservices (not only to give basic money guidance but also understandwhat follow-up services are available to customers from theregulated advice market), practitioners must demonstrate a soundsoft skills such as empathy.

The second issue of follow-up is also critical and should beseen as a key performance measure for MG as a concept. It is nothow many customers are helped, but what percentage take furtheraction as a result of the advice they are given. The Thoresenreport MG prototypes identified about 70% as a sign of a positiveservice. Other financial capability initiatives such as the FSAParent’s Guide to Money pilot have enjoyed success rates of about70% of customers taking “hard action”. We have seen above that thefirst CII-CitA pilot achieved a follow-up rate of nearly 80% ofcustomers following up the guidance provided.

What next?

The responsibility for the pathfinder project now falls to theFSA, which is due to announce soon how it will proceed as part ofits national financial capability strategy

Credit Action

Financial Literacy: A priority for schools

A high level of financial literacy is always vital, butparticularly so in the modern global economy.

We live in a world of complex financial markets, where thenumber of financial products available is higher than ever beforein history.

We live in a world of greater financial responsibility, where“the burden of financial security in later life has shifted fromemployers to employees with the decrease in defined benefitpensions...and a more fluid job market than in previousgenerations” (Hogarth, 2006).
We live in a world where tacking low levels of financial capabilityis must, and we must begin in schools.

A study by The Association of Investment Companies (2006) foundthat 54% of parents think they would be in a better position todayhad they received personal financial education in schools. Parentsalso would rather their children were taught personal finance thana range of the more traditional subjects.

Bernheim at al. (2001), working at Stanford University in theU.S., found that consumers who graduated from U.S. states withmandatory financial education were more likely to have higher networth and a higher rate of saving later in life.

There are a large number of studies that have found a positivecorrelation between levels of financial education and financialcapability – the ability to manage money and keep track offinances. For instance:

Research Study Findings

Hogarth, Anguelov and Lee (2005) Low educated consumers aredisproportionally represented among the “unbanked”, those lackingany basic bank account.

Calvert, Campbell and Sodini (2005) More financiallysophisticated households are more likely to buy risky assets andinvest more efficiently.

Kimbell and Shumway (2006) Find a large positive correlationbetween financial sophistication and portfolio choice.

Hogarth, Beverly and Hilgert (2003) Persons that are moreknowledgeable are more likely to engage in more cash-flowmanagement, saving and investment behaviours.

The National Endowment for Financial Education’s High SchoolFinancial Planning Program. Three months after students completedthis course, 60% had increased their saving to save for what theywant.

Present work on financial education in schools

The Personal Finance Education Group (pfeg) and the ifs Schoolof Finance do important and influential work in the area offinancial education. Pfeg, who found that 90% of teenagers say theyworry about money and spending (Feb 2007), works “within schoolsacross the UK at a strategic level to promote the development offinancial capability” (www.pfeg.org). The ifs School of Financeoffers four levels of assessed, structured qualifications for thoseaged 14-19 years, the top two of which are awarded a tariff of 60UCAS points, equivalent to an Advanced Subsidiary (AS) levelqualification.

Should you wish to discuss any of the above issues, please donot hesitate to contact Jason Taylor on tel: 020 7436 9934 email:jasontaylor@cretidaction.org.uk

Consumer Credit Counselling Service

The Consumer Credit Counselling Service said: "The credit crunchhas shown that government must intervene more actively.

"Lenders and the government should make free third party advicebetter funded and better known and find ways of keeping people intheir homes. There has been a proliferation of organisations outthere preying on the vulnerability of people with debt problems whodo not know where to turn for free and unbiased help."

Should you wish to discuss any of the above issues, please donot hesitate to contact Jan Smith on tel: 0113 235 5333 email:jans@cccs.co.uk

Finance and Leasing Association

The Finance & Leasing Association (FLA) represents some ofthe UK's major lenders.

The FLA welcomes the Bill's call for practical personal moneymanagement lessons in schools. We share Mrs Gidley's view thatprevention is key. We already work closely with the various advicebodies and contributed to the recent Thoresen review of genericfinancial advice. As members of the trade body grouping known asthe Financial Fringe, last week we launched an MPs’ constituencyguide to personal finance, a copy of which you will receiveshortly.

Store Cards

Mrs Gidley described store cards as a temptation for 18 yearolds. Store cards can, however, be a good way for a youngster toborrow responsibly. Credit limits for 18 year olds are typically£100 reflecting the fact that they have no credit history. Andstore card balances are low: at the end of 2006, the average was£162.

The FLA’s Lending Code which is binding on our members requiresthat the consumer is given a summary box before they sign a storecard agreement which clearly sets out the main features of theproduct (Annual Percentage Rate (APR) and other rates,interest-free periods, minimum payments, yearly fees and otherfees). This summary box appears on application forms at the pointof sale and the forms are available to be taken away if a customerwants to think further about applying for a store card.

While we sympathise with the idea of a mechanism to explain thecost of borrowing each £100, the reality is that a store card isnot a fixed form of credit. Costs differ according to when apurchase was made, when a balance was paid off, and whether it waspaid off in full or in part. The APR calculation method is laiddown in statute. The OFT has recently investigated a Which?super-complaint about the calculation of interest charges andconcluded that greater transparency would address many of theissues. We are working closely with the OFT on this.

Data Sharing

Data sharing is at the heart of responsible lending. The moredata lenders share, and the better its quality, the lower thechances of customers getting into difficulty. We have long calledfor the sharing of data on student loans and utility bills toenable lenders to build up a better picture of a consumer’s credithistory.

Should you wish to discuss any of the above issues, please donot hesitate to contact Edward Simpson on tel: 020 7420 9654 email:Edward.simpson@fla.org.uk