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It is a pleasure to be with you this afternoon and to have this opportunity to set out the Government’s vision for a responsible approach to personal finance.
Taking action on personal finance is a priority for the new Government and one that featured significantly in both our Coalition Programme for Government and our Emergency Budget.
Together these two documents set the scene for what we want to achieve in the next five years and everything in them is based on the three core values of freedom, fairness and responsibility.
Each of these values is fundamental to our approach to consumer finance, but today I would like to emphasise one aspect in particular, that of promoting responsibility in personal finance.
Impact of financial crisis on families
The financial crisis and the recession that followed it hit Britain hard. It was the worst in living memory. Many thousands of families in Britain have been affected over the last 3 years. For example there were more than 130,000 personal insolvencies in 2009 and some expect even more this year.
The financial crisis is often talked about in abstract terms dealing with high finance, but when the financial crisis hits a family it has the real potential to jeopardise people’s livelihoods and the freedom for them and their children to fulfil their potential.
So where did it go wrong? How did so many families end up being such big victims of the crisis?
Prior to the crisis the flow of cheap money increased consumer spending and borrowing to unsustainable levels. Credit was cheap and readily available and the range and complexity of financial products proliferated. Banks bombarded their customers with unsolicited offers of cheap loans and credit cards.
So for a large part of the last decade economic growth in the UK was being driven by household consumption, much of which came from families who were living beyond their means and borrowing more than they could safely afford.
Families in the UK were borrowing particularly high levels compared to those of our European neighbours. The UK’s household debt was 99.9% of GDP in 2008. That compares to 61% in Germany and 50% in France.
Too many in the UK have had to learn the hard way to live within their means and face up to the consequences of over-borrowing when it was too late.
Both the industry and consumers assumed that stability would prevail indefinitely and that the times of abundance would never end.
It would be something of an understatement to say that savings levels were too low. In fact household saving was negative in 2008 for the first time since the 1950s.
Far too few were saving for a rainy day. Before the crisis
- more than a quarter of households had no savings at all
- almost half had less than £1500 in savings
- and of those who were in debt, many were in arrears, at an average level of £1,100.
As a Government, we are committed to helping families to take greater responsibility for their finances and to cushion themselves from future shocks.
We are also committed to increasing the protection of consumers. And we have already made a start to this by setting out our plans to establish a new Consumer Protection and Markets Authority (CPMA).
The CPMA will have a strong mandate for ensuring that everyone – from someone buying car insurance to derivatives traders working for hedge funds – can have confidence in financial services and markets, and get the protection that suits their needs and experience.
The CPMA will regulate the conduct of every authorised financial service business, whether they trade on the high street or trade in high finance. This will bring a tougher, more proactive approach to regulating conduct.
But families themselves need to take responsibility for providing for their future, especially as the cost of doing so is rising inexorably.
In general we are living longer lives and many of the extra years that we are living are healthy ones. Living longer and healthier is of course very good news, but people will need to make financial provision for a longer retirement.
That is why we will give people the opportunity to work for longer and thereby to save more for their retirement. We are going to phase out the Default Retirement Age from April 2011 to ensure that people who want to work past 65 can. And we will shortly be launching a consultation on how this will work.
Increasingly, people will retire with a wider range of assets, so our policy response must not just be about pensions but about income in retirement.
We will increase people’s ability to make flexible use of a wide range of savings when they reach retirement, to make saving more attractive and to encourage people to plan for their future.
Although these are helpful first steps for people who are approaching retirement, the key question remains: how do we get all people at all stages of life to think ahead and plan for their future? And what can the Government do to help?
This afternoon I would like to set out our approach to improving the help that families receive to enable them to meet the needs of tomorrow as well as the needs of today.
First, we will improve the advice available to families on how to manage and plan their finances.
Second, we will work to improve families’ access to straightforward products which do what they say on the tin.
And third, once families know what to look out for and how to make sense of what’s on offer, we will make sure that better information is out there on which to base financial choices.
Turning first to advice.
The best kind of advice is not that which solves all your problems for you but that which shows you how to deal with the challenges you face and gives you the tools to confront them on your own in the future.
Our approach to advice is about leading people in the right direction and promoting cultural change.
We want to nudge people in the direction of healthy financial behaviour, including saving and protecting their families from financial shocks.
That is the approach that we want to see through the annual family financial healthcheck which we announced at the Budget. The healthcheck will be a key component of the national financial advice service delivered by the CFEB, our hosts today.
We are committed to developing the advice service according to the model set out in the Thoresen Review: a service that offers advice on all kinds of money matters online, over the phone, and face to face.
The healthcheck will help families and individuals get into the habit of taking a thorough look at their finances. It will show them where they are most at risk and it will show them how they can regain control and plan for the future. The healthcheck will give people a ‘prescription’ that will offer clear advice on what they can do to improve their financial situation now and for the years ahead.
The healthcheck is being developed and piloted by the CFEB this year ahead of a launch next spring.
We are also looking at the scope of the National Financial Advice Service to make sure that families in financial distress can find the support they need and rebuild their finances.
Over the summer we will be taking a good look across Government at the support we currently provide for debt advice as a part of the Spending Review. We will be working with CFEB to make sure that the work of the National Financial Advice Service is joined up with the work of debt advice services in the most effective possible way.
We want to see financial advice that helps to prevent crises before they happen and that cultivates a mindset of personal responsibility.
If we are going to encourage families and individuals to take up savings products, we need to make sure that there are products available that they understand and trust. So the second stage of reform focuses on products.
However well equipped people are to make choices, difficulties will persist if they are still confronted by a vast array of complex products to choose from.
That is why we are proposing a new range of simple products as the second step in the consumer journey. Simple products will help everyone to make better choices, and we particularly intend them to help encourage saving.
I realise that there has been some controversy around simple products in the past and I want to reassure you that we are determined to avoid making the same mistakes as the last Government.
So we will work closely with representatives from across consumer groups and industry to ensure that the products developed are viable for industry and attractive to consumers.
I also recognise that a new range of simple products is not something that can be rushed, so to ensure success we will take the time to get it right.
We plan to publish the first high level consultation on simple products by the end of this year, and officials will be working closely with interested parties in the run up to this consultation.
As well as developing simple products, we want to improve existing products that work well. The main savings product the Government has in place is ISAs – and over 17m people now hold cash ISAs.
We want to make sure that ISAs are as simple, transparent, competitive and flexible as possible.
It is a great pity that it has needed a “super complaint” from Consumer Focus to get industry to sort out its act on ISAs. We welcome the OFT report on this matter, and the changes that providers have agreed to make.
There will be personalised interest rate information on cash ISA statements by early 2012 at the latest. And providers will adopt new industry guidelines, from the end of this calendar year, to complete transfers within 15 working days.
To support the new industry guidelines, we will be amending our own guidance to reflect the new, shorter time period. The OFT also recommended that we should consider changing the time limit in the ISA legislation and I am in favour, in principle, of making that change.
Together, these changes will make ISAs even better products, with faster transfers and more clarity about interest rates.
Consumers will only save and invest with confidence if they are confident that the products on offer are fair. There is an obligation on industry to bear its responsibility for doings so.
But if families are going to make better financial choices between different products, they need to be armed with the information to illuminate those choices. This leads me to the third stage of reform, improved information.
The process of working out the product that best meets your needs is very often a time consuming and difficult one. And the fact that we see very few people switching between products in many parts of the financial market suggests that many are either unaware of or unequipped to take advantage of the full range of options.
Initiatives to improve information available to consumers are vital and industry can take steps such as including personalised interest rates in statements. However, we need to look at other ways too, so for example CFEB are launching a new impartial credit card comparison table next spring.
Our vision is for all families to have the confidence, the skills and the opportunity to manage their personal finances with responsibility.
Only by taking responsibility to live within our means will we as a country restore the foundations of our economy.
And only by taking a responsible approach in the future, across Government, business and households, will we prevent a repeat of the financial crisis.
Our approach has to be one of shared responsibility. Government will make sure that families are offered the advice, the information and the products they need to plan their own finances wisely and to encourage saving.
Industry will play its role by offering products that families can trust; by taking responsibility for conducting their operations in a way avoids the need for Government intervention; and by funding the work of CFEB.
But only families themselves can ultimately exercise their responsibility and take action now to provide for their own futures.