It’s a great pleasure to speak at the TISA conference today. Especially given that I’ve worked with so many of you over recent years - both while in opposition and now as a Minister.
As a Government we want to see personal savings and personal responsibility play a more prominent role in our society.
I myself have spoken a number of times about importance of saving …
… and today I want to discuss what we can do to encourage people to save; and particularly the role I see ISAs playing in making this ambition a reality.
In the wake of the financial crisis, there’s been a lot of talk about the need to create a more balanced economy …. And as a statement, this covers a wide array of objectives:
- We need an economy that’s built on the back of private sector enterprise, not public sector spending.
- We need higher levels of exports, relative to the levels of imports.
- And we want to see more balanced growth, across the many regions and sectors of the economy.
But another fundamental part of the rebalancing story is greater financial responsibility.
It would be something of an understatement to say that past savings levels were too low. In fact the household saving ratio was negative in 2008 for the first time since the 1950s.
Far too few were putting aside funds for a rainy day. Before the crisis:
- More than a quarter of households had no savings at all.
- Almost half had less than £1,500 in savings.
- And of those who were in debt, many were in arrears, at an average level of £1,100.
We need greater financial responsibility, and an important part of this will be higher levels of saving.
But if we’re to achieve this, we’ll need policies that work with the grain of saving habits - that create new expectations of savings, and encourage responsible levels of borrowing.
By this I mean improving the options available to savers, and ensuring that everyone can find a solution that fits their specific needs.
We want to ensure that people have right information to make the best possible financial decisions. That’s why we’re rolling out the free and impartial National Financial Advice Service, and offering consumers greater support through the Annual Financial Health-Check.
This is only part of the story, and today I want to talk specifically about how ISAs fit into this wider strategy.
Role of ISAs
But first, I know there has been some speculation surrounding the future of ISAs.
When we first came to office, I remember reading numerous articles about how the coalition was thinking about scrapping ISAs entirely, or had plans to make them less generous as part of our plans for consolidation.
These rumours were unfounded, and I was glad to see that some of you had a little more faith.
In fact, I remember reading that Tony Vine-Lott, TISA’s own Director-General, had said he was “pretty confident” that ISAs were safe; and I hope that by the end of this speech you’ll share his confidence.
Because since their introduction, ISAs have been hugely successful. They’ve offered people a clear and simple option for saving in a tax-advantaged way. And most importantly, they’ve become a brand that people can trust.
Over 20 million people now hold an ISA - that’s 40% of adult population. And the total value of these assets sits at £350 billion.
So I want to be clear - ISAs are a vital part of the Government’s savings strategy; they’re here to stay; and we will continue to support them.
That’s why we’ve confirmed that every year the annual subscription limits will go up with inflation. This means that from next April, people will be able to save an extra £480 in their ISAs, £240 of which can be in cash.
But just because ISAs are a successful product today doesn’t mean we can afford to be complacent.
We have to ensure that they remain popular; continue to give people clear way to save; and build on the brand they’ve developed over recent years. And from my perspective, this means making sure that they’re simple, transparent, competitive and flexible.
One of the key strengths of ISAs is the fact that they’re simple and straightforward - you don’t need a doctorate in economics to understand how the product works.
This helps widen their appeal and makes them popular across the income scale. For example, over 12 million people in Britain with incomes below £20,000 currently hold an ISA.
ISAs are not complex; they’re not an alternative savings option. Far from it in fact. ISAs are very much mainstream; they’re the savings product for the man and woman in the street.
Precisely because they’re a popular, trusted brand, people sometimes suggest that they should be extended to include other things, like more niche investment products. But the risk then is that we would undermine ISAs’ simplicity; and then undermine people’s trust in them.
We need to maintain that trust - I want to keep ISAs as a mainstream product. And for that reason, we don’t intend to change the investment rules to allow Alternative Investment Market shares or PLUS Market shares to be included in the ISA wrapper.
I know some people have said this option would help support small and growing companies - and I agree that’s important. In fact the Government recently published its response to the Access to Finance Green Paper that looked at different ways of ensuring that SMEs have access to equity finance, including through the tax system.
It’s already the case that companies listed on AIM and PLUS can benefit from investments through the Enterprise Investment Scheme, Venture Capital Trusts, and Business Property Relief for Inheritance Tax.
But I don’t believe that including AIM and PLUS shares in ISAs would be right. Further, these shares carry a higher level of investment risk, and can be less liquid - and while that may be a risk worth taking for those who have knowledge and experience of investment, I’m not convinced that this is the right thing for ISAs more generally.
It’s important that the 20 million customers who currently have an ISA continue to have confidence in the brand.
To do that, it’s also important that ISAs work in the interests of the consumer.
As I know you’re all well aware, there are some concerns surrounding whether ISAs are fulfilling this obligation.
Only recently the OFT was asked to investigate the cash ISA market after a super-complaint from Consumer Focus.
The OFT report raised concerns about both the transparency and the competitiveness of cash ISAs. And frankly, I found the report dispiriting.
I think that it damages savings and the financial services sector if customers can’t easily find out what interest rate they are getting on their statement, and if there’s high barriers to switching when it should be a relatively simple. There may be short term gains to providers at the cost of savers, but in the long term it will be to the detriment of both. If savers start asking whether it’s worth saving, you’ll lose customers.
Savings products have to be transparent if people are to have trust in the product, and trust in their providers.
One of most basic things people need to know about their account is the rate of interest they’re earning - this is fundamental!
It seems incredible that people should struggle to find out what this is - that it isn’t at the top of every statement…
…and remedying this was one of the OFTs recommendations.
I know that the industry in general has signed up to achieving this by 2012 - I also know that some of you have agreed to do it by next year, and that a few providers do this already.
But today I’d like to encourage you all to put this in place as soon as possible; to lead by example; and to reconnect with your customers.
The events of the financial crisis have damaged the bond that exists between the financial sector and its consumers. We need to restore this trust - and greater transparency is part of the answer.
That greater transparency is important in making sure that consumers can compare products - and that is one part of making sure that there is a competitive market, with real choice. But to ensure competition, people also have to be able to move between providers quickly and easily.
At the moment, ISA transfers are supposed to take a maximum of 30 days. So I’m surprised to see that the average transfer takes nearly 26 days - and that almost a quarter of all transfers take longer than the 30 day limit.
I know from some of the letters I’ve received that this is damaging people’s trust in the ISA brand.
And many people find it ridiculous that in these modern times - in a country with one of the most advanced economies and financial sectors in the world - an ISA transfer still relies on a cheque being sent through the post - and second class post at that.
This was another area the OFT covered in their report. They recommended that transfer times for cash ISAs need to come down to 15 working days. And I welcome the commitment that TISA, the BBA and the BSA, have all made to do this from January of next year.
To reinforce the importance that I attach to this, I will also be taking on the OFT’s recommendation to change ISA Regulations, so that they include the 15 working day limit for cash ISA transfers.
But 15 working days is still three weeks. People have pointed out to me that if you want to switch your insurance provider it usually takes no more than a week; that balance transfers on credit cards are usually completed within seven days; and that faster payments means that bank transfers can be done within a matter of hours.
With this in mind, I’d like to see the ISA industry go further than the OFT recommendation…
…to reduce transfer times to levels seen elsewhere in the financial sector.
I think it’s important for the industry; for the consumer; and for ISAs in general, that we move to a position where transfers take no more than a few days.
I know there is work underway to introduce electronic transfers, and I welcome that. But we need to push this forward - ISAs have to become more competitive; more flexible; and be more customer-friendly. And reducing transfer times will go a long way towards achieving this.
Greater transparency and greater flexibility will strengthen the reputation of the industry and help create that intangible value which is needed to encourage saving - confidence.
So, I’ve talked about how we need to have ISAs that are simple, transparent and competitive. But I also want to discuss about how we can make greater use of their flexibility.
ISAs provide people with a clear option for saving… and they’re an option that people use in many different ways.
For instance, some people use them to save for retirement - and I see them as an important supplement to pension saving, though not as a replacement. It’s important that people who want keep their money in an ISA, then move it into a pension, can do so.
And I also know that some employers have started offering workplace ISAs. This will allow their employees to save directly from their pay packet into an ISA. I think this is an interesting idea. We know from the role they’ve played in traditional pensions that employers can help nudge people in the right direction, by making it easy for them save; and I’m keen to explore the opportunities that this presents.
As I said at the beginning of this speech, it is important that we work with the grain of savings habits, and this is exactly what the workplace ISA is looking to achieve.
And I also announced last month that we’ll be introducing a Junior ISA from next year. This will give parents a simple way to save for their children’s future.
This does, of course, follow on from the decision earlier this year to end Child Trust Funds.
I know that will have been disappointing for some of you here today - as will the decision not to introduce the Saving Gateway. And I’m grateful to TISA in particular for all of their work on these policies over the years.
Neither of these were easy decisions. But as I said earlier, we do need to reduce the deficit - for the benefit of everyone. And I’m committed to making sure that we can encourage saving as effectively as we can, with the limited resources we have at our disposal.
That is where the Junior ISA comes in. We’ve already set out some of the detail of these accounts. They will be held until the child reaches adulthood; family, friends and anyone else for that matter will be able to contribute to them; and, like normal ISAs, they’ll be able to invest in cash, stocks and shares.
We are now working hard on the final design of these accounts - and I’m grateful to TISA and others here today for their contributions.
I know that by working together we can make ISAs more flexible, we can extend the options available to consumers, and build on this well-established brand.
We all know that ISAs are popular; they give people a clear way to save; and that they’re trusted by the consumer.
The challenge we face today is ensuring that they stay that way.
We need to make sure that ISAs work for their customers; that we see faster transfers; and greater clarity on the rates of interest that consumers are earning.
I know that the industry is making progress towards these objectives, but I feel that more could be done.
The ISA industry can go further - not just for the benefit of your customers, but also for your own benefit as well. Your relationship with customers is vital in determining your success. And we shouldn’t lose sight of this fact.
So my commitment to you is that ISAs are here to stay; but Government alone cannot ensure their future success.
We need to work together.
To make sure that ISAs preserve their simplicity.
To ensure that they become more transparent; more competitive; and that people can continue to take advantage of the flexibility they offer.
My challenge to you is to work with us to make that happen. So I look forward to hearing your ideas for reform, your plans for the future; and your thoughts on how to strengthen the ISA brand.