Simon Read: Encouraging us to save will not work unless it is made simpler
Saturday 17 July 2010
The Financial Secretary to the Treasury, Mark Hoban, talked a lot of sense this week but I'm afraid his wise words could be scuppered by unsupportive financial companies. Speaking to the Consumer Financial Education Body conference in Cambridge on Thursday, he revealed that the Government plans to launch a new range of simple financial products.
He wants to encourage people to start saving and not to borrow money that they cannot afford to pay back. His aim, in essence, is to help families get their personal finances in order so that another recession or credit crunch won't hit them so hard. He said: "The 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." Of course, that will only work if he can persuade financial companies to play ball.
"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 the Consumer Finance Education Body," added the minister.
But, let's face it, this is where his laudable aims could founder. Banks, insurers and the rest are much more focused on making profits than helping their customers to sort out their finances. We need only to look at the example of the basic bank account to see how much support financial institutions tend to give government initiatives like this.
To remind you, the basic bank account was set up in the last decade to help the so-called "unbanked" – those who, for a variety of reasons, had no access to a current account. It meant they could not enjoy the convenience (and often lower cost) of paying by direct debit, or saving money by shopping online for bargains. The basic bank account has no overdraft or fees, so it is a way for people who may have been turned down for a normal account to get the advantages of having internet banking and easy payment methods.
But the main banks didn't support the concept. Why? Because there is no profit in it for them. Many of them took the short-sighted view that people who need a basic bank account are people who will always be struggling financially.
The opposite is true, in my experience. Many thousands of people who have begun with a basic bank account have proved themselves able to manage money properly, which allowed them to progress up to full banking services and even a mortgage to buy their own home. For many, the basic bank account was the first step to gaining financial independence and confidence.
Yet the product-driven culture of some of the banks ignored this potential. They did their best to deter people from applying while appearing to conform to the Government's demand that they offer the basic bank accounts.
One lender, for instance, as part of its agreement to advertise the accounts, apparently paid for an advert in the Financial Times, precisely the place where someone who could benefit from one of the accounts wouldn't see the advert.
Banks were also supposed to put up notices in banking halls informing customers of their right to open a basic account, but the notices were often hidden behind pillars or desks, where only the determined could see them. I have little confidence that the main financial institutions will play ball this time. Andrew Hagger of Moneynet, who writes our weekly Money Insider column, agrees with me. "There needs to be a total change of mindset from providers if this is going make any real difference," he says.
It's true. Just consider the fact that there is currently a mind-blowing array of more than 1,700 savings products to choose from and you will see customers are not in mind when these accounts are being sold. "It is no surprise that many consumers, baffled by complex accounts often riddled with restrictions, do not bother to switch their account to get better deals," Mr Hagger points out. "The financial services industry needs to move away from short-term, best buy initiatives to satisfy internal marketing targets and start putting itself in the customer's shoes."
A good start would be to have less complexity with loans and savings accounts, so people can see, at a glance, the pros and cons of different deals rather than having to trawl through the small print. It is essential that people are able to understand what they're doing when they buy a financial product, rather than just signing up for the first deal they come across because it is too difficult to understand and make an informed decision. Introducing simple products will not be going far enough. There must be greater education towards pointing out the importance of saving and, if possible, some new inducement to encourage people to save.
"Simplicity isn't a magic bullet," says Kevin Mountford, of Moneysupermarket. "There is an underlying problem in Britain where people do not save enough, despite the Government trying to encourage saving by giving tax breaks. Consumers need more incentive to save other than simply understanding a product."
Mr Hoban has a way to go to achieve his simple product aims, but ensuring that plans match people's needs is crucial.
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