3 rd November 2010, Resolution Foundation, W1S 2ET

1. 3rd November 2010, Resolution Foundation, W1S 2ET

2. Financial Health Forum Overview 1. Key challenges: economic context 2. Financial health review • Financial inclusion • Financial capability • Financial services

3. 1. Key challenges for Financial Health • Recovery • Housing • Unemployment • Savings • Household lending • Insolvencies

4. 1. Key challenges: recovery • Some signs of recovery: • Economy grew by 1.2 % in Q2 2010, 1.7% higher than last year. • IMF declared UK economy ‘on the mend’: put growth at 1.3 per cent in 2010 and 2.7 per cent in 2011. • Similar to the OBR forecasts which put growth at 2.6 % • But not all convinced: • CBI revised down its GDP forecast for 2011, to 2.0% from 2.5% • Growth of 0.8 per cent announced for Q3 • Interest rates maintained at 0.5% and calls from Adam Posen for a further round of quantitative easing • And concern that the CSR cuts will result in a ‘double dip’

5. 1. Response: tackling the deficit • CSR set out fiscal plan for next 5 years • Committed to eliminating deficit by 2015 predominantly through cuts ((£81 billion, down from £83 billion in June) over tax rises. • In addition to June cuts: • Average 19% four-year cut in departmental budgets • 490,000 public sector job cuts • £7bn in additional welfare budget cuts - £18bn in total • Local Governments cuts of 7.1% per year • Tax rises: • Bank Levy to be introduced • VAT increase • CGT rate to rise to 28% • Labour said poorest 10% will pay more

6. 1. Key challenges: housing Repossessions • 9,978 properties taken into repossession during the three months to the end of June, 5% fewer than the first quarter and the lowest since the beginning of 2008 (FSA) • CML revised down forecast for this year to 39,000 from 53,000 • But concerns about the impact of the reduction in ISMI House prices • According to Lloyds Banking Group prices in the third quarter of 2010 were 0.9% lower than in the second quarter of 2010 , but still higher than this time last year Mortgages • Low interest rates mean that typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in mid 2007 to 30% in mid 2010.

7. 1. Coalition Government Response: Housing • ISMI • Rate at which Support for Mortgage Interest paid reduced from 6.08% to Bank of England’s average mortgage rate, currently 3.63%. • 13 week waiting period and limit on eligible capital to remain for another year • Housing Benefit cuts: • To be calculated at 30% of market rates • Caps on the maximum that can be received • Increases linked to CPI • Shared Room Rate extended to those up to age 35 • Entitlements for working age people in the social sector to reflect family size • People who have been on JSA for more than one year will have their HB cut by ten per cent • Social housing to be cut by £4.4bn and introduction of new shorter term tenancies for new tenants at 80% of Local Housing Allowance rates

8. 1. Key challenges: unemployment • The employment rate rose by 0.2 per cent in the three months to August 2010 to 70 .7 per cent, mainly driven by the increase in part-time employment • Inactivity rate decreased: by 0.2 per cent to 23.2 per cent • The unemployment rate decreased by 0.1 per cent on the previous quarter to 7.7 per cent • Claimant count rose: by 5,300 between August and September 2010 to reach 1.47 million. This is the second consecutive monthly increase in the number of claimants. • And earnings increased: to 1.7 per cent for the three months to August 2010, up from 1.3 per cent for the three months to July. • But jobs losses forecast, PWC estimate 1 million job losses

9. 1. Coalition Government Response • Train to Gain funding to be discontinued • Making work pay: • benefits simplified into a universal credit • a family that doesn’t work will no longer receive more than an average family that does (around £500 p/w) • Future Jobs Fund likely to be abolished • New Work Programme designed to help people back into work, with a greater focus on role of private and voluntary sectors • Increase in adult apprenticeships from 50,000 to 75,000 • Increase in the Regional Growth Fund from £1bn to £1.4bn but abolition of the Regional Development Agencies • One year time limit to receipt of Employment Support Allowance

10. 1. Key challenges: consumer credit conditions Secured lending to households • Availability of secured credit rose slightly in the three months to early Sept despite a tightening in wholesale funding conditions. • However demand for secured lending for house purchase fell slightly • Lenders have tightened credit scoring criteria, in part a response to more cautious approach to affordability of higher LTV mortgages or lending to the self-employed • Default rates continued to fall Unsecured lending to households • The amount of unsecured credit available to individuals was unchanged in Q3 2010 • Demand for credit card lending fell unexpectedly and demand for non-credit card lending increased • Credit scoring for non-credit card lending increased • Default rates continued to fall http://www.bankofengland.co.uk/publications/other/monetary/creditconditionssurvey100930.pdf

11. 1. Key challenges: savings • Savings ratio fell from 5.5 per cent to 3.2 per cent in Q3 this year the lowest level in seven quarters (ONS) • Reflection of the fact that household income is down, largely due to wage freezes • But also people spending more: consumer spending increased by 0.7% • At the same time the Deputy Governor of the Bank of England urging people to spend to help kick-start the economy http://www.statistics.gov.uk/pdfdir/qna0910.pdf

12. 1.Key challenges: insolvencies There were 34,743 individual insolvencies in England and Wales in the second quarter of 2010, an increase of 5.0% on last year made up of: • 14,982 bankruptcies (down 20.6% from the previous year), • 13,466 Individual Voluntary Arrangements (up 10.2% on previous year) • 6,295 Debt Relief Orders

13. Financial health review Financial Inclusion Financial Capability Financial Services

14. Financial inclusion

15. 2. Financial Inclusion: summary • Budget and CSR: • Pensions • Savings • Energy efficiency • Big Society Bank • Proposed changes to consumer protection quangos • BIS call for evidence to inform consumer credit and insolvency review • Campaigners call for an end to legal loan sharking • Fuel poverty statistics • Review of Lending Standards Code • FSA review PPI • MyHome Finance launched • Which? accuses banks of offering meagre savings rates

16. 2. Financial Inclusion Pensions • Auto-enrolment to be funded from 2012 – plans outlined in DWPs response to the review • Retirement age to rise to 66 by 2020 • State pension to be increased by at least 2.5% from April 2011 • Public sector employee contributions to rise • Freeze ofmaximum Savings Credit award in Pension Credit for four years • Change to annuity rules – not longer required to purchase by age 75 • Changes to pensions tax relief: annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000 Radical transformation to state pension • Proposal that everyone will receive the same £140 per week payment - there will be an end to means-tested top ups. • Green paper to be published later in the year.

17. 2. Financial Inclusion Savings • Savings Gateway will not longer be rolled out • Govt contributions to Child Trust Fund to reduce and then stop by 2011 – it will be replaced by a ‘junior Isa’ with similar cap and restrictions • Government will index link the annual ISA subscription limit from 2011-12. Fuel poverty • Universal winter fuel payments maintained for older people • Support to improve home energy efficiency at no upfront cost through a Green Deal • The temporary increases to Cold Weather Payments will become permanent Big Society Bank • To provide money from dormant accounts for voluntary sector capacity building (CFDIs, mutuals)

18. 2. Financial Inclusion Changes to consumer protection quangos • Government proposed a simpler structure and a stronger role for front line consumer services: • The Competition Commission will merge with the competition overseeing functions of the Office of Fair Trading • Consumer Focus is to be abolished and its research functions transferred to the Citizens Advice Bureau. • Consumer complaints currently received by the Consumer Direct helpline (OFT), will be run by Citizens Advice. Complaints regarding gas and utilities prices will be dealt with by the CAB, but credit-related unfair trading practices currently dealt with by the OFT will be dealt with by local trading standards officers. • The licensing of consumer credit appears likely to go to the new Consumer Protection and Markets Authority. • Peter Vicary-Smith, chief executive of Which? says vital merger does not erode consumer protection • The proposals will be fully outlined by BIS in a consultation in the New Year.

19. 2. Financial Inclusion BIS call for evidence to inform consumer credit and insolvency review • The review will take forward the Coalition Government's priorities to: • tackle unfair bank charges; • introduce a seven-day cooling off period for store cards; • introduce a power for a regulator to cap interest rates on credit and store cards; • require credit card providers to make electronic statements available to enable consumers to judge whether an alternative credit card would provide better value for money. • The call for evidence also seeks views on : • what more can be done to ensure a fair deal in high cost credit markets, • whether the Competition Commission remedies in respect of home credit have been effective debt solutions and the insolvency system • Closing date 10 December http://www.bis.gov.uk/Consultations/consumer-credit-call-for-evidence

20. 2. Financial Inclusion Campaigners call for an end to legal loan sharking • Campaign co-ordinated by Compass has the support of one hundred MPs, academics, and civil society groups • Calls for an end the practice of legal loan sharks through • A lending rate cap to cover all forms of consumer credit • Increased access to more affordable, responsible sources of credit • The government to develop a "people's bank" using the post office network • Ensure greater support for local credit unions, community development financial institutions, co-operatives and mutual’s • Banks to be made to provide a universal banking service. http://www.endlegalloansharks.org.uk/

21. 2. Financial Inclusion Annual fuel poverty stats • There were around 4.5m fuel poor households in the UK in 2008, defined as households that have to spend more than 10% of its income on heating its home to a decent standard • This was up from 4.0m in 2007 -largely caused by rising fuel prices, which have risen by an average of 80 per cent between 2004 and 2008 • Projections for England indicate there are likely to be 4.1m fuel poor households in 2009 • 4m in 2010 forecast to due to falling energy prices and improvements in home insulation and energy efficiency http://www.decc.gov.uk/assets/decc/Statistics/fuelpoverty/615-pn10-106.pdf

22. 2. Financial Inclusion Review of Lending Standards Code • An independent review is being carried out on the content of the Lending Standards Code • The code sets standards of good practice in relation to personal unsecured loans, credit cards and overdrafts and lending to micro-enterprises • A revised Code will be published in March 2011 • Citizens Advice urged for the Code to be strengthened by ensuring that the outcomes subscribers are expected to provide are clearly stated http://www.lendingstandardsboard.org.uk/news.php

23. 2. Financial Inclusion FSA completes review of Payment Protection Insurance • The FSA has introduced measures to ensure customers are treated more fairly when complaining about PPI and better treated when buying the product. • It includes: • handbook guidance to ensure complaints are handled properly, and redressed fairly • an explanation of when and why firms should analyse their past complaints to identify if there are serious flaws in sales practices that may have affected complainants and non-complainants; • an open letter setting out common sales failings to help firms identify bad practice. • PPI covers consumers against being unable to pay off loans because of sickness, unemployment or other circumstances. • Comes in response to consumer complaints regarding PPI to the Financial Ombudsman including improper selling practices. • The BBA has asked the High Court for a judicial review of the rules arguing that the new rules are illegal as they allow for retrospective cases to be brought

24. 2. Financial Inclusion MyHome Finance Launched • Launched by the Department of Work and Pensions in partnership with the National Housing Federation and Royal Bank of Scotland, the scheme offers a lower-interest alternative to high cost lenders. • To be piloted through ten branches in the West Midlands and will aim to make 150,000 loans over the next ten years. Loans in the pilot scheme will offer a 29.9% APR, rising to 49.9% in April • Borrowers will be interviewed in the branch for 45 minutes to ensure they will be able to pay back the loan and given advice on how to manage their debts. • But small scale - it is estimated that over 2.5m British people borrow from doorstep lenders.

25. 2. Financial Inclusion Banks offering meagre savings rates • Which? survey finds almost half of savings accounts are paid a rate of 0.5% while one in four pays 0.1% net or less. • If savers moved their money to best rate versions of those accounts, they would be £12bn a year better off. • Banking Code of Business rules state banks must inform customers if the rate drops by 0.25% or more in one go (or 0.5% over 12 months). • Banks do not have to inform customers with a balance of less than £500, except by impersonal means such as a notice in branches. • Which? is calling on banks to: • Publish interest rates on all statements – paper and online • Clearly display all savings account interest rates online e.g. no more than one prominent link away from the savings home page • Provide each customer with an annual notice of savings interest rates

26. FINANCIAL CAPABILITY

27. 2. Financial Capability: Summary • Budget June 2010 • Chair of CFEB announced • National Money Advice Service Evaluation report • OFT threatens to close 129 debt managements companies • CFEB report on changing financial behaviours

28. 2. Financial Capability: Summary Budget June 2010 • National Financial Advice Service to be rolled out from Spring 2011 • CFEB asked to develop a new annual financial health check

29. 2. Financial Capability Gerard Lemos announced chairman of CFEB • Gerard Lemos is a partner at social researchers Lemos&Crane • He is currently chairman of the Lending Standards Board, Vice President of the British Board of Film Classification, Chair of the Institute of International Visual Arts and non executive director of the Crown Prosecution Service. • He was formerly a Civil Service Commissioner and has worked closely with several government departments, including HM Treasury and the Foreign and Commonwealth Office. • Previous board appointments include Chair of the Notting Hill Housing Group and Acting and Deputy Chair of the British Council.

30. 2. Financial Capability Money Guidance Pathfinder evaluation report published • Pathfinders have been successful at raising awareness of the Mondeymadeclear brand, high levels of satisfaction were recorded and information received was considered clear and pitched at the right level • Some teething problems/ issues: • Face-to-face most popular channel among vulnerable and yet most expensive • Telephone users 5 times less likely to gain from the information received • Over half were referred to other agencies however 70% of these referrals were not followed through by users • http://www.cfebuk.org.uk/pdfs/20100709_pathfinder_summary.pdf

31. 2. Financial Capability OFT takes action to address problems in debt management industry • The OFT has told 129 debt management firms that they face losing their consumer credit licences unless immediate action is taken to comply with its Debt Management Guidance. • Debt management companies are fee-charging firms that provide advice and solutions to over-indebted consumers • The formal warnings follow an OFT review of the debt management sector, which found widespread problems including • misleading advertising, in particular failing to disclose a fee • frontline advisers lacking in competence and are providing poor advice • low industry awareness of the Financial Ombudsman Service (FOS) rules for resolving consumer complaints. • OFT report sets out a detailed action plan to improve standards across the industry, • http://www.oft.gov.uk/news-and-updates/press/2010/101-10

32. 2. Financial Capability CFEB report on ‘Transforming Financial Behaviour’ • CFEB published report on most effective drivers for changing financial behaviour and consider ways in which these could be harnessed to improve financial capability. • Identified the following effective interventions: • Use the best person or channel to provide education/information. • Provide incentives to change behaviour • Use mental accounting to encourage provision for unexpected outcomes. • Provide relative information on peer group, i.e. people like you. • Use a default behaviour to encourage action • Provide feedback to encourage money management • Present outcomes in such a way that invokes particular feelings or influences behaviour • Make a commitment to an action or behaviour • Set realistic targets and goals • Financial health checks that challenge negative self-beliefs and norms • CFEB have consulted stakeholder to gather other organisations’ experiences. Closed 30 September 2010 http://www.cfebuk.org.uk/pdfs/20100709_transforming_financial_behaviour_summary.pdf

33. FINANCIAL SERVICES

34. 2. Financial Services: Summary Financial Services • CSR and budget • HMT consultation on bank levy • Banking Commission call for evidence • HMT committee inquiry into banking • HMT consultation on financial regulation • FSA releases information on bank complaints • Basel Committee on bank requirements • FSA consultation on bankers bonuses • Banks back in profit • News on the high street

35. 2. Financial Services: Summary Budget and CSR : • New system of regulation to be introduced • Action on bankers bonuses • Banking Levy • Independent Banking Commission set up

36. 2. Financial Services HMT Bank Levy draft legislation • Following consultation, HMT have issued draft legislation on the levy. • In the consultation, the Government said it would introduce a 0.04pc levy on balance sheets in 2011, rising to 0.07pc in 2012. • The levy will only affect excess bank liabilities over £20bn. Thought to raise £2.5 bn per year • John Varley, CEO of Barclays says the tax risks making Britain an uncompetitive place for banks to be based. • The British Bankers' Association warned of a double taxation this year on banks because of a failure to co-ordinate levies with other European countries. • Others, including TSC member ChukaUmunna MP, have argued that the banks have got off lightly http://www.hm-treasury.gov.uk/fin_bank_levy.htm

37. 2. Financial Services Independent Banking Commission issues call for evidence • The Independent Banking Commission, led by Sir John Vickers, has issued a call for evidence and views on possible options to reform the banking sector • In the initial paper the Commission seeks views on: • The relationship between competition in the banking sector and financial stability • How the Commission can take into account wider objectives • Options concerning the structure of banks • Options to encourage greater competition including the possible restructuring of RBS and Lloyds Baking Group and changes to merger rules. • The closing date for responses is 15th November. • The Commission will publish an options paper, on which there will be further consultation in the Spring of 2011.

38. 2. Financial Services Treasury Select Committee inquiry into banking competition Chaired by Andrew Tyrie the inquiry has taken written evidenceon: • the impact of the financial crisis on competition and choice in retail and wholesale markets • the impact of widespread consolidation among banks • key barriers to entry inhibiting increased competition • whether competition is inhibited by difficulties faced by customers in accessing information about products • governments and competition authorities’ strategy to increase competition in banking, • interaction between competition and financial stability • impact of free banking on effective competition • role of foreign-based operators and whether they are likely to return to the UK. http://www.publications.parliament.uk/pa/cm201011/cmselect/cmtreasy/memo/banking/contents.htm

39. 2. Financial Services HMT consultation, ‘A new approach to financial regulation’ Proposals include: • Creation of a new Financial Policy Committee within the BofE with responsibility for maintaining financial security • Transfer of the FSA’s responsibility for deposit taking institutions, insurers and investment banks to a Prudential Regulation Authority • Creation of a Consumer Protection Agency to regulate the conduct of firms towards their customers • Bill to be brought forward in mid 2011 http://www.hm-treasury.gov.uk/d/consult_financial_regulation_condoc.pdf

40. 2. Financial Services FSA release information on bank complaints • Among the major banks, the list of banking complaints is topped by Lloyds, which received 288,717 complaints in the first six months of the year. Followed by Barclays and Santander. • Lloyds said it received the most because it was the largest bank. • The FSA has proposed a number of changes to improve the way complaints are handled including • stopping banks sending letters which reject complaints but fail to explain that customers can challenge this • stipulating that banks identify a senior manager responsible for complaints handling • putting in remedies for common complaints • raising the maximum compensation level that can be ordered by the ombudsman from £100,000 to £150,000.

41. 2. Financial Services Basel Committee agrees banks' new capital requirements • Committee agreed reforms that will see banks required to hold over triple the amount of capital they are currently required to have in reserve. • The minimum common equity requirement will be increased from 2 per cent to 4.5 per cent. Banks will also be expected to hold a “conservation buffer” of 2.5 per cent to withstand future periods of stress, bringing the total requirement to 7 per cent. • “important” banks should have loss absorbing capacity beyond the standards announced in the reforms. • The new requirements will be phased in from January 2013 to January 2019. • BBA chief executive Angela Knight says the measures are likely to result in an increase cost to the borrower.

42. 2. Financial Services FSA consultation on banker bonuses • The FSA is updating its Remuneration Code to take on board rules required by the Capital Requirements Directive and the Financial Services Act • The current covers the UK’s largest banks, building societies and broker dealers. The amendments will also bring over 2,500 firms within its scope • Some of the key changes proposed are: • at least 40% of a bonus must be deferred over a period of at least three years, rising to 60% when the bonus is more than £500,000. • at least 50% of any variable remuneration components must be made in shares • a new rule will be introduced which defines instances where breaches of the code may render a contract void and/or require recovery of payments made. • severance payments should reflect performance over time and failure must not be rewarded. • firms must ensure that their total variable remuneration does not limit the ability to strengthen their capital base • The consultation period closed on 8 October 2010. The FSA intends to issue a policy statement in November 2010

43. 2. Financial Services Banks are back in profit • Royal Bank of Scotland's pre-tax profit has risen to £1.14bn in the first half of the year from £15m a year earlier • Barclays, which reported profit last year, saw these jump further by 29% to £2.43bn • Northern Rock Asset Management (NRAM), the "bad bank" part of the business holding old mortgages, has reported profit of £349.7m, compared with a loss of £724.2m in the same period last year. However, Northern Rock Plc, the "good bank" holding savers' deposits and new loans, made a pre-tax loss of £142.6m • Lloyds Banking group announced pre tax profits of £1.6bn, compared to a loss of £4bn pounds in the same period a year earlier. • However, may be too soon to suggest that the sector has fully recuperated after the three-year banking crisis. • Mark Hoban admitted a sale of the government stakes in RBS and Lloyds cannot take place until the Banking Commission has reported

44. 2. Financial Services On the high street Santander set to take over 300 RBS branches • Santander is set to acquire 318 high street branches from the Royal Bank of Scotland (RBS), having submitted an indicative offer of about £2 billion. The sale follows a European Union decision that RBS must sell off part of its branch network by 2013 in order to increase competition in the sector. RBS • Cut further 500 support workers making a total of 27,000 cuts in last 2 years • Along with NatWest agreed to charge £6 per day on unauthorised overdrafts over £6 with no interest charged on the balance. Those with basic bank accounts and students will be exempt. Metrobank appears uncompetitive • uSwitch, the independent price comparison service, noted that products are uncompetitive compared to other products on the market. Significant appointments • Bob Diamond (a high profile investor) appointment as chief executive of Barclays • Stephen Green, Chairman HSBC, to become next trade minister.