Session 2006-07, 27 November 2006
Serious lack of consumer protection exposed by Farepak collapse, says Treasury Select Committee
The Farepak collapse has highlighted “a serious lack of consumer protection,” according to a new report on financial inclusion from the Treasury Select Committee.
Committee chairman, the Rt Hon John McFall MP, said: “I want to see early action from the Government, the Office of Fair Trading and the Financial Services Authority to consider how appropriate safeguards can be introduced to ensure that such a situation never happens again.”
Mr McFall stressed the need to develop a long-term strategy on financial inclusion and warned that 450 debt advisers should not be made redundant when the £45 million Government funding for their work runs out in 2008.
He added: “It is important that the forthcoming Comprehensive Spending Review addresses the need for sustained and predictable funding to build on recent improvement in financial inclusion.
“The Government has already provided £45 million for debt advice, up to the end of 2007-08. This has resulted in the recruitment of over 450 debt advisors and will help over 100,000 people.
“I do not want to see any of these debt advisors made redundant in April 2008. The Government must ensure that the funding arrangements enable this valuable resource to be maintained.”
The report notes that the Government’s strategy which has, so far, only encompassed access to advice, banking and credit needs to be expanded to include access to insurance and savings, and it flags up Farepak as an example of why consumers need protection.
Mr McFall said: “It is vital that people are given confidence that their savings will be protected. The Farepak case has highlighted a serious lack of consumer protection in this area. I want to see early action from the Government, the OFT and the FSA to consider how appropriate safeguards can be introduced to ensure that such a situation never happens again.”
The Committee welcomes the creation of the Financial Inclusion Taskforce and the progress it has made under the chairmanship of Brian Pomeroy and recommends that its remit should be expanded to include access to savings and insurance.
The MPs say the £120 million Financial Inclusion Fund is welcome and that it represents a “significant Government investment”. However, they have expressed disappointment that the impact of this money has been reduced by its dispersal across several different Government departments.
Its fragmented bidding process “did not support joined-up provision of services aimed at increasing access to debt advice, banking services and affordable credit,” they maintain.
The FSA, as the statutory regulator for financial services, has an important role to play in promoting financial inclusion. This includes its regulation and role in leading and coordinating the National Strategy for Financial Capability.
The Committee calls on the FSA to make a sustained commitment to promoting financial inclusion and commission research into the markets that it regulates. It should ensure that its cost-benefit analysis examines any effect that new regulation might have on financial inclusion.
The Committee welcomes the progress of the FSA in improving coordination and establishing an overall baseline to measure progress, but concludes that the FSA needs to attach a much higher priority in identifying and drawing in extra funding for financial capability work. The Committee is also concerned that the FSA’s strategy is failing to reach financially excluded people.
Mr McFall said: “Improving the financial capability among people who are currently financially excluded will require much more active engagement, rather than just distributing leaflets or putting information on a web-site. The FSA needs to look at how financial education can be delivered alongside action to help people open bank accounts or to provide people with debt advice.”
The Report also examines the provision of financial education in schools. Mr McFall said: “In over 70% of schools, personal finance education is only delivered in the form of occasional lessons, happening once or twice a term or less. There is a need for dramatic improvement if we are to adequately equip young people for the complex financial decisions they will face. It should be a priority for the Department for Education and Skills to ensure that financial education is seen as a core part of the curriculum.”
The Committee concludes that it is vital that work aimed at improving financial capability takes place alongside efforts by the financial services industry to make their marketing and communication material clearer for consumers.
Mr McFall said “The FSA’s survey shows that 40% of people who had an equity ISA did not think that their investment was exposed to the performance of the stock market. The information provided by financial services firms is failing to get across key messages to consumers, the documents are too complex and there is too much jargon. There is a need for a more common sense approach from the industry and the FSA.”
Mr McFall pointed out that FSA regulation meant that consumers buying investment products are provided with up to 11 separate documents and that these would appear in addition to the marketing and promotional material from the firm selling the product. He called on the FSA to speed up its proposals to simplify matters and ensure that consumers are provided with clear information.