Economy: Personal Savings

Lord Leigh of Hurley Excerpts

Thursday 12th July 2018 Lords Chamber

Moved by

[Lord Leigh of Hurley]

That this House takes note of the measures being taken to promote personal savings and the role they can play in building a stronger and fairer economy.

[Lord Leigh of Hurley (Con)]

My Lords, first, I offer heartfelt thanks to those noble Lords who have chosen to speak today. I know that personally I normally allocate the night before a speech to prepare or finalise my words—yes, these words have been prepared—and that many of your Lordships do likewise. Given the competing demands last night, I am very grateful to those in this Chamber who have decided to speak today. I am looking forward to hearing from all speakers but perhaps I may say how much I am looking forward to hearing, in particular, from my noble friend Lord Lilley and how pleased I am that he has chosen this debate for his maiden. We very much look forward to it.

I also preface my remarks by reminding your Lordships of my interests as listed in the register. I am on the advisory board of Metro Bank plc, and am the senior partner of Cavendish Corporate Finance, which advises companies in the financial services sector, including those in areas that I will cover today.

Despite our relatively small numbers this morning, I notice and welcome the enormous expertise of all the other speakers in this debate. In passing, I observe that this is the beauty of having in your Lordships’ House active working Peers of sufficient number to bring expertise to a debate like this, and it is why I am not convinced of the merits of too big a cull from our numbers of those with constructive knowledge.

Despite many predictions to the contrary, certainly given by some two years ago, much of the economy remains in good shape: GDP growth is up to 0.3% in May, from 0.2% in the previous quarter; ONS figures show exports at a record high of £620 billion in the year to May; tax receipts are up; and unemployment is down. However, as we consider these upward trends, we must of course consider something else—no, noble Lords will be pleased to hear that it is not the “B” word. We must consider the fundamentals that underpin this growth. How sound and sustainable are they?

There is a tendency to assume that all our prospects are determined by our legal and regulatory relationship with the European Union. Important though that is, we must not lose sight of matters that fall directly within our gift: technology, innovation, investment, research and so on. To add to that list, we are here to discuss savings, and specifically its role in making sure that our growth is sustainable and our productivity increasing. Governments tend to view savings with a degree of ambiguity: it is always tempting to encourage consumption now to boost tax revenues. One thing is certain about the UK, though: we never seem to save enough, regardless of where we are in the economic cycle of savings and tax revenues. However, the lack of savings harms our productivity by ultimately curtailing investment and innovation, and so it is neither trivial nor a quirk of the UK—it needs to be addressed.

What savings we do have are often locked up in unproductive assets such as property, stoking inflation and denying home ownership for too many. What can be done about it? In its most recent Financial Stability Report, the Bank of England states that household debt is now back below pre-financial crisis levels. If ever there is a time to pull hard on whatever policy levers we have, it is now. The economy is still growing and we need savings buffers to be replenished now.

Unsurprisingly, it is the least well off who have the least savings, forcing them to rely on high-cost credit. Clamping down on high-cost credit is not the answer. The reason why people use such services is not usually due to predatory lending, and is certainly not due to irresponsibility on the part of the borrower. It is simply not having savings to finance rainy-day activities such as trips to visit loved ones, white goods repairs or home improvement. The Building Societies Association is carrying out specific research into this. The biggest problem is affordability. The Government’s decision to take anyone earning up to £11,500 out of tax altogether has created more opportunities to save. We now need good policy to ensure that these opportunities are taken up. That is why we should commend the Help to Save scheme—a better targeted scheme than its namesake, Help to Buy. Help to Save allows anyone entitled to working tax credit or child tax credit to deposit up to £50 a month and receive up to £1,200 in tax-free bonuses. In addition, auto-enrolment has changed the nature of pension savings for good, with millions now contributing, giving them a real economic stake in our economy for the first time. Indeed, the proportion of eligible people contributing to workplace pension has risen from a low of 42% in 2013 to 81% today.

Accompanying these new schemes is an improvement in the financial advice available, through the new single financial guidance body, chaired by Hector Sants. Sound advice is a necessary condition of embedding a savings culture so that we can empower a new generation to take control of their finances responsibly. With savings policy and the vehicles available becoming more dynamic, the advice needs to reflect this. Bringing the work of the commendable Money Advice Service, the Pensions Advisory Service and the DWP Pension Wise guidance into one place is essential. As people move from ISAs to LISAs to pensions saving, giving them a single point of contact will enable them to make better decisions.

I also commend the ABI, which has produced a guide for the industry on working with and providing products to vulnerable customers. After all, the industry should not and does not have to wait for the regulator to develop an approach to dealing with customers who need additional help and advice. Having a vulnerability policy in place should be its first act of leadership on this issue.

Turning to regulation, it is first important to give credit where credit is due. The FCA is developing a highly progressive, market-leading approach to regulating new products and services. The “sandbox” is being imitated the world over as the best way to allow fintech firms to test out their products in a live firing exercise, so that they can understand how they will be treated when they scale up to the mass market. For savings and investment, this dynamic approach is creating new opportunities in AI, machine learning, fraud prevention and cybersecurity, and opportunities for the firms themselves through so-called regtech, which actually reduces compliance costs for regulated firms.

More prosaically, there are areas where the FCA needs to do better, especially in its over-zealous approach to consumer protection, which does long-term damage to both providers and savers. For example, the funding of FSCS is becoming hugely problematic for smaller firms. This is being driven by the lack of a long stop on claims, which means that pay-outs can still be demanded on advice that was provided in the 1980s. That does not seem right. It also means that the burden of covering this liability, of course, falls on those currently seeking advice, which seems unfair and makes the process more expensive for all those concerned.

Similarly, there remains too much legal ambiguity around the Financial Ombudsman Service, its judgments and the role of the FCA. Your Lordships will recall my comments in regard to the ombudsman during the Second Reading of the Enterprise Bill.

A good example of the issues with the ombudsman is the case of SIPPs, self-invested personal pensions. These are tax wrappers that enable investment into a range of HMRC-approved investments. The FCA has rightly acknowledged that SIPP operators are not responsible for the investment advice given to SIPP members—the former is responsible for the wrapper only—and yet this was overruled by the Financial Ombudsman Service, which is of course complete nonsense. The result is huge legal uncertainty for all SIPP providers and, more besides, continuing uncertainty as to the role of the ombudsman and its relationship with the FCA and the FSCS.

It might be a sensible starting point always to look at these issues from the perspective of the consumer—I understand that—but this should not include making judgments that are outside any current legal precedent. Ultimately, this will come back to the consumer, with less choice, more expensive advice and, yes, lower rates of savings and investments. I ask my noble friend the Minister to confirm to me—possibly later in writing—that it is still the Government’s policy to allow savers to invest in unregulated investments of their choice through a SIPP, which is a huge attraction to many who want to make their own investments and savings choice. If that is the case, what steps will Her Majesty’s Government take to ensure that SIPP providers will not be liable when, as is inevitable, some of these investments go wrong? I have seen huge uncertainty and I am very concerned about the SIPP market.

However, two other dynamics are potentially more impactful than government policy and regulation, both of which can be a force for good for savings: technology and new attitudes to responsible investment. First, technology is creating new products that make saving easier and even—believe it or not—fun for savers. Products such as Moneybox allow people to round up everyday purchases into investment funds. You buy your cup of coffee, you pay through Moneybox and you have the opportunity to put your change straight into a savings product. Monzo allows a customer to ring-fence a current account in any way to create pots of savings for different purposes. This is a far cry from filling in forms, going to the post office and getting plain vanilla, low-interest savings accounts.

Technology also helps with tackling the financial inclusion challenge. In 2012, 2 million people took out some form of high-cost credit. If they had access to savings pools this might not be necessary. Research has shown that if households had just £1,000 in accessible savings their risk of debt would be reduced by 44%, which could prevent half a million families from falling into problem debt.

The desire to save is ubiquitous but higher barriers exist for the poorest. Tax-free incentives such as ISAs are aimed at those who can afford to save thousands of pounds a year, so new businesses looking to help the unbanked, such as Pockit, which Cavendish is helping, are to be welcomed. It has found that few high-incentive savings products currently exist for those who can afford to put away a few pounds every week or month.

I recognise that the Government are addressing this issue from different directions. Last night—before 7 o’clock—I went to a DCMS reception for the inclusive economy at No. 10 Downing Street, where I met Jerry During, a director of Money A+E, which has a government grant and is an award-winning social enterprise that provides money, advice and educational services to BAME, black, Asian and minority ethnic people, and seeks to reach out to other communities in London. As I mentioned earlier, the Help to Save scheme will begin to address this problem, but technology can help as well. Companies like Aire provide non-standard credit scoring tools that allow normally sub-prime or unbanked borrowers to access cheaper loans.

Secondly, responsible investment is becoming increasingly interesting to the next generation of savers. Some 77% of 22 to 29 year-olds in the private sector are now contributing to a workplace pension. As these pots are built up and technology allows better management and more transparency, where people’s money is invested is becoming more important. The United Nations sustainable development goals create opportunities for people to save more, but by investing in things that matter to them. Closer to home, in 2016 Swindon Council crowdfunded a green bond to allow local residents to invest in local solar energy projects, which is marvellous. Connecting local savers to investment opportunities that they themselves have a community stake in can be very powerful.

While saving rates are still low, there are reasons to be optimistic. Government policy is coming together through different departments with new technology and evolving social attitudes to create the best opportunity we will get to embed a savings culture in the UK. In doing so we will improve our productivity and, most importantly, reduce financial exclusion. That is why I am pleased to move a debate on this subject and I look forward very much to the contributions of noble Lords and of course to the response of my noble friend the Minister.

--- Later in debate ---

[Lord Leigh of Hurley]

My Lords, I thank all noble Lords who have taken part in this debate. One never knows quite what to expect in any debate, but I had not expected a debate on savings to include an extremely interesting lesson about eighth-century politics. I am extremely grateful to my noble friend Lord Lilley for that and for his welcome remarks in his maiden speech. The noble Lord, Lord Davies of Oldham, was typically gracious enough to compliment my noble friend Lady Altmann. We all benefit from my noble friend’s extremely detailed knowledge of the savings and pensions industries—I will always remember to differentiate between the two—but she does not have a monopoly of wisdom. The time that was kindly allotted to us enabled a number of very interesting arguments to be fully developed. It was a pleasure to hear those arguments taken forward and to have a short-lived break from Brexit, which I understand will change very shortly.

My noble friend the Minister was, as ever, most courteous in his response. There is a limit to what the Government can do in a low-rate environment, but one thing they can do is listen to good advice. For that, I am very grateful.

Motion agreed.