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Damian Hinds (East Hampshire) (Con)
It is a great pleasure to see you in the Chair this afternoon, Ms Osborne.
For most of us, using a current account is as natural and normal a part of modern life as indoor plumbing, but it was not always so. Many hon. Members will remember their parents coming home with weekly wages in cash, in an envelope with little holes in it so people could count the money when it was given to them. On arrival at home, the cash would be divided into amounts for the rent, the bills, housekeeping and, hopefully, savings for an unexpected bill, school uniforms or Christmas. The sub-divided amounts would typically be kept in separate boxes, tins or jam jars, from which this debate takes its title.
Most households have changed a lot since then, and there are many advantages to that evolution. For most jobs now, people need a bank account to accept their salaries or wages, and people also need an account to pay the rent or the mortgage. People’s money is also safer in a bank than on the kitchen windowsill. As payments through direct debits and standing orders cost less for financial institutions to process, bank accounts give people access to better deals. A bank account also becomes a gateway to other financial services.
Much progress has been made over the last number of years on that front. The number of people without a transactional bank account, including a basic bank account, fell by about a half between 2003 and 2010 to just 1.5 million households.
As I said, there are many advantages to the transition, but there are also some drawbacks. For a start, there is loss of control, particularly with things such as direct debits. Although people set them up, they happen subsequently without people actively having to do anything.
Justin Tomlinson (North Swindon) (Con)
My hon. Friend has secured a fantastic debate.
Our extensive research in my all-party group on financial education for young people highlighted loss of control as a particular problem. Some 91% of people who got into financial difficulty did so because they kind of lost control, and my hon. Friend has highlighted exactly why that is happening.
Damian Hinds
My hon. Friend goes right to the heart of the matter. There can also be a feeling of being rather flush on payday and a danger of people not making provision for unexpected, or sometimes even expected and known, subsequent liabilities.
Although most of us enjoy free in-credit banking, nothing in life is free; there is a cost to operating bank accounts. The point made by my hon. Friend the Member for North Swindon (Justin Tomlinson) also goes to the heart of that issue. The provision of free banking relies on people making mistakes and incurring penalty charges. Research for the financial inclusion taskforce has shown that low-income families that move to have a bank account in order to save money through direct debits and so on found that those savings were entirely wiped out by penalty charges, which averaged £140 in the first year. That combination of factors, as my hon. Friend says, can lead to people tripping into debt, which can then spiral. I mentioned people who do not have a transactional bank account, but many choose to manage in cash even if they have a bank account.
Esther McVey (Wirral West) (Con)
My hon. Friend talked about people tripping into debt. He will also find that people trip into ill health, particularly mental ill health. I work with Advocacy in Wirral, and one of the main issues that it deals with is the sheer practicalities of life and not being able to pay bills, leading to a deterioration of mental health.
Damian Hinds
My hon. Friend’s point is, as ever, apt and to the point. She could also have mentioned the stress that debt and trying to manage one’s finances can bring to families, which is one of the key factors in family breakdown.
To address those points—at least in part—and a few other points, we have jam jar accounts. They mimic the jam jars on the windowsill; that is the whole point of such accounts. Louise Savell of Social Finance has identified three core features. First, when someone’s wages come in, the money is automatically distributed among different pots within the bank account—for rent, household bills, spending money, savings and so on. Secondly, the person would receive a low balance alert by text, if there is a danger of that person failing to meet one of their bills from the bills account. Thirdly, if the person does not act on that for whatever reason, there would be an auto-sweep from savings into the bill-paying account in order to avoid penalty charges or failing to make the payment.
There are a number of questions about product design, which can be done in different ways. One big debate is about budgeting support, which could accompany the accounts. Comprehensive budgeting support—helping people to decide how much goes into each pot and how and when to redistribute—would be a great bonus, but that is quite costly. The issue should have a separate debate, because we can have a lot of the benefits from jam jar accounts without fully comprehensive budgeting support, and we can have a lot of great benefits from fully comprehensive budgeting support without jam jar accounts.
A second question about product design is how easy we make it to raid a savings account. Jam jar accounts are in many ways a method for one to impose discipline on oneself. A customer might decide that it would be good to impose further discipline and say, “If I want to move money out of the savings account into the spending account, I should have to do something actively. Ultimately, it is my choice because it is my money, but I will make myself ask for it in writing or by e-mail.”
David Simpson (Upper Bann) (DUP)
Does the hon. Gentleman agree that more attention and help need to be given to those of a certain age? They could find bank accounts hard to deal with—it is taxing, as he has suggested—and they like to see what they have and manage it in that way. More help is needed for the senior citizens of our country.
Damian Hinds
The hon. Gentleman is absolutely correct. There is a generation that is more comfortable with managing such matters online, if they have access to a desktop personal computer, or, for those who do not have that, through smart phones, mobile phones and auto-voice recognition. However, there is a cadre of people for whom that is less appropriate.
The third question on product design is how to market such accounts, by whom and to whom.
Why would we want a great increase in jam jar banking? First, it would reduce the extent to which people trip into debt. Secondly, the poorest would pay less, both directly, through lower bank charges; and indirectly, because service providers would have a lower average cost of collection. Therefore, the poverty premium, as highlighted by Save the Children and others, would be reduced. Thirdly, and just as importantly, it would stimulate savings through a sort of a nudge. One of someone’s jam jars would automatically be a savings account, and they would have to say yes or no to put a few pounds away every week or month. We all know what a difference that makes; it can be quite transformational to have savings and assets.
Guy Opperman (Hexham) (Con)
As my hon. Friend knows, I am leading a campaign for the establishment of community-based local banks. Would one of the best custodians for jam jar accounts not be a community-based local bank? Such banks allow people to save locally with a local bank manager, with whom there can be a close, personal relationship. That would increase savings and the benefits of a jam jar account.
Damian Hinds
My hon. Friend makes a fine point, and I commend him on his leadership in the local banking movement. I will say a few things about credit unions, which I think share some characteristics.
I have talked about the “Why?” of jam jar accounts, and it is also fair to ask, “Why now?” There are three good reasons why the issue is particularly relevant at the moment. First, the Government and Members on both sides of the House are focusing, rightly, on the cost of living. We discussed heating bills in the preceding debate, and there are active debates about rail fares and petrol and diesel costs. Bank charges are also a significant part of the cost of living. The second reason why the debate is particularly timely is because of the introduction of universal credit, the move from fortnightly to monthly payments, and the move away from direct payments to landlords. The third reason is the sector modernisation fund of £73 million for credit unions that the Government are supporting. That presents new opportunities for development in that sector.
Esther McVey
Of course I greatly welcome—as all of us here do—the universal credit, but does my hon. Friend agree that what is being offered protects not only those receiving the credit, but potentially the landlords and other people who are the recipients of bill payments? Those people also need protection.
Damian Hinds
My hon. Friend is right. Of course, there is a potential benefit for landlords and other service providers. There is a line of argument that goes: why not just keep the two-weekly payments and the direct payments to landlords? However, a key objective of universal credit is to make the receipt of benefit feel more like being in work, which usually means having to cope with monthly payments, not having money paid direct to a landlord and so on. The use of such accounts is a good way of helping people through that, which is a perfectly legitimate aim, while keeping the key features of universal credit.
We know that Ministers are interested in this area. Most recently, in answer to a written parliamentary question tabled by my hon. Friend the Member for North Swindon, which was published after I applied for the debate, the Minister of State, Department for Work and Pensions, my hon. Friend the Member for Thornbury and Yate (Steve Webb), confirmed that the Government are actively looking at the potential for low-cost budgeting accounts.
So why do they not exist already? Well they sort of do, just not on a particularly big scale. Last year, there were four providers of jam jar accounts, although three of them are not the household names that most of us would recognise. Until now, a key driver for the development and roll out of such accounts has been debt management companies wanting to have greater security of payment schedule, rather than consumer advertising. So although they exist, they do not exist at scale. Social Finance estimates that there are only about 150,000 such accounts in the UK. They do not exist through big brand institutions—by the way, the exception to that is the Royal Bank of Scotland. I know that it is not very fashionable these days to say nice things about RBS, but I commend it for having such an account, which it uses for its most challenging customers. However, that also means that the account is not actively marketed to the general public. Someone would struggle to walk into an RBS branch and open such an account, unless they are referred on to it.
Guy Opperman
Given that RBS will potentially be sold or divested by the Government in the longer term, is that something that should be carried through post-sale and hopefully made part of a community-based organisation?
Damian Hinds
In the interests of time, I will have to leave that question hanging—fascinating though it unquestionably is—because I must plough on.
The third important point is that such accounts are not available at an attractive price—with the exception of the RBS account. Typically, they cost the consumer about £150 a year. Why are such accounts not available at scale through big brand institutions at an attractive price? That is a very good question. Intuitively, such accounts seem like an attractive concept. In fact, many hon. Members here might reflect that, in our own personal finances, we mimic how jam jar accounts work. We might have a separate current account for household bills or a separate credit card that we use for car payments or something like that.
There is an attraction to such an idea, but the key stumbling block is economics. There is no reason to believe that the banks that do offer such accounts at the prices I talked about are making above normal profits, although at scale the cost should come down. Social Finance estimates that it should be possible to provide such accounts at between £5 to £7 a month, which is around £60 to £85 a year. The biggest sensitivity to that cost is the extent to which call centre human support on budgeting and so on is provided.
In any case, that is still a lot of money, so the question of how to pay for it remains. My hon. Friend the Member for Wirral West touched on some of those issues a moment ago. There is some reason to believe that people—consumers themselves—would be willing to pay something. In the credit market, if we think about how much consumers implicitly are willing to pay for the convenience and flexibility of home credit over cheaper sources, there is some evidence that people value and would pay for control. Some research suggests that maybe people would be willing to pay £1 a week—£50 a year. However, that still seems rather a lot. That could possibly be augmented with some other charges for ATM withdrawals and so on.
Some people might say, “Get the banks to pay for it. They’ve done all these bad things, so they should do it.” To be fair to banks, they do quite a lot in the corporate social responsibility sphere already, including with credit unions. We could perhaps get them to provide such accounts on a semi-commercial basis, forgoing their normal profit margin. What would not be a good idea is to suggest that other customers should cross-subsidise those with jam jar accounts. There are two reasons for that: first, for competition policy reasons and, secondly, because it is generally a bad idea in the interest of effective markets.
As my hon. Friend the Member for Wirral West mentioned, there may be a role for service providers, particularly housing associations and utility companies, who would benefit from having a more reliable payer. Particularly for the most risky customers, a housing association, for example, might even be willing to provide cash support for the costs. Perhaps more generally, one would be looking for softer support in terms of marketing and so on to reach scale.
We are talking about banks and consumers, but is there a role for the Government? There is certainly not a role for the Government in telling people what sort of bank account they should have. There is also not a role for the Government in telling banks what should be in their new product development pipeline. However, there is a real social interest in all these issues, as I outlined earlier. If it is a question of bringing together organisations that may all have an interest, some of which may not know about it yet, in developing this market, perhaps the Government are best or uniquely placed to do that.
In my final minute or so, I have three simple asks of the Government, to which I would love to hear the Minister’s response. The first ask is to prod the banks and continue to stress to them the benefit that may be had both to society and potentially to them in developing these products. There may even be a pure commercial case to be made for them. After all, I often remark that nobody knew until 3M brought it to market that the thing that was really holding back their office productivity was a little yellow square piece of paper that can be stuck to the wall. Sometimes products just have to get out there before we realise their potential.
The second ask is to consider having a pilot scheme in one area, working with a housing association and one or more utilities. It would then be possible to quantify the benefit that comes from security of payment and collection cost, as well as to assess the beneficial impact on individuals in terms of their budgeting behaviour, the amount of money they save and their propensity to start to make savings.
My third ask is to work with credit unions. This Government have been a great supporter of the credit union sector, particularly through the £73 million modernisation fund. If part of that were to be used to develop a robust, sustainable common banking platform, it would open up all sorts of possibilities, including this one. There would also be the potential to work with the Post Office, which would provide a great new source of revenue and business to post offices, which matter so much to all of us in our communities and constituencies.
We know that financial inclusion, helping people to make the transition into work and helping hard-pressed families with the cost of living are all things for which Ministers have shown a passion. They are also all things where jam jar banking could make a substantial difference. I hope very much that Ministers will continue to work with consumer groups, housing associations, utilities, banks and credit unions to help to stimulate such accounts into becoming an at scale reality.
The Economic Secretary to the Treasury (Miss Chloe Smith)
I thank my hon. Friend the Member for East Hampshire (Damian Hinds) for securing this debate on the topic of jam jar accounts and low-income consumers. It is particularly interesting and timely, given the various reforms going on in the area, which I hope to explain a bit about in my remarks. In the absence of my colleague the Financial Secretary to the Treasury who leads on these issues, I am very pleased to be responding on behalf of the Government. Indeed, hon. Members may know that I have taken a long-standing interest in these issues in my constituency of Norwich.
My hon. Friend the Member for East Hampshire made a number of relevant points concerning the potential role that jam jar accounts could play in helping to improve financial capability and inclusion, particularly alongside the introduction of universal credit. I should like to respond to the various points that he made and take this opportunity to set out briefly some of the work that the Government are doing in this area, which I am sure he and others will welcome.
Let me begin by dwelling on the progress made to date on the issue. Jam jar—or budgeting—accounts are a relatively new concept, as my hon. Friend mentioned. However, they are available in various places. As he has described, such accounts include various features that are aimed at helping customers to manage their money more easily. At the most basic level, that includes the ability for customers to divide their money between different pots. It may also include, as my hon. Friend said, a function that automatically moves money between accounts and access to support from a trained money manager who can provide advice or direction if necessary.
As hon. Members may know, the Financial Inclusion Taskforce commissioned initial research into the viability of this concept in 2010. It was carried out by Social Finance and was published in June last year. As I think my hon. Friend is aware, the report surveyed the demand and provision of jam jar accounts. It noted, as he said, that such accounts currently exist but tend to carry a monthly account usage fee that can put them out of the reach of those on the lowest incomes. The report also quantified the pool of customers who could benefit from such accounts if they were available at lower costs—up to 9 million. The report recommended that further research be undertaken, followed by a pilot study to explore the potential benefits of such accounts.
Certainly, the idea is extremely interesting. While no one financial product will suit every individual, some people may find these kinds of budgeting facilities useful, and far more useful than the methods that they use currently. The Government are committed to promoting a diverse and competitive financial services sector that provides consumers with access to a range of financial products such as jam jar accounts, which may form a part of those services, to meet consumer need.
If my hon. Friend the Member for East Hampshire will allow, I will refer briefly to a couple of points raised by my hon. Friend the Member for Hexham (Guy Opperman). Ms Osborne need not worry—I will not veer into the scope of the Royal Bank of Scotland in this debate. The Government are committed to providing a diverse and competitive financial services sector, exploring options to expand the roles of credit unions, which have been mentioned and which have an important role in providing services to communities. I note the other points that were made about more local banks and housing associations. Hon. Members will be aware of the current opportunity, under the Big Lottery Fund, for housing associations to take an interest in financial capability, which is important and an issue that I am aware of at constituency level. The Financial Services Authority has made improvements to its authorisation process to ensure that it will not act as a barrier to entry for new local banks, if that is something that the good people of Hexham want.
It is relevant to consider this issue, as my hon. Friend the Member for East Hampshire has, in the context of the introduction of universal credit. The new benefit will simplify the existing complex system of benefits and tax credits, improve work incentives and make it clearer to claimants how the move into work will benefit them. As hon. Members are aware, it will be paid in a single monthly payment, with housing costs paid direct to the tenant. That will enable low-income households to overcome one of the traps of poverty relating to the responsibility of managing a budget and the impact that that can have on other things. The monthly payment of benefits will make it easier for households to take advantage of cheaper tariffs and make access to affordable credit easier through an increased financially responsible record.
The Government recognise that some claimants need additional help to budget, particularly during the transitional period. As my hon. Friend suggests, jam jar accounts could have a role to play in helping many universal credit claimants to budget, protecting their essential payments and supporting positive money management behaviours. For that reason, I am pleased to confirm that, in addition to working with the advice sector to ensure that claimants can access appropriate budgeting support services, the Department for Work and Pensions is working with a range of banking and financial product providers, such as banks, buildings societies, credit unions, pre-paid card companies and others, to explore options for delivering such services, and to make financial services more accessible and supportive to low-income households.
David Mowat (Warrington South) (Con)
We have heard a good idea this afternoon, but high street banks cannot, or will not, provide such accounts at a cost-effective rate. Until that issue is fixed, we are just talking about an idea or a concept, and it will be very hard for it to be realised. Will the Government do more to bridge the gap between what the banks are able or willing to do and what the market is apparently willing to spend?
Miss Smith
I shall, with pleasure, come on to some of the work that the Government are doing to encourage simple financial products, via explaining briefly the next steps for the DWP and via credit unions.
From June this year, the Government will run a series of housing demonstration projects in which we will pay housing benefit direct to tenants to test the support required to help claimants budget and manage their rent payments effectively. They will be an opportunity to consider what type of budgeting products—whether from the commercial sector or elsewhere—can be used to support universal credit claimants in the longer term.
Several hon. Members have mentioned credit unions. They play an important role in offering access to financial services—bank accounts, affordable credit, insurance and savings to name but a few—to people who may not be able to, or may not wish to, access those services through mainstream banks or building societies. They work within a local community ethos and often actively seek to help those most in need of support. The recent legislative reform order brings new and exciting opportunities to credit unions. It is now for the sector to respond to those opportunities by seeking new ways to reduce their costs, to improve the products and services that it offers and to reach out to new markets to become self-sufficient and sustainable. To support credit unions in making this leap, the DWP has carried out a feasibility study to look at options for expanding their role. That study has reported to Ministers and an announcement on its findings will be made soon.
On the point about how the Government can otherwise help consumers take responsibility for their finances and make better choices, jam jar accounts may be one useful tool, but consumers need access to both financial advice and an appropriate range of products. That is why last year the Government launched the Money Advice Service, which promotes understanding of the financial system and helps to raise financial capability across the UK. In particular, its financial health check is helpful to some of the citizens referred to by my hon. Friend the Member for East Hampshire.
Another part of empowering consumers is ensuring that the right products are available. They need to be straightforward, easy to understand and simple to provide consumers with a benchmark with which to compare products, make good decisions and make sense of an often bewildering marketplace. Earlier this month, the Government launched a steering group to design a range of simple financial products, made up of representatives from both industry and consumer advocates. The group will report to Ministers in July and has announced that it will focus initially on developing simple deposit savings and protection insurance products. This is an opportunity for industry to innovate and develop a range of simple products, and it comes at a time of exciting developments elsewhere in the industry.
Under the various developments that I have outlined today, it is clear that there is an appetite, in the Government and in the third and commercial sectors, to find a way forward. I thank my hon. Friend and other hon. Members for their remarks. I am sure that my colleagues, the Financial Secretary to the Treasury and the Secretary of State for Work and Pensions, will appreciate the insights that they have contributed and will continue to take them into account in the further development of work in this area.