Social Mobility

Mark Garnier Excerpts

Thursday 28th June 2012 Westminster Hall

[Mark Garnier (Wyre Forest) (Con)]

I congratulate my hon. Friend the Member for East Hampshire (Damian Hinds) and the right hon. Member for Salford and Eccles (Hazel Blears) on securing this important debate. The right hon. Lady will be delighted to hear that I have no background in politics, but may be disappointed that prior to coming to this place I was a hedge fund manager and investment banker. However, as a result, I tend to view my work here, and the world, through a financial prism. It is in that context that I want to speak this afternoon about social mobility and financial education.

Something that has struck me since I have been in this place is that when we consider education we still mean reading, writing and arithmetic, and how important it is to go to university. Yet we miss out the fundamental, basic core skill of financial literacy. We expect current and future generations to go out into the world, find a job, save for retirement, buy houses, take on debt, start and run businesses and bring in the next generation of their families with only the most rudimentary knowledge of how the financial and money systems work.

That is not to say that there is no financial education. Schools make efforts to provide it. I have been lucky enough in my capacity as a Member of Parliament to give such a lesson, at Baxter college in Kidderminster, where the kids I talked to engaged very well with the subject of money. I also witnessed a lesson given by RBS at King Charles school in Kidderminster. Bank staff teach years 7 and 8 how to use a bank and understand the basics of the banking system. I know that schools would like to do more in that area. I am in the process of setting up a group of volunteers to go into schools to provide financial education for local kids.

Even with that benevolent tailwind of good will from teachers, provision is patchy and sporadic. There are serious problems in this country because of financial illiteracy. I shall paint a slightly gloomy picture to take account of where we are now. For many years our constituents were bombarded with letters from banks and credit card companies, announcing pre-approval for a £10,000 loan, an opportunity to go on that life-changing Caribbean cruise or a chance to own that sports car that it is impossible to live without. All the while, even senior people in the country—I am not making any political point—were assuring us that the traditional economic cycles had somehow been changed.

The reality is that economic cycles will never change. There will always be an economic cycle that goes through the five stages of recovery, acceleration, boom, slowdown and recession. However, to maintain the illusion, we had irresponsible lending and, it now seems, as we have heard today, illegal activities around market abuse from the biggest banks, which is one of the most shocking things that we will hear while we are Members of Parliament.

To talk about irresponsible lending without addressing the other side of the coin is, however, only to half-address the problem. Taking out a 120% mortgage at the height of a property boom is irresponsible borrowing, and the banks could not lend irresponsibly were it not for irresponsible borrowing by successive consumers. However, here is the nub of the matter: is it fair to brand a consumer an irresponsible borrower, if he or she is not equipped with the knowledge to make a rational and informed decision about their borrowing? If someone does not have the knowledge to recognise the cynicism of the advertising campaigns and the short-termism of something like the fashion industry, how on earth can they make a sound judgment on the merits of a spending decision?

It is worth putting the country’s situation in perspective. Government debt, amassed over many years, stands at £1 trillion. Personal debt—the debt we collectively own among us—stands at just under £1.5 trillion. That is more than £56,000 for every household in the country. To put that into a wider context, I understand that half of all European personal debt lies within our shores, among a population representing about 10% of the population of Europe. Of that total debt, £55 billion is on credit cards.

The real worry to bear in mind is that I have outlined the situation at a time of super-low interest rates. The base rate has been at its present level for nearly five years, but that is totally abnormal. It is not even normal for a very low interest rate period, but over the five-year period, people have got used to ultra-low rates. The reality is that interest rates will undoubtedly rise, to a low interest rate environment. That means that the rise could happen before we get back to any semblance of a healthy economy. In a normal period of low interest rates, the base rate could rise from 3% to 4%. That, in simple terms, would increase the cost of borrowing by about one third; but if the base rate rises from its current level to a still low 2%, the cost of debt servicing rises fourfold. The implication is an astronomical rise in households’ debt costs.

We are talking about social mobility at a time when everything we are trying to achieve could be scuppered by the most basic movements in interest rates. It is vital that we try to head off such a disaster by providing advice, and we must also ensure that we never again face this potential catastrophe by training our next generation to engage in the economy in a far more educated way.

The immediate problem can be mitigated for some by website-based advice services. Some of the private ones, such as moneysavingexpert.com, provide good advice for those who can access and engage with them. That is an important point; not everyone can engage with the websites, because they do not understand even the basics. The Financial Services Authority’s efforts through the Money Advice Service are, at the moment, lamentable, but at least it is putting cash into debt advice services such as those provided by citizens advice bureaux.

If we are to avoid any further crises in household finances, we absolutely must introduce financial education into our curriculum. The demand for it is not being met. Some 97% of 11 to 17-year-olds think it is important, 80% of parents want their nine and 10-year-olds to learn about money and 66% of Britons think that financial lessons would have given them the resources to deal with their financial challenge. Given that 43% of parents do not know what an APR or a PPI is, it seems that those 66% of Britons are absolutely right that we need to teach people more.

As a former investment banker, even though I can dissect the Bayesian probability models that drive some black box hedge funds, my bank manager will testify, I am embarrassed to say, that I am completely incapable of balancing my cheque book every month. The all-party group on financial education for young people, of which I am vice-chairman, is calling for financial education to be put on the school curriculum.

I have painted a gloomy picture, but only because I want to reinforce the message that we cannot possibly expect people to achieve any form of social mobility without being able to engage with the oil that lubricates the engine of the economy in which we all live. If people are comfortable dealing with money and financial products, we have a confident population, equipped to do well in life, but if not, we trap people at best and, worse, in this complex financial world, we place them in danger of social failure.

I want to see financial literacy taught in two ways. First, I want to see the quantitative side being taught in maths, which not only will equip people to know whether they can afford something, but can bring maths to life. If the question, “Compounding 125 at 17% on 18 regular intervals while reducing the sum equally over those 18 intervals requires what discounting?” were asked as, “You want to buy a pair of football boots costing £125 on your credit card with an APR of 17%. What is your monthly repayment if you are to pay it off before they wear out in 18 months’ time?”, that would engage a lot more people in finding out how the maths works.

[Damian Hinds]

Without a calculator.

[Mark Garnier]

Absolutely. On the qualitative side, the question, “If I spend £125 on a pair of football boots, will I be able to play like David Beckham?” needs to be taught elsewhere, in personal, social, health and economic education, and in the wider curriculum. I discovered, to my cost, that the answer is no.

As time progresses, and we talk more about the subject, I am increasingly convinced that financial education needs to be not only included in the curriculum, but tested. Teachers who have huge pressures on their time naturally tend towards subjects in which there is testing, so if we do not test financial literacy there is a fear that it will not be put into the curriculum.

What we are trying to achieve is not just people being able to work out their bank and credit card balances. I want my constituents and all the people of this country to be able to work out problems such as that of a hypothetical individual who loses their job and lives in a rural community with £5,000 redundancy money to their name. I want people to be able to make the crucial decision about that individual’s future. Should they blow the money on a cheer-me-up holiday of a lifetime, or should they buy a car to seek work further afield? Should they use the money to retrain for something different, or should they invest it in a new business that they own and can drive forward, thus taking control of their own life?

The absolutely crucial engine to social mobility has to lie in financial literacy. That is why I will continue to urge the Government to put financial education on to the curriculum, and to test it.

[Mr Philip Hollobone (in the Chair)]

There has been a change to the running order, due to a late entry. It will now be: Meg Hillier, Mark Pawsey, Virendra Sharma, Mike Crockart, Jackie Doyle-Price, Kelvin Hopkins and Martin Vickers. But do not worry; you have an average of 11 minutes each.