Consultation Response: INSERT TITLE of the CONSULTATION from the Consumer Financial Education

Everyone Needs a Savings Buffer: Why Income and Expenditure Statements Need a Default Savings Category

Response from the Money Advice Service

19 August 2016

Bee Thakur

PolicyManager

1. About us

1.1.The Money Advice Service is a UK-wide, independent service set up by government to improve people’s financial well-being. Our free and impartial money advice is available online, and by phone, web-chat or face to face with one of our Money Advisers. We are the largest funder of free debt advice in the UK and work extensively with the advice sector to improve the quality, consistency and availability of debt advice.

1.2.Our core statutory objectives are set out in the Financial Services Act 2010[1]. We are paid for by a statutory levy on the financial services industry, raised through the Financial Conduct Authority which is the conduct regulator for financial services firms and financial markets in the UK[2]

1.3.From April 2012, MAS has taken on the responsibility for the co-ordination of debt advice in the UK. We are responding to this consultation in light of our statutory role to work with partners to increase the availability, quality and consistency of debt advice, as well as our wider role to ensure that consumers are well informed and empowered to take action across the existing and emerging retail financial services marketplace.

1. Summary of our response

2.1.We are pleased to have the opportunity to respond to this consultation and are strongly in support of the proposal for introducing a savings category into the standard income and expenditure statements used in Australia.

2.2.We are responding to this consultation in light of our experiences of integrating a savings category into the Standard Financial Statement (SFS) which we will launch in March 2017.

2.3.We worked closely with creditors and debt advisers alike to establish the SFS working group which gave valuable input into how such an initiative can be operationalised. We are sharing this learning in the hope that some aspects may be transferable in the Australian context so that those in debt in Australia, have the same opportunities to save as those in the UK.

1. Responses to consultation questions

3.1 Levels of the Savings Buffer

• Is 10% or $20 a reasonable amount?

• Should there be a limit to the amount that consumers repaying debts can save?

• Should there be controls on when and how the consumer can withdraw funds from the savings account and on how they can be spent? If so, who should oversee these controls?

• Should a savings target be set and once reached, should funds be redirected towards paying off debt? If so, what should the target be?

• Should there be a ceiling for monthly contributions?

3.1.a.We believe the savings level proposed is reasonable and is aligned to our own proposals. We have stipulated that the savings level can be set at any amount up to a maximum level of 10% of the client’s available income (the income left after outgoings have been paid but before payments to creditors are made), with a cap of £20 per month.

3.1.b.Whilst there is a monthly cap to the amount that can be saved, there is no restriction on the total amount which can be saved on an ongoing basis within the limits described above. The SFS working group was of the view that setting a limit on total amount of savings for a client was not congruent with the aim of setting up a long term savings habit to get people to save. There was a concern that once people reached a goal amount, the behaviour of savings would not be continued into the long term, and the primary benefit of the savings category should be the positive behaviours it instils in the person beyond debt solution arrangements.

3.1.c.An exception to the above guidelines is whenthe client is entering an insolvency solution- the terms of which are mandated in legislation. In the UK, there are rules in insolvency which deem specified amounts of cash as assets, thus the client has to save within parameters defined by insolvency laws. We have recommended that where this is the case,insolvency rules and procedures should be followed[3].

3.2 Pre-filling the Statement of Financial Position- A Savings Buffer Default

• Do you agree that the savings buffer amount should be pre-entered by prefilling an income and expenditure statement where possible?

3.2.a. We stronglysupport the idea of pre-populating the savings category. We believe, and the SFS working group agreed, that this would encourage more people to save as it created an extra step in the process to actively opt-out.

3.2.b.Here we also leverage on learnings from behavioural science which demonstratethat setting defaults is an effective tool in choice architecture, when there is inertia or uncertainty in decision making. Such a pre-populated default option may work for several reasons;

1. In a choice context, a default refers to that option which choosers end up with if they do not make an active choice. Setting the default affects how likely people end up with an option. More precisely, it refers to changes in the probability that a person chooses a particular option when it is set as a default, as opposed to the situation where this option has not been set as default.

1. Some default effects are implied by the situation. In social settings, for example, the normative choice (what others are doing) may be adopted unconsciously as a social default effect[4].People are thus more likely to choose what they observe others choosing, even if they do not believe that other person is the more knowledgeable person. People are also more likely to treat choices that require less justification as defaults.

1. If a person interprets the default as a signal from the policy maker, whom he or she sufficiently trusts, they might rationally decide to stick with this default. It is important that the trust established between the client and the debt adviser is leveraged here, as this effect speaks directly to this notion. That the debt adviser isseen to set a default is interpreted as an implicit recommendation to choose that default option. The information taken from this recommendation might be sufficient to change some people’s preferences[5].

3.2.c.In designing our own SFS tool, the savings amount will automatically be populated with £20, with advisers able to overwrite to the desired amount. There is no restriction on the total amount which can be saved on an ongoing basis within the limits described above.

3.2.d.In addition, we are currently scoping research experiments to understand in-depth what works best in regards to encouraging over-indebtedpeople to save. We hope these experimentswill provide us with insight into how intentions to save translate into behaviours, and how we can best create circumstances which enable positive attitudes and behaviours towards savings. We will use this learning to support advisers using the SFS to help their clients save more.

3.3Voluntary Participation- But Requiring ‘Opt Out’

• Do you agree that participation by consumers in setting aside some savings should be voluntary? Alternatively, should there be a mandatory requirement in relation to debt repayment arrangements so that some amount is set aside for savings (even if below the minimum amount)

3.3.a.Whilst the savings category in the SFS is non-mandatory, we recommend the adviser should encourage the client to save up to the maximum permitted amount from their available income where possible in order to sufficiently buffer themselves against any future circumstances which may impact their finances.

3.3.b.We also believe that clients should be given all of the information in relation to the benefits of savings and an explanation of how this would impact on their repayment plans and debt solutions, for example highlighting the consequences of reducing the amounts available to offer to creditors.Ultimately, if a customer chooses not to save then this should be accepted.

3.3.c.Given the clearbenefits of saving, reviews of customer circumstances are an opportunity to revisit the savings category and encourage the customer to consider saving again if appropriate. This is particularly the case where a person’s available income has increased, and/or their expenditure or repayments have decreased.

3.3.d.The SFS group was of the view that arrangements should be made to deal with any priority debts the customer has. If it is not possibleto reach agreements with all priority creditors immediately then advisers may use their discretion to include savings if it is considered that reasonable offers on the priority debts are being made. This will avoid possible delays and enable the financial statement to be sent to all creditors at the earliest possible time.

3.4 A Separate Account to Hold Savings

• Where should savings be deposited?

• Do you agree that creditors have a role in helping people in financial difficulty set up accounts and mechanisms to deposit savings?

• What role could Centrelink play in assisting consumers set aside a savings buffer?

3.4.a.The SFS working group, which was made up of creditors as well as debt advice providers debated at length about the best way for debt clients to save, which wouldnot contravene regulatory requirements or competition principles between providers.

3.4.b.It was agreed that debt advisers are vital to enabling clients to save and have a key role to play in helping people access savings accounts. This is in line with findings from behavioural economics on “messenger effects”, referring to the tendency to be influenced by a messages’ source, not just its content[6]. It is therefore important that a debt adviser is perceived by the client as a trusted source of credibility, knowledge and authority.

3.4.c.It was agreed by the SFS group that whilst a debt adviser shouldnot compel or recommend a client to save in any particular product, in the UK, introducing customers to deposit accounts, and enabling the client to make an informed choice about using that deposit account, is not a regulated activity. Therefore, clients can be advised to put their savings into such accounts, especially where there is a benefit in doing so, and an advice agency has established a relationship to enable this, for example, with a local credit union.

3.4.d.Where possible, a client should be advised to set up a standing order, to pay the savings contribution into the deposit account.We also recommend that debt advisers should guide their clients to save in an account with a savings provider to whom they do not owe money (or with a creditor who has formally agreed not to exercise their right of set off[7] on any credit balances held). Additionally, clients should also be encouraged to deposit their savings in an account which is covered by the Financial Services Compensation Scheme.[8]

3.4.e.Given that Centrelink works with the most vulnerable people in Australia, we would also view this as an opportunityfor closer referral routes into the Australian debt sector, who in turn can help people to budget and save, so that people can receive holistic support and are less likely to wait until they are in a crisis situation before seeking debt advice.

3.4.f.The ability for agencies to offer holistic support early on requires closer working between agencies, and even between sectors. Recognising that debt is not an isolated issue and occurs in the context of broader life events, we include provisions within our grant agreements for advice providers to develop referral routes into other sources of support to ensure that clients receive holistic support.

3.4.g.To facilitate and learn more about cross-agency working, we havebeen working in partnership with the Scottish Legal Aid Board (SLAB) on the Making Advice Work (MAW) programme[9] whichconsists of a range of pilot projects designed to specifically target advice at vulnerable groups of people, including those with mental health issues and people who have experienced domestic abuse. This has enabled us to learn what works to reach people with debt advice and how organisations can work in partnership across health, welfare and debt advice sectors. It is important that a client’s debt situation is looked at as a whole, and they have access to the different type of support they need. Our learning and experience through our MAW projects puts us in a position to help facilitate such partnerships into the debt sector and we would welcome the opportunity to share our learnings with organisations who want to encourage people to access debt advice.

3.5Evaluation

• Do you agree that this measure should be evaluated? If so, we would welcome support from financial institutions that may wish to be involved in doing this.

3.5.a.Evaluation and evidence based policy underpins everything we do. Indeed, we have also provided free resources for evaluation purposes for other organisations.[10]However, there are particular challenges to establishing upfront evaluation criteria for the Standard Financial Statement, as it is a brand new tool and there are many unknowns. We will take an iterative approach to evaluating the SFS and aim to refine the evaluation as it gains greater traction.

3.5.b.We have included provisions within the terms and conditions for using the SFS which allows us to conduct ad hoc research once the statement has been in use for a period of time and can generate a sufficient evidence base.

3.5.c.We also believe thatgathering data across the whole sector by one tool is a valuable resource which can give a cross-sector view of over indebted people and their pertinent issues. Weremain committed to evaluating the use of the SFS and are going to be scoping this aspect of the work further in the near future.

3.5.d We encourage FCA to build a full evaluation plan for the measure before, at and beyond the 18 month mark proposed in the paper. We would be happy to share our experience with FCA in the development of this plan.

1. Annexes

Annex 1: Standard Financial Statement: Summary version

Annex 2: List of partners who helped to develop the Standard Financial Statement

Advice NI

Advice UK

Accountant in Bankruptcy

Barclays

British Bankers Association

Citizens Advice Scotland

Christians Against Poverty

Citizens Advice

Debt Resolution Forum

Finance & Leasing Association

HSBC

Insolvency Service

Lloyds Banking Group

Money Advice Trust

Nationwide

Ofgem

Payplan

RBS

StepChange

UK Cards

Wessex Water

Published: August 2016

The Money Advice Service

Holborn Centre

120 Holborn

London
EC1N 2TD

Tel: 0207 943 0500

1

[1]

[2]

[3]Further details about the approach to personal insolvency in Scotland can be found here: Further details about personal insolvency across the rest of the UK can be found here:

[4]Huh, Young Eun; Vosgerau, Joachim; Morewedge, Carey K. (2014-10-01). "Social Defaults: Observed Choices Become Choice Defaults". Journal of Consumer Research. 41 (3): 746–760

[5]McKenzie, C. R. M.; Liersch, M. J.; Finkelstein, S. R. (2006). "Recommendations Implicit in Policy Defaults". Psychological Science. 17 (5): 414–420

[6] Such MINDSPACE principles are noted throughout publications here:

[7] The rights of a bank to ‘set off’ are explained here: Financial Ombudsman Service. A Banking Firms right to set-off :

[8]

[9]

[10] Debt Advice Evaluation toolkit:

Financial Evaluation toolkit: