Target financial advice where it’s most urgent: the City

Yesterday the Commons public accounts committee delivered a devastating indictment of the Government’s ‘complete failure’ to tackle high levels of consumer debt. The Committee found no one holding the reigns on the Government’s money guidance service, which aims to educate people to avoid debt problems. While advice is available at crisis point in the UK (the CAB soldiers on!), there is virtually no independent financial advice.

Given the public purse is cash-strapped it makes sense to target financial education to those who need it most.

Statistics show that debt problems are most common in low income households. But dig deeper and you find few examples of risk-taking behaviour. The number one cause of over-indebtedness is not ‘bad’ behaviour but job loss. The explosion of personal debt was driven in the main by the over-mortgaged middle classes who gambled on the buy-to-let bubble.

Looking further afield it becomes clear where money mismanagement is most problematic. A friend once met a City trader at a party. Politely making conversation, he said it must be a difficult job, derivatives sound so very complicated. ‘It’s easy really’, the trader replied, ‘you don’t have to understand them to sell them.’ Feckless bankers and overpaid traders repackaged, relabelled, and sold on shed loads of debt – and the entire country now faces a decade of high unemployment and savage cuts to public services as a result.

To be really effective money guidance initiatives could target the City regulators, MPs, and the bright young things in the Treasury. It’s a shame they weren’t implemented earlier. A cross-party class to advise Ken Clarke and Gordon Brown may have covered the perils of a cavalier attitude to regulation. The late Eddie George would have benefitted from homework on the importance of capital ratios in the banking system. Surely report cards for the Woolworth’s management – who wiped out 25,000 jobs in one swoop – would have read ‘could do better’.

The City offers one clear lesson: advisers on commission tend to give bad advice. Former RBS chief Fred Goodwin and his contemporary Victor Blank at Lloyds TSB were both ‘advised’ and ‘guided’ by advisers who made vast profits on the toxic takeovers of ABN-AMRO and HBOS. Better money management won’t help ordinary households to avoid spiralling debt. Sir Fred and his pals, however, should surely be first on the list for independent money guidance.

See our blog post on basic bank accounts Read our report Strength Against Shocks

Tess Lanning

Basic bank accounts to solve the personal finance crisis?

It’s safe to say that the Government’s Budget announcement that banks will be forced to provide basic bank accounts to everyone is a Good Thing. The Labour Government has already halved the number of people without a bank account, which, as Darling pointed out, is a useful tool for people’s personal finances. From buying a holiday to getting wages paid in, a bank account certainly comes in handy.

But is access to a bank account the critical personal finance issue of our times? Measures to increase financial education and improve access to financial products and services have been a major feature of efforts to tackle poverty and debt in recent years.

In fact, before the banking crash in 2007, the light touch regulation of banks was paralleled by increasing focus on the ability of individuals to manage their finances. Concern about the extraordinary rise in personal debt focused almost entirely on poor people: those with the smallest levels of debt but most associated with ‘problem debt’.

But, as ippr’s recent report Strength Against Shocks showed, people rarely get into financial difficulty because of ‘bad’ financial management. Poverty, sickness and unemployment are by far the biggest drivers of over-indebtedness.

The disparity between low pay structures and consumer-driven growth is an integral part of the story of debt in low income households. Successive governments have encouraged and supported our cultural obsessions with consumer comforts and home-ownership. But while Britain remains one of the most unequal countries in the developed world, many people on low incomes can only keep up with the Joneses – and the rising cost of living – by taking on debt.

Banks, as we know, have been only too happy to oblige, offering no-income-no-job-no-assets loans and mortgages. Low income families that took part in our research had been inundated with calls, letters and visits from loan companies urging them to manage their poverty through debt.

Financial products simply offer practical ways for poor people to manage limited resources, and access to basic bank accounts barely grazes the surface of Britain’s personal finance crisis. A radical pre-election pledge this is not.

Tess Lanning, researcher, ippr