The Saving Gateway: Operating a national scheme

A Submission by the Building Societies Association

Introduction

1.     The Building Societies Association (BSA) represents all 59 building societies in the United Kingdom. Building societies have total assets of just under £350 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, more than 20% of the total outstanding in the UK.  Societies hold about £215 billion of retail deposits, accounting for more than 20% of all such deposits in the UK.  Building societies also account for over 38% of all cash ISA balances and over 70% of all cash CTF balances. These figures suggest that building societies have been enthusiastic supporters of the new savings markets created by the Government in recent years. Building societies employ over 51,000 full and part-time staff and operate through more than 2,000 branches.

2.     The BSA supports the Government’s objectives for the Saving Gateway scheme, which are to develop a saving habit in those on lower incomes who wouldn’t normally save and the promotion of financial inclusion by instigating contact between new savers and mainstream financial service providers. Furthermore, we wholeheartedly support the Government’s principle that the scheme should be kept as simple as possible to benefit both savers and providers. This should remain paramount throughout the process of designing the scheme. Overall, the BSA would like to see the scheme expanded to a wider target group and a greater amount of saving encouraged via a high match rate.

3.     Research commissioned by the BSA concluded that psychological barriers were important in preventing people from saving, often more so than an inadequate rate of return (1) . The less financially capable somebody is, the more relevant these psychological factors are to the saving decision. By itself, a high rate of return (at any of the proposed match rates) will not encourage people to start to save. There also needs to be education and advice to encourage the target group to appraise how saving could help them meet their future needs. The Saving Gateway therefore faces many challenges to get those on low incomes to start to save, and we support the Government’s recognition that the scheme needs to work “with the grain of how people think”.

4.     Although not stated explicitly in the consultation document, it is likely that an individual will be eligible for only one Saving Gateway account in their lifetime. An alternative would be to have periodic “issues” of the scheme in which all eligible at that point in time could participate. This one-per-lifetime approach has significant implications on the size of the potential market, as well as on the advice and support required. The responses below are based on the premise that an individual can open only one account in their lifetime.

Market size

5.     The BSA is concerned that the likely size of the market, as currently defined by the eligibility criteria, may make the commercially viable provision of the account difficult. Demand for the product needs to be of sufficient scale for providers to commit resources to designing, implementing and administering the product, systems, training and associated marketing expenditure. Where possible, providers should be able to adapt existing products or processes to minimise set-up costs. For a product that has a two year life span, the economic benefits would need to be compelling.

6.     Based on the Treasury’s predicted market size, the BSA estimates that total deposits into Saving Gateway accounts will be about £300 million in the first year and £500 million in the second year (composed of deposits to accounts in their second year, and some accounts newly opened in the year)(2) . The total balance at the end of two years would be just under £800 million. Assuming a 50% match rate, the match earned after two years would be about £300 million, taking the total balance to £1,100 million.

7.     To put this into some sort of perspective, building societies, that have a share of about a fifth of the total savings balances in the UK, typically attract an average of around £8 billion pounds of net inflows (before interest credited) in a year, and attracted more than £16 billion of net saving in 2007. If societies attracted about the same share of the Saving Gateway market, they would attract around £60 million in the first year and approximately £100 million in the second year, and therefore a further £60 million in match payment. Over the two years, this would represent an average increase of less than 1% in building society net deposit inflows in each year, before the match.

8.     A long term commitment to the Saving Gateway scheme from all political parties would increase the viability of the scheme, but the ongoing commercial case for the scheme depends on the rate at which people flow on to qualifying benefits or tax credits, and so become eligible for the Saving Gateway. In the years after the scheme is established, we estimate annual saving inflows to the Saving Gateway accounts of about £300 million, and an annual match payment of £150 million(3) . The total balance would fall to about £450 million, or £600 million including the match.

9.     Although the Treasury has concluded from the second trial that a pound for pound match rate was overly generous, the BSA believes that the simplicity of this offer would help encourage take-up among the target group, as well as providing a greater incentive for people to save.

Q1 The Government welcomes stakeholders’ views on the provision of advice and support on the Saving Gateway, and on the role of intermediaries in providing advice and support.

Support and Advice

10.     The target group is likely to be hard to reach, and may have low levels of understanding and confidence in financial matters that present barriers to them taking part. Support and advice are vitally important to overcome these obstacles and increase participation in the scheme.

11.     As individuals are likely to be allowed just one account in their lifetime, support and advice are also important to ensure that potential participants open their account at the optimal time, such that they are able to take advantage of the benefits of the scheme by saving regularly. In reality, this is likely to be as they are about to come off benefits or tax credits, but are still eligible for the Saving Gateway. It is unlikely to be as soon as they become eligible for the scheme.

12.     Potential savers are likely to need support to inform them what to expect in the account opening process, and what forms of identification they need to take along. This is because the account opening process and dealing with a financial institution for the first time could be daunting for the uninitiated. The first trial emphasized the importance of help and encouragement in overcoming some people’s disengagement with financial institutions(4) . Increasing understanding can be the most effective way of reducing unfounded fears and lessening the chance of unsuccessful account openings where participants fail to provide the necessary documentation.

13.     It is also important to recognise that the participants will require advice and support for the duration of the account and when it matures, as well as prior to and at account opening. This may include advice on writing cheques, setting up and using a standing order, on whether they are exempt from tax on interest income, or an explanation of the available options when the account matures.

14.     Providers of Saving Gateway accounts, the Government and intermediaries are all likely to have a role in raising awareness of the scheme and providing support. However, word of mouth within the target group is likely to be the most powerful communication channel. Potential providers, such as building societies, would of course promote to the target group the product they offer, and would help potential savers understand the product and guide them when opening and using the account. However, building societies may be constrained in the extent to which they can give advice, such as advising when it would be appropriate for an eligible individual to open an account, if, for example, the individual had debts that it might be beneficial to pay off first.

15.     The Government has a major role in promoting awareness of the scheme. However, relying on the general HMRC website is unlikely to be sufficient in providing advice to those on the margins of the financial mainstream. Furthermore, it would be wrong to use the internet as the main information channel, as the target group may have limited access to such facilities. Direct mail linked to the receipt of benefits or tax credits would probably have more impact.

16.     In general, building societies would be happy to work with intermediaries to provide support and advice about the Saving Gateway. Many societies already have working relationships with housing associations or credit unions in other areas of activity, and increasing the reach of the scheme would be likely to make developing or extending such relationships worthwhile.

17.     However, the experience of providers of matched accounts in America suggests that the relationships work best when the roles and responsibilities of each partner are clearly defined(5) . This would most likely be a matter of negotiation between the parties involved, but the design of the scheme and its associated marketing plans should take into account the duality of the provision of support. The negotiation should consider the specific partner’s capability and capacity for the required roles, which are likely to include providing information and increasing awareness, advocacy, recruitment and encouraging saving during the life of the account.

18.     The financial service provider is likely to need to take the lead role in this relationship, but the relationship needs to be flexible to suit local needs due to third sector partners generally being small in size. Therefore, the Government’s design of the scheme could encourage third sector participation, but should not be overly prescriptive in how this works in practice. When considering the role of intermediaries, the principle of simplicity for savers and providers should remain paramount, as should the goal of developing financial capability by exposing new savers directly to financial institutions. The need for extended reach to the target group needs to be balanced against these aims.

Q2 The Government welcomes stakeholders’ views on the proposed account opening process.

Q3 The Government proposes that it will automatically issue confirmation of eligibility to a Saving Gateway account to individuals through, for example, a voucher or a unique reference number. The Government welcomes views on the form that this confirmation of eligibility should take.

Account opening

19.     The account opening process using a voucher or unique reference number seems sensible, as this would enable providers to verify eligibility simply. A voucher or reference number is preferable to other opening processes, notably self-certification, which would probably lead to confusion about eligibility. In addition, the target group, who are likely to have low levels of financial capability, are likely to find the possession of a physical voucher or number a useful stimulus to open an account. Obviously there would need to be safeguards to protect against fraudulent vouchers being used, and other checks at account opening, such as those relating to anti-money laundering, would still need to be in place.

20.     A sensible length of time in which the voucher or unique reference number can be used before it expires is 12 months. This would fit well with the annual registration for tax credits, but there should be a universal rule to maintain simplicity, rather than a different time limit for benefit recipients. Given participants’ relatively low levels of financial capability, giving them time to act is likely to help to increase participation. Also, if individuals have to choose the optimal time for them to open an account, too short a time limit risks pressurising them to use the voucher when they are not best able to take advantage of the opportunity that flows from it.

Q4 The Government welcomes views on the length of the time period within which providers should be required to make the match payment to the saver’s account. It is necessary to balance the need to get the match payment to savers quickly after the account matures with the time needed by providers to calculate and make payment

21.     Assuming the match payment is a simple calculation, such as 50% of the highest balance, it should be possible for providers to pay promptly, if not immediately on maturity. As HMRC are expected to be able to reimburse providers within a few days following the submission of the monthly return, fairly rapid payment by providers should not be an issue, particularly because HMRC should have ensured an individual’s eligibility far in advance of the account maturing and providers should not be liable for any match that is paid to somebody who later turns out not to have been eligible. If there is a significant period of time between the provider making payment and being reimbursed by HMRC, then some form of commercial arrangement may need to be put in place to compensate the provider.

Q5 The Government proposes to allow Saving Gateway accounts to roll-over into ISAs and would welcome stakeholders’ views on this point.

22.     Saving Gateway accounts should default to standard branch-based savings accounts on maturity. The default account should probably maintain ease of access as one of its primary features. Whatever the default, though, consumer choice should prevail. This includes the ability to roll into a cash ISA account, should participants so choose. However, there is a risk that if ISAs are to be the default this could lead to complications if Saving Gateway savers have already subscribed to a cash ISA in the same tax year, and may add to the complexities that new savers have to comprehend at the maturity of their Saving Gateway account. Therefore, the Saving Gateway balance that is rolled over at maturity should not count towards the ISA annual subscription limit. Instead, the balance should be treated in the same way as a transfer from an outstanding ISA balance from a previous tax year.

Q6 Are there any other matters, beyond those listed in Chapter 5 that should be prescribed in the rules governing the operation of Saving Gateway accounts? Consideration needs to be given to balancing the need for accounts to be well regulated and fair for savers with the need not to impose unnecessary regulatory burdens on providers.

Rules

23.     The requirement for providers to issue a statement each quarter may be overly burdensome, and an annual statement may well be sufficient. This is particularly the case if the account carries a passbook, something which Saving Gateway participants might find useful in keeping track of their savings(6) .

Q7 The Government would welcome views on what issues there might be in making online filing the sole means for the submission of returns to HMRC.

24.     Making the online filing of Saving Gateway returns to HMRC mandatory will not be a problem for the majority of building societies, but there are some societies and, we suspect, some credit unions, that currently do not make submissions in this way. These tend to be smaller societies. Mandatory online filing could therefore reduce the potential coverage of the scheme to some extent.

Q8 What lead-in time would be required by providers to develop the systems needed to support any changes required to administer Saving Gateway accounts?

25.     The lead-in time allowed for providers to develop the necessary products and systems and to provide the relevant training of staff should be at least a year. This should also allow links with relevant intermediary groups to be established. In the 2008 Budget, the Chancellor of the Exchequer stated his aim that the first Saving Gateway accounts are opened in 2010. To give providers twelve months for systems development would mean the final design needs to be determined by early 2009.

Q9 The Government would welcome views on any issues raised by the process of transferring Saving Gateway accounts between providers, including what information a new provider would require from the previous provider in order to transfer the account.

Account transfers

26.     The transfer of accounts should be kept as simple as possible from the point of view of both the provider and the saver. Providers are likely to require the saver’s name and address, the unique Saving Gateway reference number (or National Insurance number), the date the account was opened, the total balance (including interest) at the date of transfer, the match earned by the date of transfer and any net deposit or withdrawal in the current calendar month. It would need to be made clear how such transfers would need to be treated on subsequent submissions to HMRC.

Conclusion

27.     The BSA supports the principles of the planned Saving Gateway scheme, and believes the general design of the scheme is well thought out. In particular, we support the notion that the scheme be kept as simple as possible to enable the target group to understand the scheme, and to make it viable for those providers that choose to do so to offer the product. However, the BSA is concerned that the size of the market as limited by the proposed eligibility criteria mean that the commercial case for providing the Saving Gateway is not immediately compelling.

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