We have been undertaking a stocktake of the critical policy issues in financial services to help us plan our work and target our campaigning activities. Below we summarise what we think are the major issues facing consumer groups, policymakers, regulators and, of course, households.
The issues are grouped into the following categories: consumer issues; major public policy issues; wholesale and institutional market issues; external threats to financial inclusion; and consumer policy theory. Below are brief abstracts of the key policy issues we identified but there are also links to ‘mini-essays’ which explain in more detail why we think these are major concerns. We have not included detailed policy answers as each of the priority issues would require a separate policy report.
We would welcome any feedback and are keen to hear from organisations who are interested in exploring ways of working together to tackle these major problems. We are also keen to hear from potential sponsors who might be interested in funding further work on these issues.
It is only fair to acknowledge that much progress has been made in ‘retail’ financial services – particularly in terms of cultural and behavioural change. There is of course much still be done and there are always new risks emerging and major issues still to be dealt with especially in relation to:
- Financial exclusion and underprovision especially in response to the new economic and financial reality facing households and the financial services industry;
- Major public policy challenges such as affordable housing, pensions and long term care;
- Reforming wholesale and institutional financial markets so they work better for society; and
- More generally, changing the way we understand market failure and develop financial services policy – this may not seem an obvious problem but unless we change the way we make policy we are condemned to repeat the mistakes of the past.
Progress has been very slow on some issues so a renewed effort is needed in 2015. There are a number of emerging issues where the problems are so daunting that these cannot be fixed in one year – but work needs to begin to prevent any further deterioration in consumer detriment. There are also a number of issues on which we need to maintain constant vigilance and be alert to potential crises or risks and events that threaten to reverse progress already made.
Most of these issues relate to what we might call ‘retail financial services’. But our own research suggests that the cost to society of market failure in the hugely important wholesale and institutional financial markets is much greater than the cost of failure in retail financial services. However, civil society groups have largely been absent from the big debates on the role and efficiency of the UK’s all important wholesale and institutional financial markets. So we have included three issues (asset management, financial intermediation, and financial networks and system resilience) which we think civil society organisations could influence this year. In terms of our wider priorities, we will return to the wholesale and institutional markets at a later date.
The pensions free-for-all: the annuity reforms announced in the last budget were heralded as providing consumers with greater choice and freedom with regards to retirement planning. But in our view, this will introduce greater risks and inefficiencies into the pensions market. Robust consumer protection will be needed but we are also in a race against time to develop a NEST type default retirement product to protect consumers. More generally, we need to develop safer, more efficient ways of helping consumers ‘decumulate’ pension assets to produce a safe income in retirement – see Funding income in retirement and decumulation options in the section on Major Public Policy Issues.
Access to fair and affordable credit: with tougher regulation clamping down on payday lending, what can we do to promote access to fair and affordable credit for those who need it? How do we help alternative community lenders maximise their potential and play a bigger role in providing affordable credit? What is the role of financial innovation and new forms of distribution – including employers and other trusted intermediaries – in improving access to fair and affordable credit?
Building financial resilience and financial security: with many vulnerable households still facing huge levels of overindebtedness and with low levels of savings to provide a financial cushion, we need to help households build financial resilience and financial security. Innovative ways of helping households build financial resilience and expanding the role of trusted intermediaries such as employers, social housing providers and charities are critical.
Access to banking: much progress has been made on access to banking and consumers will soon have a legal right of access to a basic bank account as a result of new EU legislation. But more needs to be done to ensure excluded consumers get fair access. We also need to face up to the issue of ‘free banking’ which could be causing major distortions in the market.
Cybercrime and financial fraud: innovative technology and greater use of the internet brings many benefits for consumers including improved access to financial services. But increased reliance on technology also introduces new risks for consumers.
Socially useful financial innovation R&D: we now know much about why markets fail, the level of financial exclusion, who is excluded, the root causes of exclusion. But we now need to focus on financial innovation that is socially useful. Priorities are new products, new forms of distribution to reduce access costs, new financial infrastructures and more effective ways of promoting positive consumer behaviours. The role of trusted intermediaries such as charities, social housing providers, and employers will be critical.
For more detail on these issues please see: Consumer issues
Major public policy issues
Access to affordable, quality housing: one of the major policy issues given how dysfunctional the UK housing market is and the impacts it has on overindebtedness, affordability, savings behaviours. Reforms are needed on a decent consumer protection regime for renters, keeping housing costs down, and innovative, cost effective funding mechanisms for new affordable housing.
Income and pension security in an age of economic uncertainty: with over 40% of the workforce now in non-full time/ non-permanent work, we urgently need to find new ways to provide income security and decent pensions for this group who face a future of economic insecurity and uncertainty.
Funding long term care: in addition to funding decent pensions, funding long term care is a huge priority. But the current reforms don’t go far enough to provide a long term solution and rely too much on private sector insurance products which are likely to be more expensive and inefficient than state or collective funding. New mechanisms for funding long term care are needed.
Funding income in retirement and asset decumulation products: the introduction of NEST and automatic enrolment represented real progress in terms of helping consumers build up pension assets and making the pensions industry work (although again there is still much to be done). However, until the recent announcement of the reforms to the annuities market, comparatively little attention has been paid to the other main part of the pensions equation – converting those funds built up over time into an income in retirement. Rather than improve options available to consumers, the annuities reforms will introduce greater risks and inefficiencies into the retirement market. Moreover, while property assets are considered to be a significant potential source of retirement income, the market has not responded by creating the necessary safe, value for money home equity products. To address these risks, one solution would be to introduce a NEST style decumulation option to act as a beacon of good value for consumers to help them make better decisions and promote some real competition in the market. Another potential solution would be to explore whether the state can play a bigger role in providing a low risk, good value alternative. Further work is also needed on viable home equity schemes.
For more detail on these issues please see: Major public policy issues
Institutional financial market issues
Value destruction in the asset management/ pension fund industry: the asset management/ pension fund industry is not doing its core job (providing decent risk adjusted returns) well resulting in huge value destruction of long term savings and inefficient allocation of resources to the real economy. Major reforms are needed to address conflicts of interest and market inefficiencies.
Inefficient financial intermediation/ resource allocation and the real economy: inefficient financial intermediation and allocation of resources damages the real economy by limiting access to lending and capital and creates financial risks by distorting allocation of resources withing the financial system. New forms of financial intermediation are needed along with reforms to the market to ensure resources are allocated to the most productive, sustainable uses.
Financial networks and system resilience: in the modern interconnected world, ensuring our financial system is resilient and major financial networks and infrastructure secure is now a priority. This has not always been a priority for consumer organisations but they can do much to ensure policymakers devote resources to this growing problem.
For more detail on these issues please see: Institutional financial market issues
External threats to financial inclusion
‘Big data’ and abuse of financial information: developments in the way information is collected and analysed raises many difficult issues. This can be positive in terms of tailoring products and services to consumers’ needs but without a proper governance and regulatory framework, it may be abused and result in greater financial exclusion and discrimination.
The impact of the new economic and financial reality on financial services business models: post financial crisis, we are in a new economic and financial reality with high levels of household debt, low earnings growth, poor economic growth prospects, and low financial returns. But we don’t find that mainstream business models have yet adjusted to this new reality and become more responsive to consumers’ needs or more efficient. With an increased use in technology and information to segment consumers to allow industry to focus on better off households, this could result in greater financial exclusion.
Legacy business models and transition risks: related to the above, we hope that the industry will make the transition and become more efficient, responsive and consumer focused. But during this transition, there will still be major conduct risks as inefficient firms may be tempted to adopt aggressive business practices such as price gouging.
For more detail on these issues please see: External threats to financial inclusion
Consumer policy theory
Is rolling back the state a false economy: there is a perception that because of demographic trends and pressures on public finances the state cannot afford to do as much in terms of meeting core needs such as healthcare, pensions, housing, long term care and social security. The financial services industry and others argue that to save the taxpayer money we must transfer greater risk and responsibility from the state to the individual and/ or from state funded to private sector funding mechanisms – for example, using insurance products to pay for long term care or replace social security, or private funding sources to build social housing. But the claimed savings could be an illusion – costs are just displaced and collectively society probably ends up paying more to meet the same needs. As a society, we need to be more honest about the real costs of funding core needs. We also need a new way of accounting for and presenting the comparative costs of meeting these needs through the state and private mechanisms.
The need for a new consensus between the state, civil society and financial sector to tackle chronic financial exclusion and underprovision: tackling the chronic financial exclusion and underprovision seen in the UK requires long term solutions, not short term fixes. This, in turn, needs: the proper analytical framework to understand the underlying causes of exclusion and identify the most effective interventions (including whether a market based approach is appropriate in the first place); the right ‘political’ framework to provide clarity around the respective roles of the financial services industry and the state and other providers (charities, social housing providers etc); and long term thinking and consensus to provide a degree of certainty for the stakeholders involved. Is it time for a new social contract?
Rethinking competition policy and financial innovation: if we want to make financial markets work for consumers, we may need to change the way we think about competition policy and innovation. Conventional competition indicators (numbers of providers and products, price disparities, entrants and exits etc) don’t actually tell us whether markets are working. It may sound heretical but consumer campaigners should stop worrying about the number of products and providers on the market. We need fewer, simpler, better value financial products and a complete rethink on how we judge financial innovation.
For more detail on these issues please see: Rethinking consumer policy