In this section we look at six critical near-medium term consumer issues:
- Protecting consumers from the fall-out from the pensions free-for-all
- Access to fair and affordable credit
- Building financial resilience and long term financial security
- Access to banking
- Cybercrime and financial fraud
- Socially useful financial innovation – research and development
The annuity reforms announced in the budget last year have been promoted as providing consumers with unheralded choice and freedom in terms of what they can do with their pensions savings. We take a different view. The reforms threaten to reverse the real progress we have made putting into place the foundations of a decent and sustainable pensions system through the introduction of autoenrolment and NEST.
In our view, the additional complexity resulting from the free-for-all will introduce even more advice, marketing and product development costs into the pension system making it harder to produce a decent income in retirement.
The reforms will expose people in retirement to even greater investment risk and make it harder to make the right choices and decisions. For further analysis on the risks associated with reforms see the commentary on Decumulation products in the section on Major public policy issues.
Clearly, much can be done to protect consumers with targeted regulation. But regulation will not address the inefficiencies that will be introduced into the pensions market.
We are now in a race against time to develop NEST style default post retirement options to provide consumers with a safe, good value, transparent choice.
Fair and affordable credit
The new consumer credit regulations are having a significant impact on the consumer credit market. In particular, the tougher approach to regulation and new price cap on payday loans has transformed the payday lending industry. Lenders will be forced to behave more responsibly and fewer borrowers should be sold loans they cannot afford to repay or do not need.
But people still need fair and affordable credit to help them meet their short term needs. The self-employed are a particular concern.
One of the other major benefits of the payday price cap is that it clears the way for alternative, community based lenders to compete on a more level playing field. Community lenders now need to step up to the mark and create and provide access to the sort of credit consumers need.
To maximise the potential of community lenders we need the following:
- a more innovative approach from community lenders in terms of product development and all-important distribution;
- a major capacity building programme to help them compete effectively; and
- new ways of channelling sustainable funding to those community lenders who can use it best to expand their reach to underserved communities.
Greater transparency on lending by major lenders at local level is critical so we can identify which areas to target development.
Building financial resilience and financial security
We define financial resilience as the ability to withstand financial shocks and involves households: not being overindebted; having access to a low cost transactional bank account; access to low cost, short term credit; sufficient emergency, liquid savings; and some form of safety net in place – whether in the form of social security or replacement private insurance (such as income protection).
Financial security we define as having sufficient realisable assets to deal with longer term financial needs such as income in retirement or paying for long term care.
But, as explained elsewhere, levels of household debt as a percentage of household incomes are expected to grow well above even the levels seen on the eve of the financial crisis. Moreover, significant numbers of households are overindebted with high levels of unsecured debts and arrears on household bills, and have low or unpredictable incomes (see new economic and financial reality, above).
To add to the problems, levels of household savings are low compared to major economic rivals, while levels of insurance and pension provision are low amongst financially vulnerable households. The net effect is that millions of households have very low financial resilience and are a long way from building up long term financial security.
Effective debt advice remains a priority. But we also urge consumer groups, debt advice charities, social housing providers and other civil society organisations such as local authorities and trade unions to develop strategies to help households move from a position of financial vulnerability, to a position of financial resilience, towards long term financial security.
One initiative we are keen to promote is for debt advice charities to develop targeted interventions for borrowers completing debt management plans to encourage them to set up regular savings plans. Building up a savings cushion is a very effective way of keeping households out of debt.
Access to banking
There have been a number of positive developments on access to bank accounts aimed at helping financially vulnerable consumers.
The new deal brokered by HM Treasury with the major banks on basic bank accounts is very welcome as it will reduce the risk of financially vulnerable customers being hit with unforeseen costs. Moreover, legislation currently making its way through Parliament should remove some of the excuses banks have for preventing bankrupts from opening a bank account. Significantly, new EU legislation will give EU citizens a legal right of access to a basic payment account rather than having to rely on self-regulation.
However, it is now critical that this new voluntary agreement with the banks is monitored and breaches enforced to ensure fair treatment and avoid the ‘free-rider’ effect. Moreover, the FCA needs to begin planning for supervising compliance with the new EU legislation to ensure banks do not put up barriers to access. More generally, full transparency on the share of basic bank accounts held by individual banks including numbers opened, closed, and declined is critical.
While major improvements are happening in terms of access to banking, there is still a huge need for innovations in banking to ensure that vulnerable household have access to good quality, low cost transactional banking services.
Finally, it is our view that we cannot resolve the problems in the banking sector until and unless we address head on the issues relating to ‘free’ banking which we believe causes significant distortions in the banking sector. We hope this year is when we finally have this much needed debate.
Cybercrime and bank fraud
The resilience of the critical financial systems and infrastructure is a priority. However, individual consumers are also increasingly falling victim to cybercrime and fraud. Recent research quoted in the Economist suggests that half of Britons have experienced crime on-line while Government statisticians estimate that card and bank fraud could contribute 3.6-3.8 million crime incidents to the Crime Survey for England and Wales (which doesn’t yet pick up this sort of crime).
If these estimates are robust, then this represents a huge level of consumer detriment. Under-reporting seems to be a serious issue and this makes it difficult to ensure this is given due priority and for the relevant authorities to allocate sufficient resources to tackle the problem and prevent it growing even further. The UK is particularly vulnerable given how connected our financial networks are and the penetration of technology and on-line shopping and banking.
Again, consumer groups could do much more to raise awareness of the problem amongst consumers, inform them of the importance of reporting crimes such as this to the authorities, and ensure the relevant authorities devote the necessary skills and resources to tackle the problem.
Socially useful financial innovation R&D
Socially useful financial innovation is a theme that runs through much our work. As a result of years of research into the subject of financial exclusion, much is known about the scale of financial exclusion and underprovision, which groups of consumers are excluded or underserved, and the root causes of financial exclusion/ underprovision. However, we think less progress has been made on research and development (R&D) into viable solutions to the problems identified by civil society.
Therefore, we think the time is right now to put more resource into and focus on R&D into socially useful financial innovations. Note that this does not always involve new financial products. In some cases, it may involve new forms of distribution, process innovation or inventing a new role for the state and/ or civil society.
The priority areas are:
- Fair and affordable credit (see above).
- New, low cost accessible transactional banking models.
- Income security scheme: a new safety net to protect the incomes of the self-employed and other vulnerable employees against financial shocks.
- Default retirement income scheme: needed to protect consumers against the risks and market inefficiencies that will result from the pensions free-for-all.
- Alternative financial intermediation: we need to bypassing dominant models of financial intermediation in wholesale/ institutional markets to help the real economy (especially small businesses/ social businesses) get access to funding/ lending it needs (see work we are doing on social investment bonds).
- Efficient infrastructure financial models: for example, special purpose gilts, social housing bonds/ local authority funding vehicles to fund supply of affordable housing.
- New forms of distribution and partnership: this is critical, but overlooked. Often the root cause of financial exclusion/ underprovision is not that the products per se are too expensive or unsuitable but distribution channels are too costly to maintain/ don’t reach target audiences. Organisations such as social housing providers and charities have a big role to play in this.
- Trusted intermediaries and changing consumer behaviour: there is little evidence that conventional forms of financial education and financial capability interventions are effective at promoting positive long term consumer behaviours. However, we think there is plenty of scope for ‘trusted intermediaries’ (charities, social housing providers etc) to capitalise on their established access with vulnerable consumers to support positive behavioural change such as building financial resilience. For example, we are keen for debt advice charities to intervene at the right point to persuade consumers who have been disciplined enough to complete a debt repayment plan to then carry on and start a regular savings plan. But there are many other opportunities for effective interventions.
We would welcome the opportunity to work with partners on this socially useful R&D.
 The National Employment Savings Trust http://www.nestpensions.org.uk/schemeweb/NestWeb/public/home/contents/homepage.html
 Published in the Official Journal, 23rd July 2014, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0092, Member States have two years from its entry into force to implement the legislation
 Thieves in the night, Economist, 20th December 2014