The Financial Inclusion Centre has published its new Policy and Risk Outlook which identifies nearly 30 major policy issues and risks which need to be addressed if financial markets are to work for society.
The resilience, efficiency and conduct of the UK financial services industry is critical to the economic well-being of UK households, the ‘real economy’, current and future generations.
Retail financial services has historically been the focus of consumer group and media scrutiny. A litany of financial misselling scandals (now costing £50bn according to the latest tally) has left a legacy of mistrust and low levels of confidence in the industry. On the face of it, there have been improvements in the conduct of firms in retail financial services. But serious concerns remain about the dominant culture. All this is bad enough in its own right but a wider cause for concern given how much consumers are expected to rely on retail financial services in the future.
Households are expected to use financial products and services to build financial resilience and long term financial security. But, much of the industry has not adapted to the new economic and financial reality forged by low returns, technological change, more realistic regulation, changing labour markets, and squeezed household finances. The industry is becoming less relevant for growing numbers of economically vulnerable households.
Financial services isn’t just a pure consumer issue. Financial services already play a significant role in meeting public policy needs such as housing, retirement incomes, long term care, and social security replacement. This role is expected to increase over the years as policymakers attempt to transfer risk and responsibility for meeting these needs to citizens. But, the financial services industry isn’t ‘fit-for-purpose’ to provide the products and services people need.
Sitting behind retail financial services are the huge wholesale and institutional financial markets and financial infrastructures. These markets and infrastructures are of national economic interest.
We have only begun to understand the conduct failures in these critically important markets. Our analysis suggests that inefficiencies and market failure (such as resource misallocation and poor investment performance which undermines retirement incomes) in these sectors have a greater impact on the economic welfare of households and the real economy than retail financial services. Despite their importance, wholesale and institutional financial markets receive comparatively little scrutiny from civil society.
Behaviour and activities in financial markets continue to create systemic risks and threaten economic resilience. Financial markets can exacerbate regional, intra and inter-generational economic inequality.
Market failure doesn’t just harm consumers, it can harm the interests of firms – for example, high charges on investment funds extract value from consumers’ savings and reduce the amount of investment capital that reaches firms. Market short-termism affects the ability of firms to invest for the long term.
That is the state of play now. Financial markets and services are not working well for society. There is much to be done to remedy existing failures. But, more challenges lie ahead. The environment in which financial services operates is being reshaped by a range of powerful external forces creating a range of risks and challenges for the industry and its customers.
On top of tackling the existing crises identified here, we now have Brexit to contend with. It all depends on which form of Brexit the UK adopts (or is forced to adopt by the EU). But Brexit could be potentially very damaging to UK financial consumers and households whether through the loss of valuable consumer protection measures or the creation of new financial stability risks. Moreover, Brexit risks causing ‘policy blight’ in the Government and regulatory agencies. Senior decision makers will be focusing on Brexit and there may be less time and resource dedicated to dealing with the ongoing public policy crises described here.
It is important that consumer groups, civil society, policymakers, regulators and, of course, the industry itself understand the current and emerging risks and policy issues. To identify the major risks and policy issues we used a two stage process:
- We analysed the forces shaping the environment for the financial services industry ie. socio-economic, demographic, technological, commercial, and political factors; and
- Applied four tests to assess how well financial services will respond to these challenges and identify which sectors and activities create the greatest risks for consumers and the real economy.
From this process, nearly 30 risks and issues emerged. To provide some structure, we have grouped these into the following areas:
- Retail financial services including financial inclusion.
- Wholesale/ institutional markets, and financial infrastructures.
- Major areas of public policy in which financial services has a role.
- How regulatory and public policy is developed.
Much more work now needs to be done to develop the robust policies to address the risks and issues identified here. As a small, non-profit organisation we have limited resources so would welcome the opportunity to work with other civil society organisations, regulators and progressive firms in the industry to make markets work better.
The Policy and Risk Outlook can be found here: Financial Inclusion Centre policy and risk outlook 2016 final