On the other side of the equation, a number of factors relating to the way the financial services industry operates and is structured means that consumers can be excluded or don’t have access to fair and affordable products and services. The key barriers are:
- distribution inefficiencies and ineffective competition;
- oversupply in the market and diseconomies of scale;
- complex products;
- inefficient regulation;
- public policy interaction (eg. means testing);
- basic economics of access.
Although the UK’s financial services industry appears to be competitive with hundreds of providers and literally thousands of products on offer, this activity does not always work in the consumer interest. We estimate that there are around 30-40,000 retail financial products on offer to UK consumers.
For example, the sheer number of products on offer in the retail investment and pensions sector adds to distribution costs as product providers have to compete fiercely using expensive advertising and commission payments to make sure their products are sold by financial advisers and intermediaries. Often the net result is ‘churning’ of existing customers’ business rather than genuine sales to new customers. Overall, the inefficiencies in the distribution system make products more expensive so excluding more consumers on lower-medium incomes.
Having large numbers of products and providers also means that providers don’t benefit from economies of scale which again means costs to the consumer are higher than is necessary if the market was functioning.
Complex products increase the need for expensive advice and regulation. Providers are apprehensive about distributing products to vulnerable consumer groups. These factors combine to push up distribution costs.
Effective regulation is critical as it needs to strike the right balance between providing an appropriate degree of consumer protection to inspire confidence in markets, while allowing the industry to operate to meet consumers’ needs. Unnecessary regulation benefits no one as it adds to costs for industry which are passed onto consumers so creating even further exclusion. This applies to conduct of business regulation and prudential regulation. Just as weak regulation encouraged reckless lending or risk-taking behaviour by some parts of the financial services industry, we need to avoid overregulation compounding the behaviour of the industry becoming more risk averse.
Tackling those demand and supply side barriers to access should create a better environment for retail financial services providers to extend access to a wider range of consumers.
However, even if these policies were 100% successful, the basic economics of access means that large numbers of consumers will always be economically unviable for mainstream financial providers. Radical, sustainable and innovative solutions are needed to meet the needs of these consumers. For example, we are working on the concept of social investment bonds to increase the pool of sustainable loan capital for third sector organisations such as credit unions and charities.