Cicero Policy Briefer

Issue 27, August 2008

Making consumers financially capable: it’s not all doom and gloom

By Laurence Baxter, Head of Policy and Research, Chartered Insurance Institute

On 7 July, the Treasury and the FSA jointly unveiled their long-awaited Financial Capability Action Plan, which conveyed the Government’s continuing commitment and priority to improving the public’s confidence in household money matters through a range of initiatives. Of particular interest to many observers was the update from the FSA on their pathfinder pilot for a national Money Guidance service, to start in early 2009. This was the first formal announcement on this subject since March, when the final report of the Thoresen review was published alongside the decision by HM Treasury for the FSA to take action on it.

The Government statement came only a few days after the Chartered Insurance Institute (CII) published its detailed research report on consumer attitudes and behaviours towards their finances, entitled Financial Capability: The Public’s Perspective in the Current Economic Climate. It involves a ComRes poll undertaken in May for the CII of over 1000 consumers. In many ways, the report from the financial services professional body sums up the public and economic backdrop in front of which the action plan appears. Its key messages are that:

• Consumers are anxious about the country’s worsening economic downturn and concerned about the Government’s handling of the banking liquidity crisis; however,
• The situation is not yet serious, but stakeholders should not be complacent; and
• Some of the Government proposals to improve financial capability might go a long way towards staving off the worst effects of an economic slowdown, and even restore public confidence—if they are implemented properly.

Consumers are anxious about the worsening economy, but responses do not yet suggest any widespread financial difficulty. Compared to a year ago, more than half (53 per cent) of those surveyed are less confident that their savings are safe, and nearly six out of 10 (58 per cent) people say they feel less financially secure. Over a third (35 per cent) are concerned about their job security, and over three-fifths (61 per cent) are concerned with the Government’s handling of the banking system. However, more than four-fifths of respondents (84 per cent) are not yet fearful of losing their homes, despite media coverage of rising arrears and repossessions; and two-thirds (66 per cent) say they would manage modest interest rate rises without too much difficulty. The bottom line here is that the public is, quite rightly, mindful of impending economic crisis and the effect on its household situation.

While there is no widespread difficulty, policymakers should not be complacent. The public’s fears of economic crisis might or might not be well-founded. On the one hand, the economic crisis could become much worse: the banking liquidity situation could worsen considerably, and combined with rising oil and food prices, could send unemployment and ultimately repossessions well into the double digits. On the other hand, the economic downturn could rebound, and the banking liquidity crisis could simply be a healthy correction after a prolonged period of unprecedentedly high levels of retail lending. We should be mindful of the worst case, but not drive ourselves into a self-fulfilling prophecy.

Interestingly, consumers are also aware of their low confidence in financial capability, and support doing something about it. Almost all respondents (96 per cent) surveyed in the CII report believe consumers should take more responsibility for their own financial planning, but a similarly overwhelming three-quarters (75 per cent) of respondents believe they are naïve when it comes to money matters. This is itself in stark contrast to the mere 57 per cent who responded this way to the same question in a 2004 survey.

While this demand for financial education is welcome, its effect will be not be felt for a generation. What is clearly needed—and soon—is just the sort of impartial national money guidance service of the sort currently being developed by the FSA. Such a “drop-in” service would provide impartial, well-trained but basic guidance on household finances and be critical in helping consumers.

The support for such a service showed through in the survey. It is not just the fact that almost half of respondents (45 per cent) believed they would use Money Guidance or refer it to someone that was the encouraging sign. Far more important were their responses to questions about managing finances that clearly indicate that such a drop-in service might provide practical help. For example, only around a third of consumers (35 per cent) would not be affected at all by a modest rise in interest rates, although similar proportions would have to make either modest cutbacks (31 per cent) or would just about manage with difficulty (30 per cent). A Money Guidance service might, for example, help shift those on the margins of each category of financial hardship to the next category of lesser financial hardship through free, impartial support. Such a service might, for example, suggest sustainable ways of reducing household expenditure (switching utility providers, etc). So having a drop-in service might provide practical solutions to help households deal with the inevitable stresses in store in a worsening economy.

The relationship between Money Guidance and regulated financial advice will also be critical. When questioned on how likely they were to take professional financial advice, over half (53 per cent) of respondents responded positively, particularly given the financial climate over the past 12 months. When examining this figure by social class, those in lower income households are undecided over the worth of advice. In other areas, these groups of respondents are most likely to put faith in the person selling them a financial product due to a lack of understanding. Given these findings, while an advice service may not be necessary for higher income households, for the rest it certainly would be.

Overall, this report confirms the importance of Money Guidance and some of the other financial capability initiatives outlined in this month’s Government action plan. In addition, other recent research which the CII has conducted among our financial adviser members and MPs found that only about a third (35 per cent) of financial advisers believe that a Money Guidance service would benefit the wider economy, and only just over half (53 per cent) of MPs thought this. Clearly a top priority for the Government should be to communicate exactly what such a Money Guidance service would do. Were such a communication plan implemented, public and industry confidence in it might well rise.

Despite the industry reservations and relative lack of public understanding, the proposals for Money Guidance are a central component in improving financial capability and access to financial services. In the current economic climate, a national service that provides independent, accessible, and above all well-trained guidance on money matters would be a key weapon in the consumer’s armoury for dealing with any financial turmoil.

Read the full CII report.

Laurence Baxter is the Head of Policy and Research at the Chartered Insurance Institute and can be contacted here.