The level of financial exclusion in the UK is shocking. Between five and eight million households are excluded in some way. It is not just traditional forms of exclusion – there is a much greater problem of underprovision among the population.
Half the population are not providing enough for retirement and the savings ratio is the lowest for 50 years. Forty-eight per cent of households have little or no savings while over 60 per cent have no investments to speak of. The protection gap is estimated to be £2trn. Only 33 per cent of households with incomes less than £20,000 have life insurance while only 12 per cent have income protection. In some areas, half of households do not have contents insurance.
At the same time, consumers face debt at record levels of £1.3trn. Interest rates are rising and two million people are coming off fixed-rate mortgages in the next two years.
Millions face bleak futures without sufficient assets to provide security and opportunity, dignity in retirement or decent social care. They do not have insurance to protect themselves against life shocks or access to affordable housing finance and credit. They are unable to unlock valuable home equity.
Until recently, the priority for consumer advocates was chronic market failure in the industry. The challenge now must be restoring confidence and creating a regulatory system that strikes the right balance between protecting consumers and allowing the market to operate. We cannot prevent all detriment. It is unfeasible and exacerbates financial exclusion.
The RDR focuses on retail investments but it is crucial we avoid the mistakes of the past that put products into silos. Consumers do not think in silos. There is a significant degree of read-across to other product areas and we need to take the opportunity provided by the RDR and Icob review to create a coherent and consistent regulatory framework that promotes financial inclusion and greater provision.
Can we square the circle so that regulation promotes consumer confidence while being cost-effective and allowing the industry freedom to operate?
I advocate a system called new model regulation which focuses on root causes of detriment and provides a coherent framework for principles-based regulation. It consists of three strands:
- A limited number of high level principles and rules that apply across all sectors focusing on information standards, understanding consumer needs, authorisation, training, competence and conflicts of interest, for example, aggressive remuneration practices.
- A set of standards and codes of practice tailored for each product sector to implement principles. Principles-based regulation has not been easy for many practitioners who struggle to embed the concept into business processes and miss the comfort blanket provided by rules.
- A clear, robust tariff of fines so the industry knows where it stands and consumers are confident that the FSA is on their side and serious about enforcing principles-based regulation. This tariff would be based on the gravity of breaches and level of consumer detriment.
Consumer advocates should work with the industry to set a target to streamline the rulebook by about 60 per cent using simple criteria:
- Has a regulation prevented or is it likely to prevent detriment?
- Does the regulation act as a proxy for competition? Does it require firms to adopt good practices that would be standard if competition worked?
- Is regulation proportionate?
- Is the objective of the regulation covered by another regulation?
I am confident that applying these criteria would leave us with a core set of relevant principles and rules that actually work. So I throw down a challenge to the industry. Come forward with a list of regulations or rules that you think are unnecessary. If we can get successful outcomes with fewer prescribed rules, so much the better.
Consumer advocates should work with the industry to co-produce financial services. We have everything to gain by helping the industry design products that meet consumer needs and sales processes that minimise the risk of unsuitable products being sold.
New model regulation and co-production is the only realistic chance we have to strike the right balance between protecting consumers and increasing provision. The RDR and Icob review gives us the opportunity to put this in practice.
Mick McAteer is formerly principal policy adviser at Which? and now runs the Financial Inclusion Centre – an independent, not-forprofit thinktank dedicated to creating practical solutions for financial exclusion