British consumers are still not saving enough for a decent retirement, the head of the Financial Conduct Authority said in a speech in the City of London on Wednesday night.
In his annual Mansion House speech, the FCA’s chief executive Andrew Bailey said the biggest challenges facing financial services and society were an ageing population and providing a decent income in later years.
“There is a clear risk that the savings rate for retirement is for many people too low to meet their expectations of retirement,” he warned.
Looking at the role that the housing market plays in many retirees’ income plans, Bailey said that there is “more we can do” as a regulator to make lending more affordable to older borrowers. He fears that the increasing digitalisation of financial services risks leaving older people excluded from the best deals.
The FCA is planning to publish a pension strategy paper later in the year.
The regulator is also concerned at how quickly people get into debt with credit cards and loans, and find making repayments increasingly difficult to make despite record low interest rates. “We want people to get assistance much earlier,” Bailey said, but stopped short of bringing in a cap on credit card charges – a proposal advocated by some debt charities.
He also focused on overdraft charges. “Many consumers don’t seem to know the cost implications of using unarranged overdrafts”, Bailey said, and that regulator is looking at whether “fundamental change” is required in this area of financial services.
Car finance contracts are often seen as a problem area by debt campaigners, especially the rise of Personal Contracts Plans (PCPs), in which car buyers pay a monthly amount to buy new cars. But the FCA chief executive said that the regulator does not see “the shift to PCP lending as per se bad”.
“It seems to me to recognise the nature of a car as an asset, that is, consumers are comfortable renting rather than owning the car,” he added. But he recognised that consumers do not often understand the terms of the lending in PCP contracts.
Bailey also spoke at length about the problems faced by consumers in accessing affordable and appropriate financial advice. He used the example of the current trend for people coming up to retirement to be offered large lump sums by companies to leave final salary, or defined benefit (DB), schemes and join defined contribution (DC) schemes instead. A recent Morningstar article highlighted the case of an investor who was offered £850,000 to transfer out of a DB scheme offering a guaranteed £22,000 a year in retirement.
“The transfer of a pension saving from a DB to DC scheme is one of the most complex transactions an individual can undertake, with a genuinely high degree of uncertainty around some of the key variables that drive outcomes. In our supervision work, we see good practice, and we see bad practice. We act on the latter,” Bailey said.
Bailey referred to “the advice gap”, where consumers cannot afford to or refuse to pay for, financial advice in key areas such as retirement planning.
“I think that gap is probably exacerbated by low interest rates, which mean that the cost of advice looks less favourable when compared to returns. And this probably has more of an effect in areas where the fixed cost of advice – which is inevitable – looks unfavourable relative to the smaller amount of investment involved.”
The regulator is working to improve the clarity over the difference between advisers providing “guidance” to clients as opposed to offering concrete “advice” – a confusion that often leads to complaints against IFAs in regulated products.
Tom McPhail, head of policy at Hargreaves Landsdown responded: “The Treasury keeps salami-slicing away at tax-free allowances, undermining confidence and increasing complexity. The FCA’s statutory objectives do not include actually encouraging people to save and invest; a well-run regulatory system without any customers is not much use to anyone.
"Across the DWP and the Treasury there needs to be a clear focus to work with industry and regulators, actively promoting a culture of personal financial responsibility, engagement and provision for the future.”
