Author Mark Richards

The Financial Conduct Authority is once again making noises about consumer protection. But are we not overlooking the most obvious consumer protection of all – financial education?

If you had any sense you probably did not pick up a newspaper, watch a news bulletin or go online over Easter. The world news was unremittingly depressing with tension in North Korea and chaos looming in Turkey – and now there is the prospect of a seven-week General Election campaign.

The financial news – especially concerning the housing market – was just downright confusing. The BBC reported that house prices were growing at their slowest rate since May 2013, up by just 3.8% in the year to March 2017 according to figures released by the Halifax. The Royal Institute of Chartered Surveyors took a slightly different view, saying that while the market was ‘stagnant’ – and the average estate agent had only 43 properties on his books – prices were still ‘accelerating’ thanks to that same shortage of property. So no need to reach for the violin just yet…

…Especially if you own a house in postcode BN3 which, for the third year in a row, has emerged as the most desirable postcode for ‘young professionals,’ looking to buy a house. Mind you, our seaside-loving young professional will be paying a £71,000 premium to live by the sea and – from August 2017 – watch Premier League football.

So a mixture of news over Easter: but sadly, there is one story which always seems to be with us, irrespective of whatever else is or is not happening in the news. The Financial Conduct Authority (FCA) is concerned about levels of personal debt in the UK.

You might at this point spare a thought for the UK consumer: he or she has had to endure the recession, the 2010 election, the experiment with the coalition, the seemingly never-ending referendum on Scottish independence, the 2015 election, Brexit – and now another General Election will be held on Thursday, June 8th. With respect, Your Honour, which right-minded person would not want to escape all that and head for two weeks on a Spanish beach?

Not if the consumer has to borrow to do it, says the FCA. Having dealt with short-term loans, credit card debt and the misselling of PPI, the FCA has decided that personal debt levels are so high that the whole sector should be looked at.  

The FCA’s mission

Having made a start with the cap on payday lending – which FCA chief executive Andrew Bailey says has protected consumers – the regulator now wants to go several steps further. Launching their mission for the coming financial year the FCA published a 36-page document laying considerable emphasis on personal finance, including plans to protect vulnerable customers. Well, that worked well with PPI (Payment Protection Insurance) where the deadline for claims has been set at August 2019 and the total bill for compensation has now topped £40bn.

Andrew Bailey went on to point out that there had been a big surge in consumer borrowing through loans, overdrafts, credit card debt and car finance. This echoed concerns by the Bank of England, who are worried about a downturn in the economy, fearing that UK lenders could be badly hit if the economy stalls and borrowers default on their debts.

To put this in perspective though, consumer lending accounts for just 10% of all lending to households. By far the largest share is mortgage lending, which accounts for 70% of borrowing.

The FCA also faces a potential problem with Brexit – especially after Tuesday’s announcement about the General Election and the likelihood of a Conservative majority delivering Brexit. The vast majority of financial institutions in the UK will remain here and continue to offer products to UK consumers. However, those institutions will also want to continue trading with the EU – given the extent of globalisation it is impossible for them to do otherwise – and will need to comply with EU law. Will that be aligned with the protection the FCA wants to see in place for UK consumers? The short answer is ‘who knows?’

“Leaving the EU inevitably causes a higher risk of disruption to our business plan priorities,”

was how Mr Bailey obliquely put it.

Meanwhile, a House of Lords committee has also singled out ‘rent to own’ products for criticism: this is a subject we wrote about recently and you would expect controls and caps to be introduced to curb what can be excessive rates of interest.

Is legislation the answer?

The Need for Financial Education

The short answer is that legislation – across varying jurisdictions – will continue to change. It will have to: the FCA will always be running to catch up, and there will always be loopholes which unscrupulous financial institutions will exploit. As we wrote recently, you can regulate supply, but you cannot regulate demand. And where demand exists, there will always be firms willing to find a way round complex rules to exploit that demand.

A simple, long-term solution

Is there not a simpler answer than this never-ending round of oversight, calls for protection and – ultimately – yet another misselling scandal? Surely what is required, to use Tony’s Blair’s famous phrase, is “education, education, education.”

The Case for Financial Education

We have all done subjects at school that have now been made irrelevant by the SatNav and Wikipedia. In adult life, very few of us need to know about an ox-bow lake or which of Henry VIII’s wives were divorced or beheaded, died or survived.

But everyone has to face financial planning in the real world, whether it is buying a car on finance, arranging a mortgage, investing a lump sum or a myriad of other financial decisions. Why is it that the education system has taken sex education out of the hands of parents and yet not done the same for financial education?

Yes – as we have written previously – some people are good with money and some are always going to struggle: that is a reason for more education, not none at all. As it stands, if someone is struggling with their financial management far too many institutions see them not as someone who needs help but as a chance to profit. The regulators wring their hands, impose fines and ever-stricter compliance regimes – yet our behaviour remains resolutely unchanged: without proper financial education at an early age, the consumer will always be vulnerable.