Saving Us From Ourselves – How Can We Make The UK More Financially Resilient?

Untold time and resource has been devoted to quantifying and analysing the UK’s low level of personal saving – and recommending ways to change it for the better. Yet despite the concerted efforts of academics, policymakers, industry and others, the number of people in the UK with few or no savings remains stubbornly high. When we do decide to save, we are prone to making poor decisions about where to put our money

Online Personal Finance Learning

True Potential PUFin’s trilogy of free, online personal finance modules is designed to give adults the knowledge and tools they need to make better financial decisions, in bite-size chunks of learning. Between May 2014 and May 2016, a total of 53,770 people registered for Managing My Money, the first course in the trilogy, which gives people the foundations for good personal finance management. This paper looks in detail at Managing My Money: what the course covers, who has taken the course, and what impact the course has had

Beyond Risk Profiling: Achieving better investment outcomes for consumers and industry

In the wake of the Retail Distribution Review, there remain fundamental questions about how best to support consumers to make sound investment decisions, particularly those with modest amounts of money to invest, for whom a poor investment decision may have a disproportionate adverse impact. The advent of new pension freedoms from April 2015, which give people more choice and flexibility about how they use their retirement savings, adds further impetus to the issue. To help inform policy and practice on this important subject, in June 2015 we brought together consumer and industry experts to explore possible new approaches to improve risk profiling and investment decision-making

How Might We Create a Secondary Annuity Market that Works for Pensioners?

In April 2015 the government’s pension freedoms came into effect, removing the requirement for pensioners to turn their pension pot into an annuity in order to retain the tax benefits. Later last year they announced plans to extend these freedoms to pensioners who had already bought annuities from April 2017, by creating a secondary market and allowing pensioners to sell their annuities on it. The government’s expressed aims were to “achieve parity between those who are able to access their pension savings flexibly… and those with existing annuities” by developing a secondary annuity market that “best suits the interests of pensioners” (HM Treasury, 2015b). Creating a secondary annuities market that works well will be a difficult task. It is an unusual and complex market, with ‘consumers’ as the sellers, firms as the buyers, prices that are individual to each pensioner, legal complexities with the original annuity provider having to agree to any sale, and the product being one of the most important we ever purchase – an income for life. There is huge potential for it to go very wrong, with the details of government policy and regulatory action likely to play a big role in whether or not the market works for pensioners. To inform the debate, and help the government and regulator decide how best to intervene, we have conducted a study of the secondary annuity market: how one might function, what problems are likely to require addressing, and which policies appear most promising in doing so. A secondary annuity market must function on two axes if it is to deliver good outcomes for pensioners: Competition must be effective in driving value-for-money Pensioners must be adequately protected from harm. Neither of these axes is as simple as they may seem. The role and potential advantages of the original annuity provider in the secondary market may present a barrier to the emergence of competition, and the behaviour of pensioners and information difficulties may render it ineffective. Preventing harm to pensioners involves not just regulation to protect the most vulnerable, but also stopping ordinary people from making significant mistakes. Our analysis suggests there are fundamental problems that need addressing, which the government and regulators have underestimated when designing their proposals, including a real risk that there will be no functioning market at all when the laws come into force next year. Normally a study such as this would analyse how the market is currently working and look for evidence of market failure, however this market does not yet exist. Instead we have focused on how the market might develop and the potential impacts policies may have on our two axes – effective competition and consumer protection – both of which there is considerable uncertainty about. We therefore caution against overconfidence in any particular option, and strongly recommend that the government and regulator review the market carefully once it has launched and reconsider what intervention is necessary and beneficial in light of that evidence

Applying behavioural economics at the Financial Conduct Authority

People often make errors when choosing and using financial products, and can suffer considerable losses as a result. Using behavioural economics we can understand how these errors arise, why they persist, and what we can do to ameliorate them. Market forces left to themselves will often not work to reduce these mistakes, so regulation may be needed. A good example is payment protection insurance (PPI).\ud \ud This paper summarises the main lessons from behavioural economics for retail financial markets: how consumers make predictable mistakes when choosing and using financial product, how firms respond to these mistakes, and how this can lead firms to compete in ways that are not in the interests of consumers. It then describes how behavioural economics can, and should, be used in the regulation of financial conduct