By Lisa Walls-Hester on Friday 20 May 2016
A speech made by the Bank of England’s chief economist, Andy Haldane, this week is getting a lot of press attention because he admitted that he didn’t understand pension products.
Haldane said consumer confidence in the financial industry is being damaged because providers use too much jargon and the system has been mired by the loss of the personal touch on the high street.
Haldane said, “I consider myself moderately financially literate - yet I confess to not being able to make the remotest sense of pensions.”
His comments come after a series of reports which evidence that both high street and workplace pensions are too confusing for the general public.
The Telegraph is running a poll: 80 percent of respondents agree that pensions are too complicated.
At the time of writing, there were 2,880 voters.
Haldane was presenting at the New City Agenda annual dinner and added “Conversations with countless experts and independent financial advisers have confirmed for me only one thing - that they have no clue either. That is a desperately poor basis for sound financial planning.”
Is this widespread confusion reserved just for pensions products or can we say the same thing about alternative finance products and platforms? As the market matures we are seeing more methods of investing and increasingly complex and hybrid products rolled out. If finance professionals don’t understand these products are we in danger of baffling retail investors and turning them away from the industry altogether?
The ever-growing list of ISA types and supposed tax ‘efficient’ savings schemes for investors doesn’t help; it just adds another layer of jargon and complexity that turns investors off.
The Financial Conduct Authority has gone someway to protecting retail investors, it stipulates that they cannot be offered certain complex financial products and advises platforms to make sure investors are educated and aware of the risks of investments. But regulation doesn’t give the consumer much confidence, despite being one of the most heavily regulated industries in the world, the Banks still managed to pull off wholesale scandal, fraud, and mis-selling.
Mistrust of financial products and providers is still pervasive throughout the entire finance industry and will more than likely take a generation to undo.
To win over retail investors the alternative finance industry needs to simplify their products and go back to basics. Explain to potential investors not just the risks of an investment turning bad but the concept of owning equity in enterprises and lending to them. What are the regulations and legal framework if I become a shareholder? Who can invest? How do I calculate my net worth? What platform or tax scheme should I be using?
Navigating the platforms and products is a challenge for novice investors. While most platforms offer some kind of lending guide or learning centre these are still full of jargon and assume a basic level of enterprise or investment knowledge.
Standardised products and platforms would aid retail investors trying to navigate the market, but this is never going to happen. Platforms are launching new investment instruments and compound products on a regular basis in a bid to differentiate from competitors and find their niche in an increasingly crowded market.
Micro businesses now makeup over 95 percent of all UK business1 and because of this shift in the economy many commentators believe that enterprise and entrepreneurship education should no longer be limited to higher or extra-curricular education but be widened to the national curriculum.
If the UK’s burgeoning alternative finance industry is nurturing a nation of lenders and investors shouldn’t we also, therefore, include investment and personal wealth management in school lessons?
The chief economist suggests revamping the school mathematics syllabus to make the subject less abstract and more practical, focusing on topics such as interest rates and monthly budgeting.
“Sad to say, payday lenders have a greater resonance to many people than Pythagoras’s theorem,” he said.
He believes the solution includes a combination of education for the public to teach customers more about finance, and for the industry, to teach bankers and other financiers more about the public which they aim to serve.
I agree, Government initiatives and education curriculum changes will be slow to implement, in the meantime, it’s down to industry providers to educate consumers and simplify their offerings and processes to ensure that retail investors understand the concept, the products and trust the providers.
Haldane also criticizes the industry for the closure of bank branches which has removed personal relationships from the finance industry. This comment is particularly interesting in the context of the peer-to-peer lending model, which is built up around the premise of stripping away physical infrastructure.
He says “Service (used to be) customised and personalised, it delivered interactions with customers. This imbued banking with personalised trust.”
Is that the key for platforms to get a market advantage? A real human, who knows your circumstances and who can explain the products without any hard sell?
This concept is working well for Folk-to-folk, whose ethos is ‘deal with people, not just a website’. It claims to be the only Peer-2-Peer lender in the world with a high street presence and has recently expanded and now has offices in Cornwall, Devon, and Somerset. Folk2Folk’s High Street presence provides an opportunity for face-to-face interaction. The company is focused on expanding the business nationally.
As alternative finance advances into the mainstream, the platforms that offer uncomplicated products with a personal service element will get the greatest market share.
Sources: 1 House Of Commons Briefing paper, 7 December 2015, Business statistics. 5.1 million (95%) businesses were micro-businesses – employing 0-9 people. Microbusinesses accounted for 33% of employment and 18% of turnover.