Part six of our FCA Priorities series focuses on demographic change and what changes the FCA has planned to ensure that the financial services market meets the ever changing needs of the UK consumer.
Ensuring intergenerational fairness is one of the biggest challenges facing policy-makers. The old rule that each new generation should be better-off than the one before has been turned on its head. The FCA recognises that this socio-economic issue cuts across multiple sectors, and the regulator is using its platform to shape the debate on intergenerational differences.
On 2 May 2019, the FCA published a discussion paper on Intergenerational Differences. This is the first time that the FCA has placed intergenerational issues at the forefront of its plans and challenged the industry to try and do more. The paper focuses on identifying the financial needs of three generations of financial service users – Baby Boomers, Generation X and Millennials.
The three generational groups are categorised as follows; Baby Boomers born between 1945 - 1985, Generation X born between 1966 - 1980, and Millennials born between 1981 - 2000.
Whilst Baby Boomers have benefited from low house prices and asset appreciation, a major financial concern for them is how to maintain living standards into retirement and meeting the cost of long term care. Generation X has also benefited from lower house prices and borrowing costs, however they are still financially stretched, often being subject to sudden financial costs, and being relied on to bridge the gap for higher education fees and housing. Despite the low interest rates on borrowing, Millennials face difficulties in building wealth. This is mainly on account of higher student debt and insecure employment.
It comes as no surprise that the FCA considers the financial services most likely affected by intergenerational wealth discrepancies are mortgages, pensions, consumer credit and insurance. Prior to the 2008 financial crash, lenders were more likely and inclined to loan money. The younger generation have been increasingly priced out of the property market and the traditional style of long term mortgages and loans do not meet the needs of Baby Boomers requiring short term financing for care, neither do they enable strapped for cash Millennials to enter into the housing market.
There have been numerous government initiatives aimed at helping younger individuals access the property market. A number of mortgage schemes involve shifting the financial risk from younger, riskier borrowers to wealthier, asset rich relatives. For this system to work, older generations are being asked to foot the bill of often expensive deposits, or instead borrow against equity in their own homes, which they might have already paid off once before. It is without doubt that such schemes enable younger generations to gain access to a market which might, at first, appear inaccessible. However, these schemes rely on the wealth of older generations who, at the same time look for financial security in anticipation of paying for costly care fees.
The FCA's discussion paper focuses on the socio-economic factors which drive intergenerational differences. However, there is limited commentary on technology and how Millennials, the most dominant users, impact the way in which generations interact with financial services.
Millennials, unlike their Baby Boomer and Generation X counterparts have the advantage of growing up with mobile technology. This means that as well as being digitally sophisticated, they are more receptive to using digital financial technologies and place a greater level of trust in operating these systems. Because Millennials are the largest users of fintech, companies work hard to attract them to use their services. As the financial services market expands its digital financial tools, such as open banking and app only challenger banks, how can the sector ensure that these services also appeal to the older consumers who tend to be more cautious in their approach?
Generation X grew up in the very early days of digital technology, but they have a relatively low uptake of using digital payments technologies. This is unsurprising, given they faced two recessions in the early 2000s and in 2008, the latter of which had a significant impact. Generation X was faced with repaying overvalued mortgages and a stagnant job market. This, coupled with the fact Generation X has a larger debt, added to the level of distrust felt towards the financial services market.
The extensive developments we have seen in the financial services market introduced by fintech companies have enabled the sector to grow rapidly amongst younger generations. For these same companies to attract older generations, they need to focus on education and transparency to build the same level of trust between consumers.
It is important that whilst the FCA has invited discussion about the socio-economic issues which lead to divides between generational groups, they do not overlook a possible digital divide which will become more apparent as more and more services become digitalised.
It remains to be seen whether the financial services regulator is best placed to address issues of intergenerational wealth discrepancies. The FCA cannot change government policy on social care funding, regulate the housing market or alter tax policies. However, by inviting regulators, governments and firms to debate on the issues, the FCA may be able to identify areas requiring change and influence policy makers.
The FCA has asked for responses to the discussion paper by 1 August 2019, and is hosting a summer conference on 2 July 2019 to discuss and debate the issues.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.