Can better financial products help young people get a fairer deal in today’s economy?
The so-called inter-generational divide is now on the radar of the Financial Conduct Authority.
It has put seven questions out to all and sundry for consultation, but one sums them up as far as millennials are concerned: are financial services providers meeting our changing needs, and can innovative new products help?
The FCA digs out some worrying stats around millennial money.
😟 In 1993 first-time buyers paid around 2.4 times their average salary to buy a property. In 2018 it ranged from 3.2 times in the North to 9.4 times in London, averaging out at 5.2 times salary.
😟 62% of under-35 homeowners were helped financially by family and friends to buy their home in 2017.
😟 In 2008, students entered the labour market with an average outstanding loan debt of £10,870. By 2017, this had tripled to £34,800.
😟 Between 2010 and 2017, the number of self-employed people increased by 20% and almost half of these were in part-time roles. Nearly 3% of the working population was on a zero-hour contract.
😟 93% per cent of the UK’s 4.8 million self-employed workers have no critical illness cover to protect their income if they have long-term sickness absence.
😟 For the average millennial to be as well off on retirement as the average retiree today, they would need to grow their wealth by around 48% every year between the ages of 20 and 36.
This is all paints a grim a picture of young people’s finances. But what are the biggest sticking points? And is there any way forward?
Here are four key revelations from the FCA’s initial paper…
1. Income smoothing products could be the future of borrowing
The regulator says today’s young people “may require greater flexibility in their mortgage and credit products”, and technology is showing the way.
“Income smoothing products – usually online and mobile applications – help people smooth out the highs and lows in their income and offer an alternative to expensive forms of credit like payday lending. These analyse the customer’s bank account and related transactions to work out their average monthly income. The application then takes money away when customers have higher than average income and use that surplus either to cover low-income months or repay any loans, essentially turning irregular income into something like a regular salary.”
But it concludes: “Currently, the supply and take-up of such products is insignificant.”
2. Swipe-through credit is potentially *toxic*
It also has a warning about super-convenient credit via online and mobile platforms. “These may be more convenient for consumers and enable online transactions, but they also carry risks. In particular, the speed of transactions and ease of access could cause some consumers to make decisions quickly without fully considering the potential costs and alternatives.”
The FCA goes on to say that Klarna-style instant store credit is “designed to enable frictionless borrowing when consumers buy goods online”, but doesn’t appear to believe that this too creates risks of over-spending.
3. Innovative mortgage products could be a lifeline for Generation Rent
On housing, the FCA echoes the comments of the House of Lords committee on inter-generational fairness, which the blog reported on recently.
It says: “Some firms have responded by offering innovative products designed to enable wealth transfer between generations, such as guarantor mortgages.” But again it records that such products are “still a very small part of the mortgages market”.
4. We aren’t saving enough for retirement – but help is on the horizon…
On saving, the regulator says the changed housing and labour market means many workers, especially the young, are not saving enough money for retirement. “They would benefit from services helping them to engage more with long-term pension savings.”
It says workers in flexible employment can access a range of alternative products including individual personal, stakeholder, and self-invested personal pensions (though it appears not to know about the Lifetime Isa!)
The FCA is pinning its hopes on “good quality financial education”. It cites the new Single Financial Guidance Body (which merges Pension Wise, the Pensions Advisory Service, and the Money Advice Service) as the new one-stop shop for free and impartial support on money, pensions and financial plans.
It concludes with another nod to the fintechs : “Technological advances have allowed micro-saving and investment apps to enter the market, with the potential to help to increase long-term savings rates in the future. These make saving and investing manageable both in terms of the time they take and the investment they require. These apps could also make pension investments more appealing.”