This blog explores the FCA’s work on intergenerational differences to date and considers what practical changes this might eventually lead to in the FCA’s supervisory approach. In summary, whilst the FCA is yet to set out a concrete set of policy changes, we think that this intergenerational emphasis could lead the FCA to:-
The financial challenges and needs that different generational cohorts face is a topic quickly rising up the FCA’s agenda. The FCA’s 2019/20 business plan identified ‘demographic change’ as a key priority for the regulator; and in a recent speech Andrew Bailey, the FCA’s Chief Executive, said that “The most important issue that the FCA faces in the long-run are the forces shaping the intergenerational issues.”
- Increase its thematic emphasis on products and activities and make a corresponding reduction, at least from a “business as usual” perspective, on individual firm supervision;
- Encourage firms to launch new products and services targeted at different generations through Project Innovate;
- Relax some its existing regulations where these may act as barriers to new products/services which could mitigate intergenerational differences; and
- Scrutinise firms whose products poorly target consumers’ needs and who do not take sufficient account of such needs in an intergenerational context.
Implications for firms
To date the FCA’s work on intergenerational differences has been largely factual in nature. The FCA’s May 2019 discussion paper (DP) on Intergenerational Differences (DP19/2) set out data on each generational cohorts’ wealth and assets and explored their differing financial needs across a range of financial products.
However, some of the FCA’s commentary and emphasis also points to a number of areas of potential regulatory change longer term. In particular:-
- The FCA could reduce its supervisory emphasis on individual firms or financial sectors and step up its cross sector focus on suites of products and activities. Andrew Bailey’s speech specifically cites Japan as a country from which the UK could learn and, importantly, the approach taken by Japanese Financial Services Authority (JFSA) as an example of what a regulatory response to intergenerational challenges could look like. Bailey notes with approval that “the Japanese regulator took steps to transform its current entity and sector-based regulatory framework into one oriented towards functions and activities.” Adapting the FCA’s approach along these lines could potentially lead to firms facing new lines of regulatory scrutiny, across a broader range of products and markets, rather than traditional firm-based view that often characterises supervisory relationships at present.
- The FCA could look to encourage firms to bring forward new products/services tailored to the specific needs of different generations. One way the FCA might look to help firms to do this would be through Project Innovate and the regulatory sandbox. For example, the FCA already set up a specific advice related unit within Project Innovate to look at encouraging new robo-adviser and other advice related propositions, and could well take a similar approach for products that seek to address intergenerational differences.
- The FCA may review its rulebook for regulatory barriers to new products/services as well as regulations which may exacerbate intergenerational differences. For example, the FCA could look to relax certain rules related to mortgage lending in order to make it easier for younger consumers to get on the housing ladder. Of course any such regulatory changes would need to balance carefully appropriate levels of consumer protection against any wider potential benefits of having less restrictive standards.
- The FCA will be looking to ensure firms are targeting their products to suitable age groups, and that firms are ensuring their products meet specific generational needs. This looks to be another example of the FCA’s increasing emphasis towards more granular analysis of consumer needs within overall consumer groups rather than treating consumers “en masse”. In this regard the DP says that FCA is interested in “any market or firm behaviour that causes or may cause potential harm to consumers”, including offering products which may unsuitable to certain age groups, discriminating against certain age groups, or otherwise failing to treat all age groups fairly.
While it can clearly be useful to think about consumers in terms of age cohorts, we think the FCA will recognise that, in isolation, a generational approach to assessing consumers’ financial needs has inherent limitations. Consistent with its emphasis upon a more granular understanding of consumer needs, the FCA is likely to expect firms to recognise that there will be significant differences in financial needs even within a generation. For example, a Baby Boomer with a second home and final salary pension will have very different financial needs from one who does not own their home and is reliant upon the state pension. Similarly, Millennials with traditional jobs in highly paid economic sectors will have materially different financial needs from those working in the voluntary sector or on a zero-hours contract in the gig economy.
Importantly, this generational approach is only one of several lenses through which the FCA views financial services. The FCA’s vulnerable consumers agenda remains a crucial lens through which to view differences in consumers financial needs, and the FCA will continue to expect firms to apply this lens in the design, marketing and sale of their products.
Background: the FCA’s approach to intergenerational issues
The FCA’s intergenerational differences DP was published in order help foster a greater understanding of current and future consumer needs, and to start a “debate about what it [intergenerational differences] means for consumers, financial services, and firms.”
The FCA divides the UK’s population into three generational cohorts to help inform its thinking about the differing financial needs of consumers:
- Baby Boomers - born between 1946 and 1965
- Generation X - born between 1966 and 1980
- Millennials - born between 1981 and 2000
The FCA notes that Baby Boomers are more likely to have benefited from asset appreciation (mainly in the form of housing and pension related wealth) and are also more likely to have defined benefit pensions. Many will want to preserve their living standards as they grow older, and will also be looking to take advantage of pension freedoms or to unlock some of the value of their housing wealth (for example, through lifetime mortgages or equity release products).
Generation X tend to have the highest incomes of all the cohorts, but find it hard to save towards their pension or more generally, leaving them vulnerable to financial shocks. While they tend to have the highest levels of unsecured debts, like the Baby Boomers they have also benefited from rising house prices, and from low borrowing costs.
Millennials face difficulties in building savings and wealth for later life. They face higher housing costs, less secure forms of employment and higher levels of debt, including student loans. All of this limits their ability to save for the future.
The FCA points to five key socio-economic factors which have driven these intergenerational differences. These are:
- An ageing population – the number of people aged over 65 has grown considerably, and will continue to grow further. Elderly consumers are also more likely to be vulnerable.
- Low interest rates – interest rates fell to record lows following the financial crisis and have remained low since.
- Rising house prices – house prices have increased faster than incomes over the past 30 years.
- The changing nature of employment – the number of self-employed people has significantly increased, as have the numbers working on zero-hours contracts.
- Student funding – the introduction of tuition fees in 1998 and their steady increase means that many Millennials now graduate with significant debts. In 2008 students graduated with an average student debt of £10,870, with this figure growing to an average of £34,800 by 2017.