Furthermore, it is anticipated that the Bank of England’s Monetary Policy Committee (MPC) will today announce another quarter-point rise in base interest rates to 4.5% in a bid to cool excessive consumer borrowing. In the banking camp much talk centers on the effects of growing credit card and personal finance debts, and their short-term impact on consumers and financial services providers. In the insurance camp there is a great deal of discussion about consumer attitudes and failure to save enough in pensions and long-term savings. Yet, there is little – if any – communication between the two sides, each being pre-occupied only with their own markets and consumers. A report* about consumer debt, just published by independent market analyst Datamonitor (DTM.L) sends out a stern warning. “It is time for joined up thinking. The current personal finance situation is such that unless positive change occurs, there could be catastrophic consequences for both financial services providers and consumers alike. Banks and insurance firms must put consumer interests first. They must begin to take a more holistic financial services approach”, says Liz Hartley, analyst at Datamonitor and author of the study. The new report also urges the financial services industry and the government to join forces and take a balanced approach to saving and spending.
Spend, spend, spend culture is dangerous
Debt has become increasingly acceptable in modern day society. Unsecured consumer debt, such as credit cards, personal loans and motor finance, has reached new highs of £207 billion in 2003 in the UK.
The mortgage market has boomed, to a value of £271 billion at the end of 2003, with housing debt surging and many remortgaging their home to unlock the equity their properties hold although the money released is rarely spent on long-term savings. However, while interest rates currently make debt affordable, future rate rises could spell disaster for many, who may find they have overloaded their debt situation and may struggle to meet repayments. Worse still, increases in loan and mortgage repayments will mean less cash available to save into pensions and long-term savings accounts, leaving consumers with heavy debts and not enough savings, which will make later life and retirement very difficult.
There is an increasing view that property is a ‘get out of jail free card’ and that property will be the new pension. Many consumers are also using buy-to-let property as a kind of pension replacement, regarding the property as a whole asset to be sold at retirement, or using rental income as a pension supplement or substitute. However, this is a high-risk attitude, as the retirement income is dependent on property and rental values. Rental downturns and the threat of a negative equity situation could lead to potential pension shortfalls. With financial portfolios overweight in property, people are storing up trouble ahead if and when the property market crashes.
Property crash could leave consumers high and dry
Consumers are not striking a balance in their finances and banks and insurance companies need to work together for the best interests of consumers. Each side must look at the wider picture of personal finance, rather than solely looking out for their own interests.
Currently, the property market is proving too lucrative and attractive for homeowners to say ‘no’. In contrast, interest and confidence in pensions is low. There must be a significant improvement in pensions performance if investors are to move back into the long-term insurance market. Without incentives or greater earnings growth to enable people to enter the pension market, consumers may be left high and dry when a property crash does occur, leaving them with little alternative savings reserves on which to fund their mature years.
Financial services companies have a responsibility to their customers to spell out the risks of current portfolio choices and to warn consumers of the dangers they face. The time has come for insurers to add their voice to the FSA, DTI and others in raising concerns over current levels of debt. Banks are already under pressure to take a more responsible attitude to spending, but pressure is largely coming from those concerned about the ability to pay in the short-term.
“With the lines between banks and insurers increasingly blurred, companies should consider innovative ways to combine the cost of buying a home with contributing to a personal pension. Offering better mortgage rates to consumers who are also contributing into a pension scheme with the same company could be just one way forward. The industry must try harder for the sake of consumers and their long-term financial health. There must be more discussion about the long-term impact of lenders’ policies and financial services companies need to help consumers rebalance their finances,” concludes Ms Hartley
