The FCA Financial Lives Survey was published on 18 October 2017. Titled “Understanding the financial lives of UK adults”, the FCA will use the Survey to identify potential consumer detriment. Results have already informed its Financial Advice Market Review Baseline report, the Ageing Population and Financial Services Occasional Paper, and will inform the forthcoming Approach to Consumers paper.
Moreover, the FCA will compare this year’ survey with future survey results, to try and measure the impact of policy change (which will naturally be wider than that implemented by the FCA alone).
In line with accepted independent financial advice practice, the FCA has organised its analysis by life cycle stage (i.e. 10 year age bands). Anyone familiar with asset accumulation and decumulation, and life cycle stages, can afford to skip much of the centre of this near 200 page document.
Despite the somewhat hysterical coverage in papers such as the Financial Times, and the Daily Mail, the overall picture is positive.
62% of UK adults have no unsecured debt (credit and store card debt not paid off in full every month, non-mortgage loans, motor finance and overdrafts). The average 35-44 year old owes £5,130. Those aged 75 and over owe £540. 18-24 year olds owe on average £1,460 excluding Student Loan Company loans but £8,750 including them. That places all average UK adults within the scope of a Debt Relief Order (DRO), an inexpensive alternative to bankruptcy (£90 fee), which discharges debts of up to £20,000 within a year, so long as individuals have less than a thousand pounds in assets, and no more than £50/month in spare income.
Half (50%) of 35‑44 year olds with a mortgage owe between £100,000 and £250,000, and one in ten (10%) owes more than £250,000. However, this is offset by the two fifths of 35-44 year olds (41%) with a household income of £50,000 or more, and the one fifth (20%) with a personal income of £50,000. That means the squeezed middle has a mortgage to income ratio between 2:1 and 5:1, which is by no means fatal.
Notwithstanding, those interested in financial comfort should avoid having children:
“one third (33%) of 35‑44 year olds with three or more financially dependent children are over‑indebted, compared with less than one fifth (18%) of those with no children.”
The FCA Financial Lives Survey is a must read for readers concerned with aspects of vulnerability. They will include Compliance professionals, first line of defence Monitoring and Testing teams, and auditors overseeing Compliance. The FCA sets out the following vulnerability characteristics:
· low financial capability,
· a physical or mental health condition,
· low financial resilience,
· recent life event(s),
and then provides the incidence rate for these occurring individually, or at the same time. For those used to identifying vulnerability by reference to capability, ill-health and life event alone, the inclusion of financial resilience poses a challenge. Credit Risk/ Conduct Risk policy owners would do well to revisit the intersection between affordability and vulnerability assessments. This requirement becomes especially acute where customers are placed in collection and recovery processes.
The rest of the survey gives metrics on trust in financial providers, self-confidence in financial literacy and money management, and financial products held (together with the channels used to access them).
Helpfully, characteristics of low financial resilience are given (Table A.2). These should form the basis of screening criteria for lenders (bearing in mind that they already consider total indebtedness):
· Missed payments in the last 3 or 6 months (across household bills and all credit commitments)
· No investable assets
· A rent/mortgage increase of £100 per calendar month would be a stressor
· Having less than a month’s worth of total outgoings in cash savings.
Life events leading to vulnerability include:
1. losing job/redundancy/ reduction in working hours (against wishes),
2. serious accident or illness (or of a close family member),
3. death of a parent, partner or child,
4. becoming the main carer for a close family member
5. relationship breakdown/separation, divorce,
Taking these in turn, permanent health insurance with optional involuntary unemployment cover is available (and mitigates loss of income arising from the first two). The financial impact of the death of a partner/ parent may be diminished using life insurance policies.
It’s hard to find cover for loss of income arising from becoming a carer. In the standard scenario of an adult caring for elderly parents, permanent health insurance doesn’t encompass the retired, and critical illness is for a defined list of conditions which excludes dementia (but does include Alzheimer’s). Pre-funded care home fee policies are no longer available. However assets can still be placed in a long term care or immediate needs annuity (life insurance policies covering the capital in event of an early death are an expensive extra).
Divorce is a tough one. Recent Office of National Statistics data shows that divorce rates among opposite-sex couples in 2016 were highest among men aged 45 to 49 and among women in their thirties (ages 30 to 39). 106,959 divorces were granted in 2016. By comparison, there were 181,000 motor related accidents in 2016 (most of which would have been covered by mandatory insurance). Therefore the sheer number of potential claims is not beyond the capability of the insurance industry. However, claims handlers would find it extremely difficult to identify whether a couple had pretended to split up in order to collect a pay-out.
It remains to be seen whether the FCA will use this survey data to lobby Government to mandate that couples with children (whether married or unmarried), take out relationship breakdown insurance.