Andrew Bailey opening speech at the FCA Conference on Intergenerational Differences

Speaker: Andrew Bailey[2], Chief Executive
Event: FCA Conference on Intergenerational Differences, Royal College of Physicians, London
Delivered: 2 July 2019
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• The most important issue that the FCA faces in the long-run are the forces shaping the inter-generational issues.
• Financial services need to evolve to meet these changing and sometimes diverging generational needs.
• Addressing challenges from intergenerational change requires effort from across society: this is not a cause that we can fight alone.

It’s a great pleasure to be here this morning and open a conference on such an important subject. Indeed, I am going to go further and say the important issue that we face, because if we put Brexit to one side for a day – hard I know – in the long-run the forces shaping the inter-generational issues that we face are the most fundamental in the area of financial well-being.

So what are those forces? We are seeing higher levels of debt among younger age groups, and this holds true even if we set to one side student loans, around which there is a robust debate in terms of their debt attributes. The real cost of housing has risen in many parts of the country, and this has led to people becoming first time buyers at an older age, and a lengthening of the average term of mortgages to make the debt servicing cost more affordable. Both of those developments will mean that people have mortgage debt later into life.

Meanwhile, in the area of long-term saving for old age, a lot has changed. Over time we have transferred responsibility for saving for retirement from employers and the State much more to individuals, first in the accumulation phase and more recently in the decumulation phase.  To be clear, this makes sense in view of increased longevity and the need for people to manage their retirement more flexibly, but it does raise important issues.

Alongside pension freedoms has been a period for the last decade or so where real and nominal interest rates have been near zero and negative for real rates.

Alongside pension freedoms has been a period for the last decade or so where real and nominal interest rates have been near zero and negative for real rates. This has increased the real cost of saving for retirement. And in fact the saving rate has declined, something that is beginning to be tackled by auto-enrolment.

Another feature has been the decline of the more traditional life assurance saving model with a guaranteed return. These products have been replaced by asset management based savings, where the saver – individuals – is fully exposed to changes in the value of their investments, and at a time when low rates have encouraged risk taking through the so-called second for yield. Unfortunately, higher returns always come with higher risk.

The old model where we entered the mortgage market early in employment, paid it off before reaching a compulsory retirement date, and from that date received a known amount of pension income which was not at risk, are fading in the memory.

Another perspective on this comes from the evidence – compiled very helpfully by the Institute for Fiscal Studies – that the long post-war pattern of each generation being better off than its predecessor has come to an end. As the IFS has also set out, while overall levels of inequality have changed relatively little in recent times, under the bonnet – and when viewed in generational terms – the picture is not so straightforward.

Over the last decade we have seen a narrative of intergenerational financial change emerging. This isn’t surprising. Our own research, based on ONS statistics, reveals that:

• In 1993 first-time buyers paid around 2.4 times their average salary to buy a property. By 2018 this has increased to more than 5 times.
• In 2014-2016, the median person started accumulating property wealth at the age of 34, 4 years later than they did so in 2006-2008, at the age of 30.
• The tipping point from wealth accumulation to decumulation increased by 5 years from the 55-64 age bracket to the 60-69 age bracket between 2006-2008 and 2014-2016. 

Putting an economist hat on for a moment, I should stress that none of these changes invalidates the important lifetime saving model, or the life-cycle hypothesis as it is also known.  This is one of the workhorses of macroeconomics, and dates back to the early 1950s and the work of Franco Modigliani and Richard Brumberg. The core of it is that people make choices about how they spend at each point in their lives limited only by resources available over their lives and thus independent of income at each point in their lives. Decisions on spending at each point in people’s lives are thus linked to building up and running down assets to provide for retirement, among other things. An important observation on the model is that like many macroeconomic workhorses, it is founded on an apparently empirical observation, here assumed lifetime available resources, which is as a matter of fact unobservable. What we do know, however, is that available resources will change over the course of a lifetime, as will the level of uncertainty over what they will be at the point of planned retirement.

I want to add a few more pieces of the picture of the lifetime model. First, it asserts that changes in lifetime resources lead to proportionate changes in spending in all periods of life, so the link to macroeconomic policy is very clear. Second, changes in the volatility of income are likely to affect views on lifetime resources relative to assumed need. More volatile income will tend to restrain spending. Third, greater uncertainty generates a demand for greater precautionary saving.

The lifetime model is a core building block of macroeconomics, and it remains an essential lens through which to assess today’s challenges around retirement income and pensions.

The lifetime model is a core building block of macroeconomics, and it remains an essential lens through which to assess today’s challenges around retirement income and pensions. It is much more than a retirement model because it encompasses decisions taken by households on all other forms of investment, most notably housing.

The lifetime model remains the best framework we have. But the changing contours of remodel need to be set out. So, back in May we published our Intergenerational Discussion Paper[3]. In the paper, we set out our own research into changing financial needs over the last decade. We wanted to test our understanding of the issues different generations face, to ensure our assumptions and regulatory approach stay relevant for the consumers of today and tomorrow.

In the paper, we detailed the main factors which impact the financial circumstances of UK consumers.

We then considered the evolving financial needs of generations through the lens of specific financial services sectors: mortgages, pensions, consumer credit and insurance. We explored what the market and public policy response has been to these changing financial needs, and considered what barriers might exist to further innovation in each sector.

Financial services need to evolve to meet these changing and sometimes diverging generational needs. Looking at the consumer credit market, growth in this market has been driven since 2012 by motor finance and 0% credit cards and concentrated among people with the highest credit scores. While around 50% of consumer debt is held by consumers who also have a mortgage, growth is mainly driven by people with no mortgage. Prolonged low-cost borrowing, unstable income and limited savings creates new consumption patterns and financial services need to adapt to changing consumer profiles.

Addressing challenges from intergenerational change requires effort from across society: this is not a cause that we can fight alone. It is only through a combination of Government, regulatory and industry action that we, together, can make strides to meet the needs and aspirations of all generations, both today and tomorrow.

Intergenerational issues aren’t unique to the UK, although they’re taking different forms in different places.

Intergenerational issues aren’t unique to the UK, although they’re taking different forms in different places.

Japan provides an interesting example of a regulatory response[4] to a particular intergenerational challenge. Acknowledging that financial stability and inclusion will become inseparable in an ageing population, the Japanese regulator took steps to transform its current entity and sector-based regulatory framework into one oriented towards functions and activities. It aims to encourage financial markets to develop customized and transparent cross-sectoral solutions to ageing customers, as opposed to dispersed products designed to answer short-term life situations.

Our regulation should enable change to happen in a way that is consistent with the public interest. We need to encourage fair and sustainable risk taking to enable markets to develop. We also need to future-proof our regulation by ensuring competition in financial services markets works in the interest of consumers.

Our regulation should enable change to happen in a way that is consistent with the public interest.

As a regulator, we are here to serve the public interest. We aim to ensure financial markets work well for UK consumers. This includes enabling them to adapt to changing societal needs.

Finally, I would like to encourage you to share your ideas with us and each other during the course of today, to keep this debate moving and find ways to turn debate into action.

For our part we’ll be taking stock of what we hear today and the responses that we get to the Discussion Paper. That will help us determine the work we take forward to and make sure we’re taking the right approach on issues that play such a significant part in shaping people’s lives.