Potential impact of financial advice on the Financial Services Industry . 14 th March 2007 Resolution Foundation Seminar
Generic financial advice and the financial services industry
What does the financial services industry stand to gain from the provision of generic financial advice?
How should the industry support and contribute to the delivery of a national approach to generic financial advice?
What can be learnt from the industry’s experience of delivering advice?
Deloitte modelling for Resolution Foundation
Developed model to show impact of financial advice on individuals and State
Subsequent work designed to show impact on FS industry, in particular changes in:
Contributions to savings products (cash, equity-based, pensions)
Use of credit (credit cards, loans, mortgages)
Take up of life assurance
Annuity premiums on retirement
Theoretical model based on set of assumptions about how consumers would act differently if they were given access to advice (tested against current industry and regulatory views)
Resolution Foundation 14.1m target group only (below median earnings and not dependent on state)
Only 10% of the target group respond to advice
Those who do, do so over their lifetime
Model projects income & expenditure and assets & liabilities over an individual’s lifetime
Implications for financial services industry
Outputs from model suggest following changes to cashflow and revenues for the financial services industry in 2010, if advice is successfully delivered to 10% of the RF Target Group of 14 million individuals:
£2bn more in contributions to medium and long term savings products, £7bn more in funds under management and increased revenues by way of charges 1 of £105m.
Life assurance premiums increase by £225m and annuity premiums by £58m.
The unsecured credit industry 2 sees a reduction in credit balances of almost £4bn. Interest payments fall by more than £1.3bn.
Mortgage balances fall by £0.3bn and interest payments fall by £240m.
A fall in contributions to short term savings of £1.2bn, average balances falling by £5bn and interest payments rising by more than £1bn.
Over the longer term the model indicates that consumer buying behaviour shifts more significantly away from credit products and into savings, typically medium to long term. Annuity sales also increase significantly over the longer term as more individuals move into retirement with larger pension funds.
1 Assumes 1.5%pa annual management charges 2 Credit cards and other unsecured lending 4
Changes in contributions / repayments 2010
In excess of £2.36bn more money could flow into the life assurance / fund management sector in 2010 as a result of advice.
£1.5bn more in net new contributions to medium term savings plans
Pensions premiums increase by £560m,
Life assurance premiums increase by £225m
Annuity premiums increase by £58m - grows significantly over time as individuals retire
However, £2.23bn less flows into banking products
Contributions to short term savings fall by £1.2bn
Credit cards attract £370m less in new debt and experience a net repayment of debt
Unsecured loans attract £280m less in new debt and see a net repayment of debt
Mortgages attract £320m less as individuals start to repay their mortgages sooner
Margins on all products are reduced as these consumers shop around for improved rates
Changes in interest payments / charges in 2010
The life assurance and fund management industry receives £1bn more in charges in 2010 as a result of advice.
Approximately £700m more is received on medium term products (at 1.5% fund management charge)
Pension funds generate just over £300m in extra charges (at 1.5%pa fund management charges)
However, changes in interest payments amount to a difference of £2.6bn in interest receipts / payments by the banking sector
Interest payments to consumers on short term savings increase by £1.1bn
Interest receipts on credit cards fall by more than £650m
Interest receipts on other unsecured debt falls by a similar amount
Interest receipts on mortgages fall by just short of £250m
Industry Implications - Headlines 7 Negative Positive
Fewer customers using credit products
More demanding customers
More ‘savvy’ customers, better able to shop around
Less money held in cash
Higher interest rates paid on savings
Lower balances on credit cards and loans
Lower interest rates received on credit products and mortgages
Potential margin pressure on other product charges
More customers using savings, life and annuity products
More products per customer
More resilient customers, better able to sustain credit payments
Improved persistency of savings and life products
More informed customers should mean a cheaper sales process = less capital intense
Higher contributions to savings, life and annuity products
More funds under management in pensions and medium term savings
Higher pension annuity premiums
Less bad debt
Credit repaid sooner - can be recycled more frequently
Impact on customer relationship Impact on revenue / profitability
Are the findings as expected?
Does current experience suggest a different outcome?
Is it enough to encourage industry to support generic advice?
This document is confidential and prepared solely for Resolution Foundation. No other party is entitled to rely on this document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document. Deloitte & Touche LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at Stonecutter Court, 1 Stonecutter Street, London EC4A 4TR, United Kingdom. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu ('DTT'), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other's acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT. Member of Deloitte Touche Tohmatsu Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. 9