This Key Note Market Assessment considers the attitudes of lower income groups towards financial service providers and their own financial priorities.
It also considers how financial service providers communicate with and influence their lower-earning customers. New consumer research is the centrepiece of this report, supported by analyses of advertising data and discussion of business strategies and performance.
The low-income segment of the working-age population includes more than 7.1 million men and 8 million women. In addition there are more than
4.4 million men and nearly 7.6 million women over state pension age, around 2 million of whom are on very low incomes. In total, around 17.2 million adults in the UK are likely to have extremely limited financial resources.
Financial services for lower-income individuals and households, the D and E social grades, have shifted down towards the basic-insurance and
emergency-credit end of the spectrum, because the income differential between the bulk of the population and those at the top of the scale has widened, and those at the lower end have little capacity to afford discretionary financial services. There is little scope for an increase in sales of complex financial services, such as long-term investments and
defined-contribution pensions, to people with average to low incomes.
They cannot afford the risks, especially if they would also be throwing away their safety net of means-tested welfare benefits.
Banking in the UK suffered critical changes between 2007 and 2009.
Northern Rock and Bradford & Bingley Mortgages were nationalised, and the Government took a substantial stake in the merged Lloyds TSB and HBOS, and control of The Royal Bank of Scotland (RBS). Alliance & Leicester and Bradford & Bingley Savings joined Abbey in the Spanish group Santander.
Companies specialising in products popular with lower-income customers have experienced mixed fortunes. The sub-prime lender Cattles was, in summer 2009, struggling to avoid insolvency. Provident Financial, also a
sub-prime lender, angered a majority of shareholders with its exuberant pay plans for directors and senior executives. London Scottish
Bank, which catered particularly for low-income borrowers, went into administration in 2008. Pawnbrokers, on the other hand, have thrived. Debt-rescheduling companies, cheque cashers and firms that benefit from some customers' lack of financial awareness also tend to perform well in a recession.
Financial comparison sites such as confused.com, moneysupermarket.com, comparethemarket.com and gocompare.com have become a huge influence on the market since 2000, particularly in the categories of motor insurance and multi-product insurance. The most heavily advertised types of financial service are those required by law or under contract (motor insurance and buildings insurance for mortgagees), help for those seeking compensation (personal injury claims) and basic banking products (current accounts,
instant-access savings and so on). In addition, large sums are spent on brand awareness building. Individuals with low to moderate incomes are sought after in the mass market for motor insurance, home insurance and regular savings, but loans for these groups slowed to a trickle in 2008/2009.
Key Note's consumer research in June 2009 found that most of the
below-average earners in the D and E social grades had not managed to increase their savings during the previous 12 months, and these consumers were among the most likely to have seen their savings fall. Nearly half of Ds and Es said they had less money in June 2009 than a year earlier. Older people were the most vulnerable to a slide in savings. Savings decline is far more a feature of 2009 than it was when Key Note conducted its last survey on this topic, in 2006. Among the Ds in 2009, two in every nine said they had no savings at all. In the lowest-income group, the non-employed, part-time employed and casually employed Es, almost one in five had no savings.
Nationally, far more people obtain financial information from the Internet than from independent financial advisers (IFAs). More than three people in ten overall say that the Internet is their principal source of financial information, followed by newspapers, television and radio. For Ds and Es, television is the principal source of financial information. Older Ds and Es are very unlikely to obtain financial information from the Internet, and they are far behind the trend towards online banking.
Lower-income households have delicate calculations to make when deciding how much to save, because if they need to apply for means-tested benefits, they have to use up their savings, down to the level of maximum permitted capital, before they receive any state help. The means-testing rules mean
that it is common sense for lower-income households to try to buy a home, rather than to save or invest. The home can then be converted into an income stream in retirement, through equity release, although means testing is a major consideration here too.
The abandonment of defined-benefit pensions is hard for lower-income workers, because they are unlikely to have sufficient disposable income to make the far higher contributions into defined-contribution schemes that are necessary to provide equivalent pensions.
Possible ways forward to improve financial security for lower earners include: credit unions, to offer savings and loans; the replacement of current state retirement provision with a higher basic state pension and a reduction in complex means-tested benefits; and state guarantees for home buildings insurance in zones that commercial insurers wish to exclude, notably because of high flood risk.
The many millions in the UK who work hard for modest pay have benefited little from global financial services, although they will pay in future taxation for the subsidies that the Government poured into failing banks. The role of means testing in discouraging individuals from saving is a worry because,
as the numbers expecting or needing the state to support them escalate, the state will struggle and perhaps fail to meet the welfare demands upon it.
This is an important issue for public policy. The `stick' approach to the problem could be a phased withdrawal of means-tested benefits, while the `carrot' approach could include the creation of individual accounts in a new contributory national provident fund, with backing from the state. Individuals would be able to make withdrawals in cases of prolonged illness, disability or unemployment, and in old age.
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