In the 21st century UK, the ownership of capital assets and the receipt of profits are more important determinants of financial behaviour than income from work. Previously, financial services companies attempted to identify future high earners, and services for students were an important part of this strategy. However, the graduates of 2006 can no longer hope for both income sufficiency and security, unless they follow a small number of privileged occupations.
The notional increase in households' wealth in the UK is driven almost entirely by value rises in non-financial assets, mainly residential property. Financial liabilities have increased at almost the same rate as property values, meaning that, on paper, UK households as a whole are not more indebted — in relation to their assets — than they were in 2001. The significant influence of the residential property market, the main pillar of personal wealth, is a big worry: a crash would lead to loan defaults on a large scale. However, continued property price inflation — boosted by demand from the most affluent in the UK, and by money and immigrants from abroad — removes the property ladder from the reach of first-time buyers, even those in professional jobs. The bottom rungs of the ladder are supported increasingly by landlords buying to let. As young people are forced to switch from buying to renting, the implications for housing benefit are extremely serious and could, in time, lead to pressures for the reintroduction of rent controls, making buy-to-let less attractive for landlords.
First-time buyers need high incomes even to contemplate property purchase. The average mortgage loan to first-time buyers in April 2006 was £106,400 — the highest ever to that point. According to the Consumer Credit Counselling Service, a rising number of middle-income households are struggling to cope with their debts. Property prices and rents are driven up by the widening gap between the number of new households and the far smaller number of new homes; the incoming streams of foreign money and of immigrants; and the easy availability of remortgage finance granted to existing homeowners. In 2005, remortgages accounted for 41% of the value of all gross mortgage lending.
Banks and insurers seek to distribute their financial products through independent financial advisers (IFAs) to an increasing extent. IFAs are buffers between such organisations and litigious customers. The trend towards distribution through IFAs would have developed earlier and faster if more customers could afford their fees. Key Note commissioned exclusive consumer research for this report, which showed that more than three in ten (32.1%) of those in the highest social grade said that independent financial advice is too costly for them.
HSBC, The Royal Bank of Scotland Group (RBS), Barclays, HBOS and Lloyds TSB lead the provision of routine banking services to the UK's professionals and managers. Aviva, Prudential and Legal & General lead the life and pensions companies. Mass financial services remain largely in the hands of British companies.
The Direct Line, Norwich Union and Barclays brands recorded the greatest main media advertising expenditure in the year ending 31st March 2006. RBS, the parent of Direct Line, also had three other brands in the leading 15 advertisers in that period — NatWest bank, and the insurance brands Churchill and Privilege. Aviva's Norwich Union was the largest advertiser among the life and pensions companies, mainly because of its substantial direct general insurance business, motor insurance in particular. The group was also the leading advertiser of equity-release products to elderly homeowners.
Customer profiling methods have improved, but it is becoming harder to contact potential customers unless they have `opted in' to receive information by a specific channel. In the EU, the directive on Privacy and Electronic Communications, which prohibits unsolicited e-mails and short message service (SMS) text messages for direct marketing, came into effect on 11th December 2003.
Changes to the rules for inheritance tax in the UK make it harder for the affluent to pass on their assets, unless they are gifted unconditionally at least 7 years before death. The Chancellor has also limited tax-privileged pension savings, and has prevented residential property and luxury items from being included in self-invested personal pensions.
Key Note's survey revealed that there is a strong desire for assets to be passed down within the family, although the costs of nursing care in old age and inheritance tax can prevent this from happening. Those who can save are trying to put a little more aside and, according to the survey, a higher proportion of people are (in 2006) saving more than saving less. 8% of respondents in the A social grade admitted to having no savings at all, compared with 13.6% in the B social grade.
Although residential property is becoming the bedrock of household wealth in the UK, it is subject to erosion by means testing and inheritance tax. These factors, as well as parents' concerns to see their children become property owners, fuel `pre-heritance', as identified by Prudential. This refers to the transfer of assets to the next generation during the donor's lifetime. The rise of pre-heritance changes the market for financial services in retirement, so it is logical for Prudential and Aviva's Norwich Union to have identified retirement financial services as a major priority for the future. As inter-generational financial flows are brought forward, there are implications for future growth, as the costs of supporting a more dependent elderly population will soar. If the Government wants everyone to take financial responsibility for themselves, there will have to be policy changes, including reforms to long-term care funding and higher thresholds for inheritance tax.
Over the next 25 years, financial services groups will be competing ever more fiercely for the customers with high disposable incomes. However, the number of high-income consumers is likely to decline as the cost of living outruns wage rises. Uncertainty over future incomes favours flexible financial products, including current-account mortgages, flexible mortgages and offset mortgages, and equity release.
As property prices, and therefore mortgages, become larger, homebuyers will have less money to put into alternative investments, such as pensions. Indeed, the number of people contributing to pensions has fallen dramatically. The decline of defined-benefit pensions, into which employers used to make the majority of contributions, has a serious impact on young workers who may be fairly well paid, but who are failing to make enough provision for their retirement. The economic outlook indicates that, as a nation, the UK is going to become less affluent. Energy-related costs will absorb rising proportions of disposable incomes, advertisers will intensify their efforts to sell current consumption, and the Government will say that it cannot afford to raise state pensions far beyond their present levels in real terms.
Financial services companies need to be in tune with the changing world. General insurance specialists, such as Zurich, are perhaps more prepared than the mainstream retail banks for a world of fast-changing parameters. Trusted brand identities are beyond price as contexts change. Brand strength has to be allied with local management autonomy, in order to give the required flexibility. HSBC has the strongest global brand within UK-based financial services groups. Barclays, Halifax, Legal & General, Norwich Union and Prudential are prominent among other leading UK financial brands. Foreign groups with rising brands in the UK include AXA, ING and Zurich.
The concept of `one-word equity' is of growing importance, in order to cement brand name with brand value in consumers' minds. The way ahead for financial services is to build the brand, and be ready with clear information when customers seek out a financial product or supplier. There is also an urgent need to improve consumers' knowledge about the scope and remit of the different categories of financial adviser.
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