Citizens' Financial Futures

Regulation of Retail Investment Financial Services in Britain

Michael Clarke

• Publisher: Routledge
• Year: 2018
• Print ISBN:
  9781138613584
• eBook ISBN:
  9780429873638
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Published in 1999, this is a review of recent changes in the regulation of retail financial investment services and products, notably the creation of the Personal Investment Authority and the continuing roles of the Office of Fair Trading and the Securities and Investments Board. The attempt to establish new regulatory standards in the wake of the personal pensions mis-selling and other scandals is critically appraised in the light of evidence of the needs and capacities of citizens. The book concludes, firstly that the regulators have not succeeded in making more than a limited progress in preventing the tendencies of the industry to abuse the public, and secondly, that the model of regulatory effectiveness which they espouse, based on creating a competitive market of informed decision-makers, is inappropriate given the complexity of the products in question. No systematic appraisal of the development of retail financial services regulation exists, other than those conducted by the regulators themselves.

1 The Problem

The difficulties that currently beset the current financial services industry, particularly in respect of longer term savings and investment products such as life assurance, pensions and mortgages have their origins in success. It is the enormous expansion of the financial services sector as a whole in the postwar years on the back of the rise of affluence in the middle classes that has created the political and economic context in which mass participation in personal savings and investments has become so fraught a matter. This chapter will identify that growth and go on to elaborate the context by including the rise of consumerism and the success of the welfare state as crucial additional factors. The fundamental thesis will be that the financial security traditionally associated with middle class status has recently been put in question by multiple shocks: unemployment, job insecurity, a dangerously volatile housing market, rising rates of family breakdown and the fiscal crisis of the state. The outcome is a state led expectation of increasing participation in financial services by individuals in order to secure themselves. The unresolved questions concern the terms on which they may be expected to do this. It is these terms which regulation since the mid 1980s has attempted to set with, as the following chapters will show, only limited success. We should be wrong to overemphasize the present and its failings. As stated above the current difficulties, severe though they are, are the outcomes of substantial successes.

The Rise of Affluence and of the Middle Classes

Such is the concern with international competition today that the more or less sustained pattern of postwar economic growth averaging 2.4 per cent per annum is frequently ignored. Whilst Britain became less affluent than its reference nations – in the early postwar years the USA then France, Germany and Japan and more recently the Asian ‘Tiger’ economies – sustained growth has produced a social and economic transformation.

The occupational class structure has shifted progressively towards white collar work, with its traditionally better working conditions, fringe benefits, including occupational pension schemes, job security and promotion prospects. Whilst expansion has been greater in terms of numbers in the lower white collar occupations which have come to sustain weaker career development prospects as they have expanded, the fastest and most sustained growth has been in the upper sectors. The following tables show the process of transformation. The allocation of occupations to agreed social classes is now a professional expertise in its own right, the details of which are beyond the scope of this chapter. Regrettably the outcome is that it is difficult to obtain full time series before academic research has taken place. Table 1.1 hence abuts Routh’s comparison of the 1951 and the 1981 figures with the Registrar General’s classifications in the last two national censuses. The figures differ but the trend is confirmed.

Figure 1.1 Gross domestic product*

* At factor cost This measure of GDP excludes taxes on expenditure and subsidies.

Source: Office for National Statistics.

It is not simply the rise of the middle classes to constitute nearly half the population that is significant however, but the spread of affluence more widely. By the mid-1950s the identification of ‘affluent workers’ in modern industries such as vehicles, aircraft, chemicals and light engineering began to generate increasing debate. First it was pointed out that these workers were earning as much or even more than those in white collar jobs, albeit sometimes because of consistently available overtime. Further, it was recognized, not least by those industries ready to offer products and services for these workers’ additional income, that a shift in consumption patterns and lifestyle was taking place, which affected not only the expanding middle classes but the affluent working classes too. At a lower level the spread of household appliances and fittings – vacuum cleaners, washing machines, refrigerators, freezers, food processors, telephones, televisions and fitted carpets – was progressive to the point where, for example, only the exceptional family in the 1950s would have had a television where in the 1990s a family reliant on state benefit would expect to have one, and of course a much larger one with colour reception. At the more substantial end of expenditure affluence was manifested in the growth of home and car ownership and the rise of foreign holidays, assisted by the creation of the package holiday. Although Thomas Cook is generally credited with founding the foreign tour industry in 1841 the true package holiday was dependent on the modern passenger jet aircraft. The first package holiday was put together by the founder of Horizon Holidays in 1950. Civil Aviation Authority figures indicate a rise in package holidays to 2.7m in 1970,6.25m in 1980 and 12.0m in 1990. The International Passenger Survey for the Office of National Statistics gives the following picture for recent years.

Table 1.1 Occupational class structure, Great Britain %

Table 1.2 1981 occupations % 1951

Table 1.3 UK residents visits overseas by purpose of travel, thousands

	Holiday	Business	Other	Total
1975	6,981	1,520	1,875	10,268
1985	14,898	3,188	2,628	21,610
1995	27,777	6,201	7335	41,513

Figures for car ownership show a similar spectacular growth.

Table 1.4 Car ownership: vehicles currently licensed, thousands

1950	1960	1970	1980	1990	1995
1,979	4,900	9,971	14,660	19,742	20,505

Source: Department of Transport Statistics, 1996, Tables 1 and 9.

The implications of the shift in home ownership for the purposes of this book are more substantial but, as is evident from Table 1.5, the change is one that has been faster in the past two decades, partly as a result of the deregulation of credit and the sale of council houses, matters taken up in chapters 2 and 3.

The population has hence become more affluent and middle class. Has it also become more financially sophisticated? This is a judgment that is difficult to make. What can be said is that it is certainly more educated and that participation in financial services in the wider sense has greatly increased. Our concern however will be with savings and investment decisions. From what has been shown so far, it might be conjectured that a significant proportion of the population now has the experience, repeated with time, of saving and borrowing to finance holidays, cars and home purchase. This affluent and middle class population is also more educated. All indicators show a great expansion of education, but perhaps the most significant for our purposes is the higher expansion of higher and further education. Both in terms of numbers of students and of institutions founded and upgraded, this expansion has been sustained, though with lulls, and clearly caters for the growing middle classes – studies of the success rate of higher education in taking on the children of manual workers have persistently shown relative failure. Thus ten colleges of advanced technology were founded in the latter 1950s and early 1960s and later upgraded to universities. Twenty-five universities were established between 1957 and 1970, and 30 polytechnics between 1969 and 1973. A further ten polytechnics or similar institutions were established between the mid-1970s and the early 1990s and in 1992–94 the polytechnics converted to university status, doubling the number of universities to ninety, or 115 if the separate colleges, which are of university size, of the Universities of Wales and of London are counted separately. The impact of expansion on student numbers was similarly marked, with around a third of the 18–21 age cohort now entering higher education.

Table 1.5 Stock of dwellings by tenure % UK

The Growth of Retail Financial Services

It is worth recollecting that in the immediate postwar decade manual workers – up to three-quarters of the labour force – will have been paid weekly in cash. Most will not have had a bank account or a cheque book. Some may have had a building society savings account or national savings account; some will have had modest life assurance, but few any form of risk assurance. With affluence has come a vast expansion in retail financial services: a greater proportion of the population has come to participate in any one form, the value of the average level of participation has risen, often in real as well as in nominal terms, and the range of products and services on offer in each sector has proliferated. Mortgages and hire purchase along with banking, building societies, occupational pensions and equities were there at the start, followed by unit trusts in the 1950s though they only took off in the 1970s, personal loans in the 1950s, credit cards in the 1960s with Barclay Card/Visa in 1966 followed by Master Card/Access in 1975, and debit cards from 1987. Deregulation of credit and the boom of the 1980s saw rapid diversification of products and the government introducing PEPs and TESSAs and fostering share ownership through privatizations. There are three aspects to this growth that are pertinent to present purposes: first and fundamentally its great extent, secondly its implications for the financial services industry, and thirdly its implications for the citizen consumers of these products and services.

Table 1.6 Student numbers, thousands

Growth of the industry can be illustrated by examples only and statistics are not always available for the entire postwar period. The total numbers of shareholders in building societies (i.e. members) rose from 2.26m in 1950 to 10.26m in 1970, 30.64m in 1980 and 36.95m in 1990, still reaching 39m in 1995 despite the conversion of some large societies into banks, so removing them from these figures. Figures from the Association of Payment Clearing Services for more recent years allow the presentation of more wide-ranging information.

So successful have been the services offered by direct transfers and plastic cards that the cheque clearing system run by the clearing banks peaked at 2,300m transactions in 1990 with numbers now at 2,000m. Non-cash payments are now split roughly equally between cheques 33 per cent, standing orders and direct debits 27 per cent and plastic cards 37 per cent, with the latter growing at the expense of the first. The total value of Visa and Mastercharge transactions grew from £58.9m in 1975 to £388.4m in 1985 and £449.lm in 1995. Debit card purchases rose from £10m in 1988 to £1004m in 1995.

Table 1.7 Account holding in Great Britain % adults

Table 1.8 Payment of wages and salaries % employed adults

	1976	1984	1991	1995
Cash	58	37	21	14
Cheque	12	16	11	11
Direct to account	26	43	64	70
Other	4	4	4	5

Source: APACS Yearbook of Statistics 1996, Tables 8.8,8.9,8.10.

Like the banks the insurance industry prospered as a result of affluence. All those cars required cover and the rise in home ownership meant more insurance, accompanied as it was by a sustained building and rebuilding program in both the public and private sectors, which produced large numbers of properties to insure. As affluence led to purchases of consumer goods and the value of home contents grew, so did the demand for insurance cover for them, particularly given a rise in crime rates. Foreign holidays likewise fuelled a great expansion in travel cover. It was life assurance however, which was to become the great success story, notably...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Preface and Acknowledgements
• 1 The Problem
• 2 The Foundation of the New Regulatory Regime: Failure to Achieve Control
• 3 Market Changes and Customer Abuse
• 4 The Road to the PIA
• 5 The Training and Competence of Financial Advisers
• 6 Investors
• 7 Conclusion
• Bibliography