News & Views

Last month I wrote about some of my views on the nation's financial health and areas of potential focus for improvement. Many of you kindly gave both positive and thoughtful feedback with points that certainly develop that conversation, some of which I wanted to take time to respond to.

Last month I wrote about some of my views on the nation's financial health and areas of potential focus for improvement. Many of you kindly gave both positive and thoughtful feedback with points that certainly develop that conversation, some of which I wanted to take time to respond to in greater depth.

The critical nature of how growth is achieved

One particular point from Robert Westcott, said: "We have somehow evolved to running the whole nation on debt which is the opposite of hundreds of years of wisdom. As if, somehow, by just clever financial manipulations, we can magically create value out of nothing."

This rings particularly true for me. How stable and sustainable growth is achieved is the critical factor and arguably too much of our economic growth has been based on leverage and borrowing rather than building firm foundations and compounding returns on assets. There will always be a need to borrow money to bridge finances but growth in borrowing and leverage also brings much greater likelihood of financial instability. So, we need to harness a firmer, more incremental nature to the growth we achieve. That’s because the problem is that leverage that leads to the bifurcation of who benefits, growing divisions between the haves and the have nots as well as creating a more unstable economy.

When the current model topples, and it is a question of when, the poor will suffer the most. Some of the solution around that is to do with financial structures and tax subsidies/tax breaks, including the fact that debt is treated more favourably than equity.

The advice gap

Peter Jenkins said: "The stats on so many families with virtually no savings is truly alarming. The subject should be taught in schools particularly to sixth formers about to hit the real world."

Meanwhile, James MacDonald-Smith states poignantly: “And the advice gap only grows…”

These points on education and advice I think are so vital at all ages. There are courses available, but they are not part of mainstream education. Rathbones runs a financial awareness programme for 16-24 year olds as well as versions for adults, while the CISI Fundamentals of Financial Services course is accessible to those in years 12 and 13 and gives a very helpful context.

Nonetheless it's true that the advice gap grows, and in part this is because of the regulatory environment. It costs financial institutions, advisors and planners so much to meet compliance regulations that they're unable to advise less well off people because they have to charge so much money to comply with regulations, insurance costs and the FSCS levy. As a result of those high costs, it is not economic for those who have smaller pots to pay the price to receive advice and so the situation perpetuates.

For many people, if we don't get good financial education from our parents then we don't get it from anywhere because the advice simply isn't accessible. It's all very well regulating businesses but if it’s to the point where that business can't look after customers then it effectively disenfranchises parts of the market - and probably those in need of advice first.

The unintended consequence of quantitative easing

Linking to this is something I've thought about a lot recently. When I was growing up you could go to the Post Office with your savings book and put some birthday money or Christmas money into a savings account. Some might even remember having savings stamps. There's now no equivalent, trusted institution where people can go with modest sums and learn the art of saving.

Part of that change is also probably the product of the interest rate environment over the last decade. I tried to do the same thing with my children 15 years ago, but there's no compounding to see, so they understandably questioned the point at the time because they couldn't see it accumulating. It's arguably the unintended consequence of quantitative easing that's discouraged people from saving, compounded by facing growing costs.

I have pondered whether or not there's scope for something like the National Employment Savings Trust (NEST) to be the kind of trusted vehicle for savings that the Post Office was a decade ago. As things stand, the NEST savings rate is 8%, which, while still lower than perhaps desirable, is a good start. In 2023 NEST had savings of nearly £30 billion under management. If you take a 6% rate of return, that amount will double in just over 10 years not including the extra funds that will be added to it, which will be a large chunk of change over a 20 year period. That's brilliant, but then how is that deployed effectively and wisely?

I was heartened by your responses to my last article and thank you enormously for the input - it's highly valued and appreciated, continuing to shape and inform my thinking. I think the few that I have pulled out express the different sentiments that everyone who commented conveyed and it’s galvanising to know that there’s alignment and resonance in some of the thoughts one has cultivated. Perhaps, together, there are changes that can be made.