Financial Illiteracy and Risk Aversion: Challenges for UK Consumers

Strategic Insights -

The Financial Services Authority has painted a bleak portrait of the British consumer, highlighting their lack of understanding of the financial markets and their aversion to risk. According to the FSA's Financial Risk Outlook, 17% of investors expect returns in excess of 7% over the next year, indicating a lack of understanding of investment risks. Additionally, nearly a third of adults believe that only some types of firms would be allowed to go bankrupt, and a fifth believe regulated firms would not be allowed to go bankrupt at all. This lack of understanding is further exacerbated by the fact that 59% of consumers have been active savers during the last year, but only 13% have invested in investment products.

Key Takeaways:

  • 17% of investors expect returns in excess of 7% over the next year, indicating a lack of understanding of investment risks.
  • Nearly a third of adults believe that only some types of firms would be allowed to go bankrupt, and a fifth believe regulated firms would not be allowed to go bankrupt at all.
  • 59% of consumers have been active savers during the last year, but only 13% have invested in investment products.
  • A survey found that people who believe they can save money by remortgaging in the event of getting into difficulties following an interest rate increase may indicate a lack of understanding of the risks involved.
  • 40% of consumers had savings but no investment products and half of these said they had no plans to invest or would "stick to savings and not invest".
  • Aversion to losses and insufficient trust and understanding of products were cited as the reasons for not investing.
  • The FSA lays some of the blame for poor understanding at the door of financial advertising, which is unhelpful in raising consumer understanding.
  • Research found that about 1m more families would begin to struggle if rates rose by 1 percentage point to 4.75 per cent.
  • The proportion of over-indebted families having difficulty repaying debts would rise from three-fifths to three-quarters.
  • One in six people would consider bankruptcy if they could not keep up with their debt payments, while just over a half said they would consider it as a last resort.

Statistics:

  • 17% of investors expect returns in excess of 7% over the next year.
  • 59% of consumers have been active savers during the last year.
  • 13% of consumers have invested in investment products.
  • 40% of consumers had savings but no investment products.
  • 1m more families would begin to struggle if rates rose by 1 percentage point to 4.75 per cent.
  • 31% of people saying they were struggling would rise to 38% if rates rose by 1 percentage point.
  • Three-fifths of over-indebted families would have difficulty repaying debts would rise to three-quarters.
  • 27% would cut back on spending in response to a 1 percentage point rate rise.
  • 25% said they would remortgage.
  • One in six people would consider bankruptcy if they could not keep up with their debt payments.

Sources:

  • The Financial Services Authority's Financial Risk Outlook.
  • Research conducted for the FSA in 2003.
  • A survey from the Department of Education and Skills.
  • The FSA's survey of households.
  • The Bank of England's warnings about household debt.