How to get a nation of savers investing

Times

4 days ago

A string of policy reforms that the government described as the 'widest-ranging' changes to the financial world in more than a decade are on their way.
In a bid to create a wave of new investors, banks and other financial firms will be allowed to push savers towards the stock market; risk warnings on investment products could be watered down; and there will be an advertising campaign spelling out the benefits of investing.
The changes have the potential to encourage the millions of savers with hefty amounts of cash languishing in low interest accounts to consider the stock market as an option for their savings. A new form of 'targeted support' could help those who cannot or do not want to pay for financial advice but could use some guidance on big decisions.
The City regulator, the Financial Conduct Authority, found that 71 per cent of us hold a savings account, but just 39 per cent hold investments. We are far more likely to save into cash Isas than investment ones — £41.6 billion was paid into cash Isas compared with £28 billion into investment Isas in 2022-23, according to HM Revenue & Customs.
The Barclays Equity Gilts study, which tracks the performance of different asset classes back to 1899, found that stocks have returned an average of 4.8 per cent a year after inflation over the past 125 years, compared with 0.5 per cent a year for cash savings. In the ten years to the end of 2024, stocks returned 1.8 per cent a year while cash lost 2.9 per cent a year in real terms.
But there are risks with investing that many ordinary savers may be reluctant to take on. Here are some safeguards that we think the chancellor, Rachel Reeves, should consider.
• The cheap and easy way to invest (without the risk)
Industry experts warned that the Leeds Reforms, revealed after Reeves shelved plans to cut the cash Isa limit to nudge more savers towards the stock market, could amount to a quiet eroding of consumer protections. To make Reeves's revolution pay off, campaigners say that the government should ensure that City firms are not allowed to cash in through excessive charges and commissions.
'There is good in Reeves's plan. There's no doubt that people have far too much money in cash accounts and that they will struggle in retirement as a result,' said Robin Powell, who runs the investment education website The Evidence-Based Investor.
'But there's a risk that we are experiencing 'regulatory amnesia' — our collective tendency to forget why rules were put in place once the immediate crisis fades. Light regulation leads to crisis, crisis leads to tighter rules, tighter rules lead to calls for 'red tape cutting', which leads to light regulation.
'This is why we need a strong set of rules that dictate how banks and other financial companies behave when it comes to putting these reforms into practice.'
Investors are typically charged a fee for the investment products they use. Investment fund fees, which are usually charged as a percentage of how much money you hold, range from as little as 0.05 per cent to 1.5 per cent or higher.
These fees can eat into your returns over the long term. A fund that returns 3 per cent a year and costs 0.5 per cent would be worth about £37,500 over 30 years, but the same fund with a 2 per cent fee would be worth just £24,300.
James Daley from the consumer consultancy Fairer Finance said: 'One of my main concerns is that financial firms will push consumers towards investments that are high-cost. They should have an obligation to only nudge consumers towards low-cost options. There is only one certainty when it comes to investing — and that is cost.'
One way to manage this risk would be to introduce a fee cap on investment products that savers are nudged towards. It could work in a similar way to the cap on default pension funds, which workers are automatically enrolled into by their employers. These pensions cannot charge fees of more than 0.75 per cent, thereby protecting savers. It works well, and in reality most schemes charge significantly less than the cap.
These rules could also be extended to investment exit fees and charges for buying and selling shares.
Under its consumer duty rules, the Financial Conduct Authority already requires companies to ensure that any exit fees — charged when a customer wants to move their money out of an investment product — are fair and reflect the actual cost.
These exit fees could also apply to any investment products that savers are 'nudged' into, and a cap that matches the average dealing charge across the industry could be placed on such products too.
The chancellor suggests that 'savers with cash sitting in low-interest accounts' would be helped by the Leeds Reforms. While it is likely that many of these savers could benefit from considering the stock market as an alternative place for their cash, it will be less suitable for others — such as those who have the money lined up for a house deposit within the next year, or who use the account for their rainy day savings.
Financial companies could use pop-up warnings, similar to the fraud warnings on mobile banking apps, that flag to the end user that there are circumstances where these 'nudges' might not apply or be beneficial.
Powell said pop-up warnings should be added to private equity and alternative investments, which are being pushed under the reforms. Such investing often involves putting cash behind small, illiquid companies that have the potential to grow a lot — and quickly — but also come with a higher chance of failure.
He said: 'Given the government's push towards these investments, we need mandatory risk warnings that actually mean something. People need to understand that these products cost more, that they're more complex, that you cannot get your money out easily and that they are far less transparent than traditional investments. Make these warnings unavoidable.'
• How to build a portfolio that keeps its value
At the moment there is a limit on the amount of compensation that the Financial Ombudsman Service (FOS) can demand for the mis-selling of financial products. The FOS is a free dispute resolution service that settles complaints between consumers and the financial firms that they use. It can demand that a business pays compensation and puts customers back in the financial position that they would have been if they had not been given bad advice, but the compensation is limited to £430,000 for complaints from April last year. The limit is £415,000 for complaints brought to the FOS the year before.
Scrapping the limit would give consumers more confidence about any 'nudges' they get from investment firms over what to do with their cash.
Since 2012 commission-based payments for investment advice have generally been banned in the UK. When financial advisers recommend a product, they are not allowed to take a percentage of the money you put into that product, but instead must charge you specifically for the advice — as a percentage fee or in pounds and pence terms.
But the investment 'nudges' or recommendations that would be allowed under the new rules will not fall under investment advice, but instead be deemed 'targeted support'.
While it is unlikely that the FCA will allow old-style commission to creep back into the selling or recommending of investment products, a strict ban on commission could be put in place to ensure that financial firms do not profit from pushing savers towards certain riskier products.
Daley said: 'Just 20 years ago most of the banks were selling investment products and getting large fines for poor conduct and bad outcomes. We need to ensure we don't forget the lessons that we should have been learning from over the past couple of decades.'
• Reeves is right, but she is walking a tightrope — with our cash
Another risk for investors is 'consumer inertia' — where you end up paying more (or gaining less) for a financial product because you stick with a firm you already use. If your high street bank 'nudges' you towards an investment product, it might be easier to stick with the bank rather than to shop around.
This could be fixed with a requirement that any firm 'nudging' a cash saver towards the stock market give information that relates to the whole of the market.
For example, under rules from the Competition and Markets Authority, banks that offer current accounts have to display 'clearly and prominently' the satisfaction ratings scored by their competitors in comparison to their own scores.
A similar approach could be taken under the reforms. For example, if a high street bank offers a ready-made investment portfolio with a fee of 0.7 per cent, it should be forced to flag that other companies offer a similar product for 0.3 per cent (even if both fall below the charge cap).
If a financial company recommends a product, information could also be provided on alternative choices in the wider market. For example, a company that does not offer a low-cost global tracker fund should still need to explain the benefits of such a product to their customer.
Tom Selby from the investment platform AJ Bell said: 'Investing is often seen as something that is only for relatively wealthy people, or something which you need a great deal of financial knowledge to get involved in. In fact, it is relatively easy, with straightforward products designed for ordinary people. And you don't need tens of thousands of pounds to get started.
'There is still a lot of work to be done to develop the plan, but this campaign could help to break some of the taboo around investing and encourage more people to get started.'
How can the government protect consumers while getting us investing? Let us know in the comments