Topic 3
The impact of external factors
Learning outcome
After studying this topic, students will be able to:
◆ understand the key external financial factors influencing financial
performance and the resulting effect on the consumer;
◆ analyse how external financial factors can affect personal decision-making;
◆ use PESTEL analysis to analyse an individual’s financial situation;
◆ analyse data sources to assess the impact of external financial factors when
making financial decisions and plans;
◆ discuss the implications of change; and
◆ demonstrate an awareness of the impact of international events and
developments on the consumer.
Introduction
We have already touched briefly on the external factors that can affect personal finances
(in Topic 1) and explained how appropriate contingency plans should be included in
short-term, medium-term and long-term planning to help to prevent ‘external shocks’
from upsetting personal financial plans. The importance of these factors cannot be
overstated, which is why this topic explores these factors in more detail and looks, in
turn, at the impact that each can have on sustainable personal finances.
External factors are factors over which
individuals have little or no control,
but
which
nevertheless
have
significant effects on financial
products and services, and therefore
on people’s economic well-being. The
key external factors include:
Factors such as interest rates and changes in
taxation affect people’s decisions on saving and
spending.
◆
inflation;
◆
interest rates;
◆
house prices;
◆
economic growth or recession;
◆
unemployment;
◆
regulation;
◆
exchange rates;
◆
legislation and legal rights; and
◆
changes in state benefits, levels of
taxation and exchange rates.
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Individuals cannot know exactly when and how interest rates, inflation, exchange
rates, etc, are going to change, but they must at least be aware of the changes that
might occur. They must consider the effect that these changes could have on their
finances and develop ‘just in case’ or ‘what if’ contingency plans to cope with the
impact on their finances of sudden changes that are beyond their control.
Economists and marketing experts use ‘PESTEL’ analysis to consider how external
factors falling under six key headings might affect individual and corporate financial
decisions.
Figure 3.1 PESTEL analysis
P
Political
E
Economic
S
Social
T
Technological
E
Environmental
L
Legal
In this topic, we will use PESTEL analysis as a framework, looking at examples of
factors that fall under each heading and considering how these can affect personal
financial plans. We will also identify which factors may have the greatest impact on
personal financial capabilities. We will come back to PESTEL analysis in the next unit
(Unit 4, Topic 5) when we look at how external factors affect financial services
providers.
3.1 Political factors
When we refer to political factors in PESTEL analysis in the context of financial
services, we are referring primarily to the various ways in which the policies of a
government affect the products and services offered by financial providers, and the
impact that these policies have on individuals. These political factors generally derive
from the legislation that has been introduced to govern the financial services industry
(see also section 3.6) – ie both the rules and regulations with which financial services
providers have to comply, and the regulatory and consumer protection bodies that
governments have set up to ensure that providers do comply with those regulations.
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3.1.1 Regulation
The importance of having a comprehensive and effective system of regulation of the
activities of financial services providers was clearly demonstrated by the 2007–08
global financial crisis. It has been widely accepted that failings in the regulation of
banking and finance worldwide were a key factor among those that caused the crisis;
at the very least, it is agreed that better regulation may have helped to prevent the
crisis.
The result was that governments in the many countries affected by the crisis
undertook wide-ranging reviews of their regulation systems and followed this with
reform, aiming to make the systems more effective in terms of maintaining a
sustainable global financial services industry and properly protecting consumers’
interests.
As a former European Union member country, the UK also had to abide by European
legislation, much of which affects providers and consumers of financial services. The
EU Withdrawal Act 2018 ensures most of this law continues after the UK’s exit from
the EU. Since the crisis, the EU has also made it a priority to create a new financial
system for Europe by ‘pursuing a number of initiatives to build new rules for the
global financial system [and] to establish a safe, responsible and growth enhancing
financial sector in Europe’ (European Commission, 2014).
A central part of EU policy is that there should be a high level of competition between
a range of financial providers. The aim is to ensure that consumers can choose the
products and services that meet their needs, and which offer the best value for money.
Putting EU policy into practice
When the effects of the financial crisis in the UK led to the creation of the Lloyds
Banking Group (LBG) – comprising Lloyds TSB, the Bank of Scotland and the
Halifax – EU regulators demanded that LBG reduce the size of Lloyds TSB.
First, LBG proposed to sell off 631 of its branches to Co-operative Bank. Then,
when this sale fell through, LBG complied with the EU regulations by making
Lloyds and the TSB separate companies.
The hundreds of branches are now operated by a stand-alone TSB bank.
(European legislation is covered in more detail when we look at the legal factors: see
section 3.6.2 below.)
Overall, the system of regulation (in the form of the various pieces of UK and EU
legislation) sets out exactly what financial services providers are allowed to do – and
what they are not allowed to do. It covers the way in which financial services
organisations go about providing products and services, including matters such as
the transparency of their product pricing, the quality of the financial advice that they
give and how they respond to complaints.
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Why regulate banking and finance?
◆ It protects consumers from dishonest, incompetent or financially unstable
providers.
◆ A well-regulated financial system will be more sustainable, enhancing
individual and corporate financial stability, and reducing the likelihood of
any future financial crises.
◆ It gives people confidence in the financial system and encourages them to
use the financial solutions that are available to them.
◆ It requires providers to run their businesses prudently (ie with care and
foresight) and to manage their risks properly, particularly in terms of capital
– ie the balance between the money that a provider holds and that owed to it.
◆ It requires providers to ensure that consumers are fully informed about, and
have a good understanding of, the features, benefits, restrictions, and terms
and conditions of the financial products and services that they choose to buy.
The products and services that financial services providers offer are often
complicated and can be confusing to the ordinary consumer. Whether you are
applying for a mortgage, buying insurance, paying into a private pension plan, or
signing up for any other financial product or service, you may find it hard to
understand the products available (what they do, how they work, what they will cost,
etc) or to decide which one is going to meet your needs in the most cost-effective
way. Financial products and services also tend to differ from other kinds of goods
because of the serious financial consequences that consumers can face if they make
the wrong choices. This is the main reason why governments have established
stricter regulation and more extensive consumer protection (at which we look in
section 3.1.3) for the financial services industry than exists for most other industries.
3.1.2 The regulators
The different roles and powers of the organisations responsible for regulating the
financial services industry were covered comprehensively in CeFS (Unit 1, Topic 8).
We will consequently supply only a summary here, as a reminder.
The present regulatory system was established in April 2013 under the Financial Services
Act 2012. The Act returned overall responsibility for regulating financial services and
maintaining the long-term sustainability of the industry to the Bank of England.
The three bodies that replaced the Financial Services Authority (FSA) after the
2007–08 financial crisis are:
◆ the Bank of England’s Financial Policy Committee (FPC); an interim FPC met in
2011 and the full committee was established in April 2013;
◆ the Financial Conduct Authority (FCA); and
◆ the Prudential Regulation Authority (PRA).
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Between them, these three bodies are responsible for enforcing the system of
regulation that governs the financial services industry, for maintaining the stability
of the industry and of individual providers, and for ensuring that consumers are fairly
treated and have their interests protected.
3.1.3 Consumer protection
Consumers do not always buy the right products or services to meet their needs.
This might be because they do not fully understand what they are buying, or because
the provider has made a mistake, or because the provider does not make it clear
exactly what the product will cost. In recent years, there have been cases of financial
products being ‘mis-sold’ by providers – ie of providers, anxious to maximise sales,
using convincing sales techniques to persuade customers to buy products that they
do not actually need. The biggest and best-known case of mis-selling was the
widespread selling of payment protection insurance (PPI) to customers taking out
loans who either did not need PPI or would be ineligible to claim on some sections
of the policy.
Mis-selling PPI
Payment protection insurance is designed to cover the monthly loan repayments
of an employed person who stops working as a result of sickness or redundancy.
Many banks, building societies
and other lenders have been
found to have persuaded
borrowers to buy PPI even if they
were not employed (eg people
who were self-employed or
retired) – and who were
therefore not eligible to claim on
the policy.
These providers have since been
forced to pay billions of pounds
in compensation to the affected
customers. In addition, the
lenders involved have been
sanctioned with large fines
imposed first by the FSA and,
more recently, by the FCA.
The total cost to the financial services industry
of the mis-selling of PPI is predicted to reach
over £50bn
Because of the risk of mis-selling and other problems, there are now several consumer
protection agencies that help to protect financial services consumers. The FCA now
has responsibility for regulating consumer credit – ie loans and hire purchase
arrangements, which retailers often use to help consumers finance the purchase of
furniture, domestic appliances, cars, etc. In addition, the following also play a role in
protecting financial service consumers (as we explained in more detail in CeFS).
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◆ The Financial Ombudsman Service (FOS, online at https://www.financialombudsman.org.uk) is an independent official body, the role of which is to
investigate consumer complaints and to resolve disputes between financial
services consumers and providers. The FOS is funded by an annual levy that every
provider covered by the scheme is obliged to pay, and case fees paid by providers
if the complaints about them referred to the FOS exceed a certain number.
◆ The Financial Services Compensation Scheme (FSCS, online at https://
www.fscs.org.uk) provides a safety net if a bank, building society or certain other
financial services business cannot pay its customers’ claims because it has gone
out of business. All businesses authorised by the FCA are covered. The FSCS is
also, like the FOS, funded by the providers who are members of the scheme and
this includes the cost of any compensation payouts.
In addition to these organisations, the Competition and Markets Authority (CMA),
Citizens Advice and local authority trading standards offices also have powers and
responsibilities for consumer protection more generally across all industries and
businesses. These powers may not be specifically targeted towards financial services,
but providers must nonetheless adhere to this more general system of consumer
protection regulation.
3.1.4 The political agenda
Regulation and consumer protection can be seen as measures that primarily try to
prevent financial services providers from engaging in practices (such as mis-selling)
that, if left unchecked, would adversely affect consumers’ personal finances. There
is, however, another set of government policies – known collectively as the political
agenda – that is focused more directly on helping to ensure that every individual
has access to the benefits that financial products and services can provide.
3.1.4.1
Social exclusion and social inclusion
A key policy within this agenda is ‘social inclusion’. If certain groups of people or
individuals in certain situations are denied access to the benefits enjoyed by most
people in their society, they may be said to be ‘socially excluded’. Those who are
unemployed, for example, or those who do not have a permanent address, or those
who have a poor credit history have often found it difficult to open a bank account
or to take out a loan.
A society in which there is full social inclusion is therefore one in which all members
of society:
◆ can participate fully in community life;
◆ can influence decisions affecting them;
◆ are able to take some responsibility for what goes on in their communities;
◆ can exercise a right of access to the information and support that they may need
to do all of these things; and
◆ have more equal access to services and facilities.
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Unfortunately, the reality is often very different from this ideal. Many people find
themselves socially excluded to a greater or lesser degree, perhaps because they:
◆ have a physical or mental illness or disability;
◆ have poor basic skills (ie literacy and / or numeracy);
◆ live in a deprived urban area or a remote rural area;
◆ have a low income because they work in low-paid jobs;
◆ are not working because they have been unable to find work;
◆ are homeless or have no fixed address to give to an employer or a bank; and / or
◆ are (illegally) discriminated against on grounds of ethnicity, religion, gender, age
or disability.
Social exclusion is a complex and multi-dimensional process. It involves
the lack or denial of resources, rights, goods and services, and the
inability to participate in the normal relationships and activities, available
to the majority of people in a society . . . It affects both the quality of life
of individuals and . . . society as a whole.
(Poverty and Social Exclusion, undated)
3.1.4.2
Financial exclusion and financial inclusion
A key aspect of social exclusion is ‘financial exclusion’ – ie the inability to get access
to even the most basic financial services products and services. Financial exclusion
can be caused by the same issues as social exclusion, such as mental health issues
or being unable to afford financial products, but there is an additional factor: the
individual’s financial literacy. The term ‘financial literacy’ refers to an individual’s
level of knowledge and understanding of financial matters. Those who have ‘low
financial literacy’ may not know how to go about managing their personal finances,
or may not be aware of the range of financial products and services that might help
them to improve their financial well-being.
One measure of financial exclusion is the number of people who do not have a bank
current account. Up until the early 2000s, almost one in four low-income families
were in this situation – often, retired people, low-paid employees or self-employed
workers being paid ‘cash in hand’, or those who, for some other reason (perhaps
because they did not trust banks or understand how current accounts work),
preferred to use cash to pay for all of their bills and spending. Other people who
wanted a current account were unable to get one because of a poor credit history or
because they did not have a permanent address.
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If someone has no bank account, not only is that person unable to make use of the
numerous ways in which a current account allows its holder to make and receive
payments and transfers, but also their access to other financial services is restricted.
◆ Some savings accounts require that the customer has a current account.
◆ Personal loans, credit cards, hire purchase and insurance policies usually require
monthly payments to be made by direct debit.
◆ Gas, electricity and other utilities companies often offer discounted prices if the
customer makes payments by direct debit.
◆ Some employers will only pay wages and salaries directly into an employee’s bank
account.
For those relying on government benefits, not having a current account became a
particular problem when the government began to change the way in which it made
these payments. Before 2003, claimants who had no account into which a payment
could be made directly received a fortnightly cheque, which they could cash in at any
Post Office; from 2003, benefits became payable directly into bank accounts by
automatic credit transfer.
Realising that this would cause real problems for the large number of claimants who
had no bank account, the government consulted with representatives of the banking
industry. The result was a ‘universal banking’ policy: essentially, a commitment by
the banks and building societies to offer stripped-down ‘basic bank accounts’ to any
applicant, regardless of that applicant’s status. A basic bank account typically offers
no overdraft facility or cheque book (although account holders may be offered a cash
card or debit card); some cannot be accessed online and some cannot be used to
make payments by direct debit or standing order.
In addition to basic bank accounts, another option became available to those without
a bank account: the Post Office Card Account. This operates in the same way as a
basic bank account, except that access to the account is through a local post office,
which means that those who are
used to cashing their benefit or
pension cheques in this way are
able to continue to get cash from
the same place, rather than having
to set up an account at a bank or
building society branch (Post
Office, undated).
Basic bank accounts help to reduce
financial exclusion by giving more
people access to banking services.
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Table 3.1 Example basic bank accounts
Bank/
building
society
Minimum
age required
to open
Direct debit
and standing
orders
Standard
debit card
Santander
16
Yes
No
Bank of Scotland
18
Yes
Yes
Barclays
18
Yes
Yes
HSBC
16
Yes
Yes
TSB
18
Yes
Yes
Nationwide
18
Yes
Yes
NatWest
18
Yes
Yes
RBS
18
Yes
Yes
Source: Providers’ websites
The introduction of basic bank accounts and Post Office Card Accounts proved to be
very successful, bringing the percentage of low-income families without a current
account down from almost 25 per cent in 1999–2000 to only 5 per cent by 2008–09
(The Poverty Site, undated). Even with this improvement, however, in 2010 there
remained 1.75m people in the UK without a current account – which prompted the
government at that time to declare its intention to impose on banks a legal obligation
to provide basic bank accounts for everyone (Osborne, 2010). While this intention
was never implemented, it had the effect of encouraging banks to do more to
promote basic bank accounts – and this resulted in a further fall in the numbers of
people without an account to around 1m by November 2013 (BBC News, 2013).
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Figure 3.2 Percentage of low-income households in the UK with no bank,
building society or Post Office Card Account, 1998/99–2008/09
30%
Poorest fifth of population
Households with average income
25%
20%
15%
10%
5%
0%
1998/99
1999/00
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
Source: The Poverty Site (undated)
Consumer rights campaigners believe, however, that many providers still do not
publicise their basic bank accounts enough – suggesting that this is because the
accounts are costly for them to operate and because there are no compensating
profits from cross-selling other products to account holders.
We believe . . . that . . . banks need to be strongly encouraged, or
ultimately required, to . . . meet a set of minimum standards in order to
have a level playing field – and consistency across the country – on access
to basic bank accounts that give consumers the basic functionality they
need.
(Mike O’Connor of Consumer Focus, quoted in Andrew, 2013)
3.1.4.3
Combating social and financial exclusion
The consequences of financial exclusion have been recognised by successive
governments, which have introduced a number of other policy initiatives aimed at
promoting social inclusion in general and financial inclusion in particular.
The Money Advice Service (MAS, online at www.moneyadviceservice.org.uk) is one
such initiative (see Topic 2). Funded by a levy on financial services firms, it is an
independent financial advice and information service, the aim of which is to provide,
by means of its website and publications, clear information and advice to people on
how to manage their money.
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The government has also encouraged banks and other providers to:
◆ offer a range of products (in addition to basic bank accounts) aimed at the
financially excluded – usually low-cost, low-deposit products that are relatively
simple and straightforward, and therefore easy to understand;
◆ provide information on products in a way that is accessible to everyone – eg
offering versions in languages other than English, or in Braille for people with
visual difficulties; and
◆ make their own efforts to promote inclusion through financial education, to help
people to understand how financial products can help them and to encourage
people to make more use of appropriate products.
In response to this last requirement, several banks, building societies and credit
unions have developed their own financial education resources.
◆ Under its ‘Moneysense for Schools’ programme, NatWest offers free interactive
resources online at https://natwest.mymoneysense.com/home/. (It also offers as
a range of product guides and videos on its main website, targeting those over
school age.)
◆ Ipswich Building Society offers its Money Metrics programmes for various age
groups. The sessions take place in schools and other places, such as prisons.
◆ Barclays ‘Life Skills’ programme is another initiative offering free downloadable
resource packs, online at https://barclayslifeskills.com/, providing information
on personal finance and careers.
These sites are just one of the ways in which increasing use of the internet has played
a part in reducing financial exclusion – something that the government has also
encouraged by means of policies aiming to make broadband available to the majority
of the population.
Another way in which the internet has helped to reduce financial exclusion is by
offering a means of accessing financial services to those who:
◆ are housebound and unable to get to a bank branch;
◆ have a disability (eg visually handicapped people can use screen readers and voice
synthesisers);
◆ work shifts or unsocial hours and may not be able to phone or visit their financial
providers during normal working hours; or
◆ are intimidated by the office of a financial provider and / or feel uncomfortable
with sales staff, preferring to research providers and products in their own home
and in their own time.
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3.1.5 The impact on individuals’ personal finances
Most of the decisions that politicians take in Parliament have the potential to affect
individuals directly – and a political decision relating to financial services can have a
particularly significant impact on an individual’s personal finances.
In an unregulated, ‘free market’ financial world, individual consumers would be
exposed to unscrupulous, dishonest or incompetent providers whose only objective
would be to maximise their short-term profits by selling as many products as they
could at the highest prices possible.
Many economists would say that little, if any, regulation of the way in which products
are bought and sold is necessary if the market for those products is close to what is
known as a ‘perfect market’. We can best explain this by means of an example.
Buying shoes in a perfect market
When you are buying
shoes, you will typically be
able to choose from
among
thousands
of
different types and styles,
produced by hundreds of
different manufacturers,
and sold by dozens of
different retailers in shops
and online.
The existence of these
large
numbers
of
competing manufacturers
and retailers means that no single one has the power to charge excessive prices
and to make unlimited profit: if consumers know that they can buy similar
products more cheaply elsewhere, then they have no reason to buy the higherpriced product.
Of course, a high level of competition between suppliers is not the only requirement
for a perfect market. If you want to be confident that you are buying the product that
will best meet your needs, at the best possible price, you also need to be well
informed and knowledgeable about:
◆ the product itself (its features, benefits, initial and future costs, etc);
◆ the best way in which to buy it (ie which retailer is offering the product with the
best balance of price, quality and customer service); and
◆ your own needs and the products available to meet those needs.
Ideally, you will have ‘perfect knowledge’ of each of these things.
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When consumers are not fully informed about a product – when knowledge in one of
these areas is lacking, ie when there is what economists call ‘information failure’ –
there can be no guarantee that free competition and market forces will deliver the
best products at the best prices – ie there is ‘market failure’.
When buying shoes, you are likely to have a good idea of your needs.
◆ You might be looking for ‘everyday’ shoes to replace some that are wearing out,
or you might be going to a wedding and so be looking for a new pair of ‘special
occasion’ shoes.
◆ You probably buy shoes quite regularly, so you will have knowledge from previous
buying experiences that will inform your purchase this time around.
◆ You will know what size and colour you want, how much you can afford to spend,
how much extra you are prepared to pay for higher-quality shoes, and which
retailers have good customer service and offer a good range of products at
competitive prices.
Even with many competing suppliers and well-informed consumers, however, the
market for shoes is still by no means ‘perfect’. For this reason, general consumer
protection legislation and regulation protects consumers from being sold any
product that does not meet their needs. The Sale of Goods Act 1979, for example,
gives consumers the right to return goods that are ‘not fit for purpose’.
But buying financial products and services is not like buying shoes. The legislation
and regulation that protects consumers in general is not extensive enough to ensure
consumer protection in the context of financial services.
The major banking and finance ‘scandals’ that have hit the headlines over the past
few years have shown that, even with a strong regulatory system, the financial
services industry is still by no means a perfect market. That system therefore has to
be revised and updated constantly to deal with failings as they become apparent.
As we mentioned earlier (see section 3.1.3), the practice of mis-selling payment
protection insurance (PPI) to customers who were taking out loans is one example
of a scandal that had a major impact on consumers and on the providers who were
involved. The fact that this mis-selling was so widespread and had gone on for more
than ten years before the regulators stepped in was another factor contributing to
the reform of the regulatory regime in 2013 to try to prevent similar problems from
happening again.
By thoroughly reforming the way in which financial services are regulated, the
government hopes to restore consumer confidence in the effectiveness of the
regulatory system – and hence to restore customers’ trust in financial services
providers – which is essential if individuals are to maintain their personal financial
stability.
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The costs of compliance
While regulation brings many benefits for individual consumers of financial
services, it is not without its costs. As the number or scope of regulations with
which providers have to comply increases, so too does the amount that they
must spend on staff training, on maintaining adequate compliance departments,
on administration, and on registration fees and levies to fund some of the
regulatory and consumer protection bodies – not to mention the fines and
compensation payments that they must pay when things go wrong. New
legislation can also increase providers’ costs if they have to redesign products,
product literature and advertisements, and retrain sales and administrative staff.
It is inevitable that these additional costs will have an impact on the individual.
The company may accept lower profits, but this will mean cutting dividends
distributed to its shareholders. The company may offset the increased costs of
compliance by reducing other costs, eg it may cut staffing costs by restructuring
and negotiating redundancies, or it may ‘freeze’ salaries and annual staff
bonuses at their present levels. Major changes in the regulatory system have
even led some providers to leave the industry entirely because they are unable
to make a profit.
Consumers too end up carrying the costs of regulation by paying higher prices
for the products that they need or by going without products they cannot afford.
They may also suffer if providers reduce the range of products and services that
they offer, leaving consumers with fewer choices.
Regulation and consumer protection are essential if consumers are to enjoy the
benefits that financial products bring – but governments must ensure that the
costs do not outweigh these benefits.
3.2 Economic factors
When we refer to economic factors in the context of financial services, we are
referring to changes in:
◆ interest rates, which are related to:
− inflation;
− house prices (and thus activity in the housing market); and
− savings and investments;
◆ economic activity, government spending and unemployment; and
◆ the global economy and exchange rates.
These factors affect how businesses (including financial services providers) operate
and make decisions, and can either directly or indirectly affect consumers and have
an impact on sustainable personal finances.
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3.2.1 Interest rates and inflation
Interest rates can be described very simply as ‘the price of money’ – ie they are the
price that banks charge borrowers for the money that they lend and the price that
banks pay to savers for the use of the money that they have deposited with the bank.
Interest rates are also used as a central tool of government and central bank
economic policy. Historically, throughout most of the 1970s and 1980s, interest
rates in the UK were high – generally more than 10 per cent – falling to just over 5
per cent only in 1994. From then until 2007, interest rates rose and fell regularly,
but never drifted above 7.25 per cent or below 3.75 per cent. However, the financial
crisis of 2007–08 and the economic recession that followed prompted the Bank of
England’s Monetary Policy Committee (MPC) to cut Bank rate dramatically in March
2009 to an unprecedented 0.5 per cent, where it stayed for over seven years.
In August 2016, Bank rate was lowered further to 0.25 per cent, as a result of
uncertainty following the UK’s decision to leave the European Union. Although the
MPC increased Bank rate slightly in 2017 and 2018, in March 2020 Bank rate was
lowered to an historic 0.1% in response to the economic instability created by
Covid-19, ie coronavirus.
Figure 3.3 Bank rate (and other base rates) in the UK, 1975–2021
Source: Bank of England (no date)
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The reason for these changes in interest rates is that changing Bank rate is the way
in which the Bank of England tries to manage inflation.
Basic economic theory tells us that if there is ‘too much’ spending – if consumers
are demanding more than businesses are able to supply – prices will tend to rise
as businesses take advantage of the excess demand to boost their profits. If this
happens on a widespread basis, the result is a general trend of rising prices,
otherwise known as inflation.
In May 1997, the government gave the Bank of England the power to set Bank rate
independently of government – a change later formalised under the Bank of England
Act 1998. The Bank was also given responsibility for using Bank rate to deliver ‘price
stability’ – ie to maintain the annual rate of inflation at around 2 per cent. If the
Bank’s MPC believes that inflation is likely to remain higher than the target rate, its
response is to increase Bank rate.
When Bank rate goes up, most lenders will automatically increase the interest rates
that they charge on loans, credit cards, mortgages, overdrafts, etc. Borrowers with
variable-rate mortgages or credit cards will face higher monthly payments, leaving
them with less money to spend. Those who have made effective short-term, mediumterm and long-term personal financial plans, including contingency plans that make
provision for rising interest rates and inflation, will be able to manage these higher
monthly payments, often by cutting back on their discretionary spending. Others
who were considering a loan or hire purchase as a means of buying a ‘big ticket’
item (eg a car or furniture) may be put off by the higher interest rates and delay the
purchase until the cost of credit comes down again. All of this helps to achieve one
of the MPC’s objectives in increasing the Bank rate: to reduce consumer spending.
Lower spending will reduce overall demand for products and services, which will, in
turn, put pressure on businesses to reduce their prices.
For many individuals, a high and rising rate of inflation will mean having to spend a
larger proportion of their income on the goods and services that they regularly
consume. This may significantly affect their financial plans by reducing the amount
that they are able to save and increasing the likelihood that they will have to borrow
money. Increasing interest rates to keep inflation in check therefore helps those
living on a fixed income with little or no debt by ensuring that their income continues
to cover their expenditure. Those with high levels of debt, however, are better off if
interest rates are kept low and inflation is allowed to rise, because lower interest
rates will keep down the cost of servicing their debts, while inflation will reduce the
amount that they owe in real terms.
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3.2.2 Interest rates and house prices
When interest rates are rising, some people will inevitably find it harder than others
to meet their monthly mortgage payments and will begin to fall into arrears. Some
will default on their mortgages and have their homes repossessed. The higher cost
of mortgages will also reduce demand for houses and flats, because potential buyers
may decide that they can no longer afford the mortgage they need to buy a property.
Falling demand will then cause property prices to fall across the housing market and
builders may decide to build fewer new properties.
The housing market is such a large part of the national economy that changes in
house prices and demand for housing have a significant impact on economic activity
as a whole. This is as true in the UK as it is across most European countries, where
it has been the ambition of many people, since the 1960s, to own their own homes.
In the UK around two-thirds of the population are owner-occupiers, but as the figures
in Table 3.2 show, the figure is much higher in some countries. In Switzerland,
however, the figure is lower, at less than half.
Table 3.2 Owner-occupiers by country, 2019
Ranking
Country
Proportion of
population (%)
1
Romania
95.8
2
Hungary
91.7
3
Montenegro
91.0
4
Slovakia
90.9
5
Lithuania
90.3
6
Croatia
89.7
7
North Macedonia
85.9
8
Poland
84.2
9
Bulgaria
84.1
10
Serbia
83.3
Source: Eurostat (no date)
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3.2.2.1
The housing market and the national economy
The importance of the housing market within the national economy can be illustrated
by following its progress from before the financial crisis through to the time of
writing.
Before the financial crisis of 2007–08, interest rates had been relatively low since
the mid-1990s: it was widely felt that inflation had been brought under control and
was no longer a serious threat to the economy. Banks and building societies were
able to borrow money easily and cheaply on the money markets, and were therefore
able to make mortgage loans cheap and easily available, requiring that prospective
borrowers put down little or no cash deposit. Demand for houses consequently
increased and house prices rose rapidly.
Although these higher prices began to make buying a house or flat more expensive
for first-time buyers, who needed to save up more money for even a small deposit
and who needed to make higher monthly repayments on their mortgages, those
who already owned a home were able to use the increase in the value of the home
that they were selling to put down a bigger deposit on the more expensive house
that they wanted to buy. The willingness of banks and building societies to lend
100 per cent of the value of the property – with some even offering 125 per cent –
and up to a multiple as high as seven times buyers’ annual incomes meant that many
people were able to borrow more than they could sensibly afford – and this kept
demand high.
Having lived through decades during which house prices seemed only to go up year
after year, many people now saw buying a home not only as a way of putting a roof
over their own heads, but also as a major investment that would provide a lump sum
of capital to help them through their retirement years and which they might
eventually pass on to their children.
Further, with house prices rising, people who had already bought their homes felt
wealthier: they owned a property that had significantly increased in value since they
had bought it, which meant the equity in that property – ie the difference between
the market price and the outstanding mortgage balance – had grown. Those who
had taken out a repayment mortgage some years earlier also found that they had
repaid quite a lot of their original mortgage, which also increased equity. In both
instances, homeowners were able to convert this equity into cash by borrowing from
banks and building societies on the basis of secured loans or second mortgages –
commonly known as ‘equity loans’ or ‘mortgage equity withdrawal’.
Banks and building societies were willing to lend in this way because the loan was
secured on the increased value of the house. They believed that there was little
chance that they would lose their money even if the borrower were to default,
because they could repossess the home and sell it for the increased price, thus
covering the amount still owing on the loan. Few experts believed that property
values would fall in the foreseeable future.
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Some people used the extra cash to improve their properties – which is a sensible
strategy if the improvements increase the value of the property by more than the
costs of carrying them out – but others used equity loans to buy consumer goods or
to finance life events and emergencies. Because interest rates on secured loans are
always lower than those charged for unsecured personal loans, hire purchase or
credit cards, some consumers simply saw equity loans as a cheaper way of borrowing
money. Lenders rarely pointed out to customers that taking out an additional secured
loan to pay for a one-off holiday, new furniture, a wedding or a new car over a period
of 15, 20 or 25 years would actually cost the customer more than doing so using a
personal loan in the long run, because they would be paying interest on the secured
loan for so much longer.
In this booming housing market, there was also increased demand for other
complementary financial products. Borrowers needed to take out buildings and
contents insurance; they also bought life assurance to cover the financial
consequences to their families should they die before paying off their mortgages.
If house prices had continued to rise year on year in the United States, Europe and
other Western economies, the banks and their customers might have continued to
enjoy these benefits – but the house price ‘bubble’ burst. It is the collapse of the US
sub-prime housing market – ie the market for mortgages among those with low credit
ratings, who are thus least able to repay and most likely to default – that is often
seen as the event that triggered the 2007–08 global financial crisis. At the end of
2006, house prices began to fall dramatically in the United States, and those in the
UK and Europe followed suit throughout 2008 and 2009 (Christie, 2006).
As the financial crisis bit deeply, central banks in the United States, UK and Europe
dramatically cut Bank rate to try to stop the crisis from causing a deep economic
recession, which meant that the cost of borrowing money also fell. We have already
noted that, in general terms, falling prices for any product or commodity will tend to
increase demand, because people who could not previously afford to buy them now
find that they can – but this was not the case in the post-crisis housing market.
Anxious to avoid the risks involved in making mortgages too easy to obtain (for
which they now found themselves heavily criticised), banks and other mortgage
lenders tightened their lending criteria: the ‘credit crunch’. They reduced their
maximum loan-to-value ratios – ie the ratio of the amount of mortgage loan to the
market value of the property – to 75 per cent or less; they dropped mortgage income
multiples back down to three times gross salary or less; they tightened up their credit
scoring procedures. People who now could not get mortgages as easily either had to
buy cheaper houses or had to withdraw from house purchase altogether – a situation
that began to ease only in 2013.
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House prices and Covid-19
Near the end of 2020, UK house prices were rising at the fastest rate in four
years. Due to the Covid-19 pandemic, the government had temporarily scrapped
stamp duty land tax for a majority of buyers, leading to a big increase in prices.
However, house prices were expected to fall again when stamp duty was
eventually reinstated, and because of the continued economic uncertainty
surrounding Covid-19 and enforced lockdowns. Very low borrowing costs, ie
interest rates, were hoped to balance these forces and boost the housing market.
3.2.2.2
The impact on personal finances
If fewer people are buying or moving house, it not only reduces demand for new
builds, but also for goods, such as new furniture, and for the services of builders,
decorators, plumbers, electricians, estate agents, surveyors, solicitors, etc. People
start to lose their jobs and others become afraid that their jobs may be under threat.
Many people in this situation will reassess their personal finances in order to protect
themselves against the prospect of losing their job and the income that they are used
to having.
A typical reaction among the majority of people in the face of the financial crisis was
to try to reduce personal debts (mortgage, loans, credit cards, etc), to increase
regular savings and try to build an adequate emergency fund, and to avoid taking
on any new debts. The homeowners worst affected by the crisis and subsequent
economic recession were those who had used high loan-to-value mortgages to buy
their properties or had taken advantage of mortgage equity withdrawal, and who
now faced the prospect of ‘negative equity’ – ie of the amount of money that they
still owed on their mortgage loan being greater than the market value of their
property. Those affected who can still manage to meet the monthly loan repayments
on the mortgage are generally able to manage this situation by simply staying put
until the market improves – but those who default on their repayments take a double
blow: not only may they be forced to leave their home when the lender repossesses
the property, but they may find that they still owe money to the lender when the
forced sale fails to cover the debt in full.
By cutting Bank rate as far as possible, the Bank of England undoubtedly helped
millions of mortgage holders to keep up to date with their monthly payments and
avoid getting into arrears. In this way, the Bank has kept down the numbers of people
who have defaulted on their mortgages and had their homes repossessed. Problems
remain, however, for those who are ‘marginal borrowers’ – ie people who are only
just managing to pay even at a lower interest rate and who will be unable to meet
even a small increase in monthly repayments when interest rates begin to rise once
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more. Not only will these people lose their homes (and see above for the impact
should they have negative equity), but they will also suffer the effects of the resulting
footprint on their credit history, identifying them as a bad credit risk and making it
difficult for them to get a mortgage or any other form of credit in the future.
Table 3.3 Repossessions and mortgage arrears in the UK
Year
Number of
repossessions
Number of
mortgages in arrears
of 2.5% or more
2008
40,600
600,000
2009
48,900
833,000
2010
38,500
734,000
2011
37,300
668,000
2012
33,900
635,000
2013
28,900
609,000
2014
20,800
504,000
2015
10,200
425,000
Source: CML (2016)
3.2.3
Interest rates and savings and investments
While rising interest rates causes problems for borrowers, it is a different story for
savers. When Bank rate rises, banks and building societies can increase the interest
rates that they charge to borrowers and increase the interest rates that they pay to
those who have deposited savings without having to narrow profit margins. The main
beneficiaries will be retired people and others who rely on their savings to provide
an income. The majority of retired people have paid off their mortgages and tend
not to have many other debts, so they will rarely be as badly affected by interest
rates going up on borrowing. Paying higher interest rates to savers may also affect
people’s attitudes to saving and borrowing – encouraging them to save more of their
income rather than to spend it – which further adds to the downward pressure on
demand and prices.
Interest changes can also affect investors, because the prices of shares listed on the
stock market may fall after a rise in interest rates. Remember that when the Bank of
England’s Monetary Policy Committee (MPC) increases Bank rate, it is hoping that
increasing the cost of borrowing will reduce consumer and corporate spending,
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thereby reducing the overall (or ‘aggregate’) demand for goods and services. If
demand for goods and services does fall, however, sales revenues will fall. Corporate
profits will therefore be ‘squeezed’ by falling revenue and rising costs, and lower
profits makes buying shares less attractive (particularly if potential investors can get
good rates of interest on savings products). As demand for shares falls, so share
prices will tend to fall across the board.
Figure 3.4 Interest rates and share prices
Bank rate
General interest rates
Cost of borrowing
Consumer spending and demand
Sales revenues and corporate profits
Demand for shares and share prices
A fall in the stock market generally affects the wealth of many people and businesses.
Those who have invested directly in the stock market – by buying shares in particular
companies or by putting money into collective investments, such as unit trusts or
OEICs – will suffer an immediate reduction in wealth; many other individuals are also
indirectly exposed to what happens in the market as a result of the effects on pension
fund and insurance company fund investments. A period of economic growth in the
five years before the financial crisis saw a steady rise in share prices: the FTSE 100
index, for example, increased from 3940 in 2002 to almost 6500 by 2007. But the
global financial crisis caused a dramatic stock market crash, which cut the FTSE 100
back down to just under 4500 by the end of 2008 (swanlowpark.co.uk, no date).
One effect of these huge changes was that many people lost faith in investment
products. They began to look for alternative places to keep their money – products
that offered the safety and security of a savings account, but also had the potential
to provide a return higher than average interest rates, even when stock markets were
falling. Providers responded to these changes in consumers’ attitudes to risk by
developing new ‘structured products’, which (it is claimed) offer a safer home for
people’s savings than the stock market, while still allowing them to benefit from
share price growth.
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Reshaping investment risk and reward
Guaranteed growth or guaranteed capital plans use complex investments called
derivatives to offer investors a return linked to the stock market over a set period
of years.
◆ If the stock market goes up in value, investors get their money back plus
growth based on the amount by which the stock market has gone up.
◆ If the stock market falls, they either get back only their original investment
(hence ‘guaranteed capital’), or get back their original investment plus a
minimum growth amount, eg 4 per cent (hence ‘guaranteed growth’).
But these products cannot entirely eliminate risk: their complex structure means
that they are not covered by the Financial Services Compensation Scheme (FSCS)
– and that means that investors risk losing their money if the bank goes bust
(Lythe, 2012).
3.2.4 Economic activity, government spending and unemployment
3.2.4.1
Economic activity
A healthy, balanced economy is one in which demand for goods and services is high
enough to keep unemployment at an acceptably low level, but is not so high that it
causes unacceptable levels of inflation. Economic activity in the UK is fuelled by
demand for the goods and services from four main sources:
◆ consumer demand refers to the amount that individuals are spending on the
goods and services that they are consuming, spending that is funded by
consumers’ incomes, savings and borrowings;
◆ corporate demand is the amount that businesses are spending on the goods and
services that they are consuming, spending that is funded by a business’s
revenue, savings and borrowing, and by capital injections from its investors;
◆ government spending is the amount that national and local government
departments and agencies are spending on the goods and services that they are
consuming, which spending is funded by tax revenues and government
borrowings; and
◆ demand for exports refers to the goods and services produced in the UK, but sold
overseas.
One of the government’s key roles and objectives is to use the economic tools
available to it to achieve and maintain full employment and low inflation. We have
seen already that, on the one hand, when inflation goes above the government’s
2 per cent target, interest rates are increased to reduce consumer and corporate
spending, putting downward pressure on prices. On the other hand, when prices are
stable and unemployment is growing because of a lack of demand, interest rates
may be reduced to make it cheaper for individuals and businesses to borrow money
to spend on goods and services, thus increasing consumer and corporate demand.
This manipulation of interest rates is known as ‘monetary policy’.
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The Bank of England’s ‘forward guidance’ statement
Mark Carney, formerly governor of the Bank of Canada, was appointed as
governor of the Bank of England in July 2013. One of his first actions was to
issue a ‘forward guidance’ statement setting out what the Bank expected to
happen to interest rates in the future.
The statement formally linked interest rates with the rate of unemployment, as
well as inflation, when Carney said that Bank rate would not be increased until
unemployment fell to 7 per cent. This would not apply, however, if the rate of
inflation – which, at 2.7 per cent, was above the 2 per cent target, but stable –
were to threaten to spiral out of control. Neither did this mean that an interest
rate increase would be automatically triggered by unemployment hitting 7 per
cent. This was demonstrated in January 2014, when the Bank did not consider
it necessary to increase Bank rate even though unemployment had fallen to
7 per cent, on the basis that inflation had also fallen to the government’s 2 per
cent target (Elliott et al., 2014).
3.2.4.2
Government spending
As well as using monetary policy, it is equally important for the government to
manage the amount of money that it raises in taxation, the amount that it borrows
on the financial markets, and the overall amount that it spends. This is known as
‘fiscal policy’.
Whenever the government changes its policies on taxation, borrowing and / or
spending, this has the potential to affect economic activity. There are different
opinions among economists, politicians and political parties as to what should be
the ‘correct’, or ‘optimum’, levels of government spending and how much of it should
be financed by taxation or borrowing. Put simply, if the amount spent by the
government each year is more than the amount raised through taxation, then the
government’s budget is said to be running a deficit, which has to be financed by
government borrowing. (Government borrowing is largely funded by means of giltedged securities, or ‘gilts’, which are bonds sold to investors and guarantee a set
return on a set date.) Any borrowing that is not immediately repaid is added to the
overall government debt. The aim of most governments is to ‘balance’ the budget
(ie for spending to be equal to tax revenue) or to achieve an annual surplus (ie
revenue greater than spending).
Most people accept, however, that many governments – like consumers – were
encouraged by low interest rates and easily available credit to borrow more and more
in the years running up to the financial crisis (leading to increasing budget deficits
and outstanding debt). They used these borrowings to finance significant expansion
in government spending – especially on education, public transport and the health
service.
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The Labour government, in power from 1997 until 2010, believed that it was right to
increase government borrowing and debt to improve public services and to maintain
full employment. Government borrowing grew at an even faster pace after 2007, in
the wake of the global financial crisis and recession, when the government faced:
◆ the need to ‘bail out’ the failing banks with injections of funds, to save them from
going bust and triggering a failure of the banking system as a whole;
◆ rising unemployment, which led to increasing numbers of claims for state benefit
payments (eg Jobseeker’s Allowance and Housing Benefit); and
◆ the negative effects of that rising unemployment and of less activity in the
housing market on government revenues from income tax, National Insurance
contributions (NICs), value added tax (VAT), stamp duty, etc.
The 2010 general election offered voters a choice between a Labour government and
a Conservative government with very different attitudes to combating the budget
deficit.
◆ Labour promised to reduce government borrowing slowly by maintaining public
spending to combat the recession, hoping that boosting economic activity would
lower unemployment, reduce spending on welfare benefits (because there would
be fewer unemployed claimants) and increase tax revenues.
◆ The Conservatives believed in an ‘austerity’ policy, which involved substantial
cuts in public spending to reduce the amount that the government needed to
borrow each year to cover the annual deficit and quickly restore a ‘balanced
budget’ in which the deficit would be reduced to zero.
In the event, there was no clear-cut victory of one over the other, and the Labour
government was replaced by a coalition between the Conservatives and the Liberal
Democrats.
The coalition government largely
introduced Conservative austerity
policies, meaning that, each year,
government spending has faced
serious cuts, which have led to
thousands of jobs being lost in the
public sector. The cuts were not
enough to stop total government
debt from growing – from £530bn in
2008 to £1,457.2bn in November
2014. This debt will not be reduced
until the annual budget deficit is
turned into an annual surplus, which
David Cameron, Conservative Party leader, and Nick
will give the government money to
Clegg, Liberal Democrat Party leader, enter
start paying off its debts (Rogers and 10 Downing Street after agreeing to form a
Kollewe, 2013). The Covid-19 coalition government in May 2010.
pandemic, which began in 2020,
demanded huge government spending that increased the deficit and further impaired
the aim of balancing the books.
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Figure 3.5 UK budget deficit and net borrowing, 2000–16 (£bn)
Source: Measuring Worth (2021)
3.2.4.3
Unemployment
The level of unemployment can undoubtedly have an impact on individuals’ personal
finances, and on their choice of products and services.
High employment can lock people into a high-consuming lifestyle and it encourages
a consumer culture. It also enables people to save money if they earn enough to have
a surplus after they have satisfied their needs and everyday wants. People feel
confident because they are earning money, and as a consequence their needs, wants
and aspirations are probably less influenced by fears for the future than they might
otherwise be. Having a secure job can also affect a consumer’s appetite for different
financial products, such as savings accounts, overdrafts and credit cards, mortgages,
pensions and insurance.
High unemployment makes for a very different market. The long-term unemployed
– defined by the Office for National Statistics (ONS) as those who have been
continuously unemployed for more than 12 months – have to rely on state benefits
for their income and do not have the resources to buy financial products, even
though they may still need them. At times of high unemployment, even those who
have a job probably feel uncertain about the future. Rather than putting money into
risky investment products, the financial priorities of these people are more likely to
be focused on:
◆ protection, eg insurance against the effects of losing a job; and
◆ security, eg low-risk savings products with which to build up a ‘rainy day’ fund.
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3.2.5 The global economy and exchange rates
The last of the economic factors at which we will look in terms of their effect on
personal financial planning are changes in exchange rates (ie the purchasing power
of the pound sterling against other currencies) and changes in the global economy.
These factors are considerably more important now than they were 100 years ago
because of the effect of ‘globalisation’ – ie the integration of the economies of
individual countries around the world.
3.2.5.1
The global economy
The 2007–08 global financial crisis, yet again, illustrates clearly the impact of
globalisation. A hundred years ago, the collapse of the US sub-prime market in
mortgage lending might have affected only banks and investors in the United States;
in the present day, globalisation has resulted in an international financial services
industry comprising many multinational banks, insurance companies and other
providers with offices scattered across the globe providing services and selling
financial products to an enormous customer base. The extent of the connections
between these providers – with fund managers in one country investing in the
products of a firm based in another – is considered to be one of the reasons why the
US collapse was so contagious: many banks in the UK and Europe were ‘exposed’
because they had invested their money in ‘toxic’ collateralised mortgage obligations
(CMOs) – a way of repackaging mortgage debts into investment products.
Many European banks were so badly affected that they had to be rescued by
government bailouts. Many European governments had already increased their public
spending and borrowing substantially during the ‘boom’ years; having to borrow
more money to support their banks added to their debt, leading to a financial crisis
among the countries that had adopted the euro as their currency (known as the euro
area, or eurozone) that, at one point, threatened the continued existence of the euro
itself. Greece, in particular, had developed a huge public sector debt, and had to
borrow enormous amounts of money from the European Union and also from
international markets to prop up its economy. Ireland nearly went bankrupt when its
property sector crashed and the government had to bail out some of its banks. The
UK government itself lent a significant amount to the Irish government when it
became clear that the subsidiaries of two UK banks (RBS and Lloyds) had made large
loans to Irish property developers, many of which loans had turned bad, threatening
big losses for the UK parent companies. Spain, Italy and Portugal also experienced
large annual public sector deficits resulting in huge government debts.
The impact that the economic policies adopted by foreign governments, and the
conduct of foreign banks and other financial services providers, can have on the
national economy and on individuals’ personal finances has never before been as
clear as it has become in recent years.
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3.2.5.2
Exchange rates
Further factors that illustrate globalisation are the extent to which people regularly
travel abroad, either on holiday or on business, and the growth of imports and
exports of raw materials, components, and semi-finished and finished goods. All of
this activity has an impact on foreign currency exchange rates – particularly the value
of the pound sterling (£) against the euro (€) and the US dollar ($). In today’s
globalised economy, for example, a UK manufacturer might buy raw materials from
France, paying its French supplier in euros, and export what it makes to the United
States, getting paid in US dollars. At the same time, it pays its UK costs, such as
wages and rent, in pounds sterling.
Individuals and businesses consequently need financial providers to supply:
◆ foreign exchange services, eg people who want holiday spending money will want
to buy travellers’ cheques or pre-paid foreign currency cash cards;
◆ buy-back guarantees, which mean that purchasers can sell any unspent currency
at the same rate at which they bought it, meaning that they are protected against
adverse currency movements;
◆ credit and debit cards that will be accepted abroad, including in cash machines;
and
◆ products that help businesses to manage exchange rate risk, so that they will not
lose if exchange rates move against them.
In the past, many governments fixed the exchange rates of their currencies, rather
than allowing them to ‘float’ – ie to be determined by the forces of demand and
supply in the currency markets, which is largely what happens now. If a country were
experiencing an economic downturn, the government could then ‘devalue’ its
currency – simply by selling the currency at a lower price on the international
currency markets.
If the UK government, for example, were to decide to use devaluation as an economic
tool and reduce the price of the pound sterling in US dollars from $2 to $1, the cost
of buying UK-produced products and services to those paying in US dollars would be
halved, which would produce a surge in demand for UK exports. The downside of
doing so, however, would be that the cost (in sterling) of buying goods and services
imported from other countries would now be double what it was before devaluation.
This would lead to a substantial increase in the rate of inflation (although it would
make it easier for UK companies to compete in the domestic market against rival
imported goods and services).
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The euro and the UK
In 1999, the euro replaced
the national currencies of
a number of European
countries that had chosen
to adopt it. Of the 27
member countries of the
European Union, 19 have
adopted the euro – and
thus
comprise
the
eurozone.
Business
carried out between two
eurozone countries is all
done in the same currency
and there is therefore no
exchange rate risk.
The UK chose not to join
the euro when it was part of the EU – but a lot of UK customers do business in
euros or have bought holiday homes in eurozone countries, and want to save
and borrow money in euros. People in the UK can therefore be directly affected
by changes in euro–sterling exchange rates.
For example, if someone in the UK takes out a mortgage in euros with a Spanish
bank to buy a property in Spain, it would be to their benefit if the value of the
pound, in euros, were to go up. If they had initially borrowed, say, €100,000,
with monthly repayments of €1,000 at a time when the euro–sterling exchange
rate was 1:1 (ie €1 to £1), a rise in the value of the pound to an exchange rate of
2:1 (ie €2 to £1) would lower the sterling value of the mortgage debt to £50,000
and their monthly repayments to £500. (Of course, the sterling value of the
property – ie how much it could be sold for – might also fall in the same
proportion, offsetting some or all of the benefits of the stronger pound.)
A fall in the value of sterling would have the opposite effect – eg a fall from 1:1
to 1:2 (ie €1 to £2, or 50 cents to £1) would double the sterling value of the
same €100,000 mortgage to £200,000 and the monthly repayments to £2,000.
This would not be a problem if the mortgage holder were to live and work in
Spain, but it could be a serious financial problem if the owner were to live in the
UK, because their income would be in sterling, meaning that they would feel the
full effect of the exchange rate change.
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With floating exchange rates, there is an interaction between interest rates and
exchange rates: if interest rates are generally higher in the UK than in other countries,
for example, investors and investment fund managers in other countries will have
an incentive to buy UK government and corporate bonds – but these are sold in
sterling, so these investors will have to exchange their dollars, euros, etc, for pounds
to be able to invest in the UK. The higher demand for sterling on the currency
exchange markets will tend to increase the price of the pound, causing the value of
sterling to strengthen.
Individuals should therefore be aware that taking on debt in a foreign currency
carries a significant exchange rate risk, which they should take into account when
drawing up their financial plans. They must consider what would happen if exchange
rates were to change significantly and they must put contingency plans into place to
take account of potential future changes in the strength of the pound sterling.
The same consideration should also be given to making investments in other
currencies (such as buying shares in foreign companies that cannot be bought and
sold on the London Stock Exchange). Any profit made from the rising price of shares
bought (in dollars) on the New York Stock Exchange, for example, could be wiped
out by an adverse movement in the dollar–sterling exchange rate.
3.3 Social factors
When we refer to social factors in the context of financial services, we are referring
to a wide range of cultural aspects, including changes in demographics, levels of
employment and home ownership. Trends in social factors have a big impact on the
type of goods and services – including financial services – that individuals demand.
3.3.1 Cultural issues
When we speak of cultural issues, we are referring not only to people’s ethnic and
religious backgrounds, but also more generally to the social groups to which they
belong or in which they were brought up. Our cultural backgrounds tend to
determine what ideas, beliefs, values and attitudes were instilled into us as children,
the overriding ideas of our peer groups and what is important to us in our lives
generally. Cultural factors affect people’s approaches to financial services, helping
to determine which products they will buy and from which suppliers they will
purchase them. They affect people’s needs, wants and aspirations, and ultimately
their behaviour, including their financial behaviour.
We will consider some of the cultural changes that are apparent in the UK and what
these could mean for consumers of financial services.
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3.3.1.1
Multiculturalism
Large sections of the UK population have family origins elsewhere in the world. Their
values, attitudes and beliefs may be very different from those of people with other
cultural backgrounds. Some people with family origins elsewhere may not be able to
identify with the traditional ways of doing things in the UK – and this means that
there is a risk that they will be excluded from using certain financial products and
services unless providers take cultural differences into account when they are
designing, marketing and delivering those products and services.
3.3.1.2
Religion
In many religions, lending and borrowing money is seen as an acceptable activity
provided that lenders treat borrowers fairly and borrowers do not build up
unsustainable levels of debt. Others, however, see debt as something to be avoided at
all costs. They believe that it is wrong to lend someone money if you charge interest
on the loan, and that it is equally wrong to borrow money and pay interest on the loan.
Complying with Sharia
Under Islamic law, known as Sharia, it is forbidden to charge or pay interest
(Riba). If an urgent need arises for someone to pay for something and they do
not have enough money to do so, the options available to them are to borrow
only from members of their own family group or to use a Sharia-compliant
financial product.
There are now six stand-alone Islamic banks operating in the UK, and these
provide Sharia-compliant home purchase plans, loans and savings. Some more
mainstream banks – notably Lloyds and HSBC – recognised the potential in
meeting the needs of the large Muslim community in the UK and developed their
own Sharia-compliant products. But these products were not a commercial
success and are no longer available in the UK (Jenkins and Hall, 2012).
In 2014, however, Britain became the first non-Muslim country to offer Shariacompliant government bonds (Sukuk). Initial demand for the products (which
matured in 2019) was high, with orders in excess of £2 billion (Moore and Hale,
2014).
A Sharia-compliant home purchase plan is a way in which devout Muslims can
access money to buy a property without technically borrowing or paying interest.
There are two widely used types of Sharia home purchase plan (Ijara and
Murabaha); in both cases, the bank will buy the property in which the customer
wants to live and allow the customer to repay in instalments. These plans were
explained in CeFS (Unit 2, Topic 3).
Islam (and some other religions) also prohibits drinking alcohol and gambling
in all of its forms. This means not only that investing directly on the stock market
is strictly forbidden as a form of gambling, but also that Muslim customers must
avoid certain investment products that might indirectly link to the stock market,
such as investment funds, pensions or life assurance policies.
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3.3.1.3
Youth culture
‘Youth culture’ is the term used to describe the values shared by people in their teens
and early 20s. It embraces everything from what you believe in to how you spend
your leisure time and money. Changes in youth culture can affect how young adults
manage their finances, and the kind of financial products and services that they use.
In recent years, providers have had to work hard to keep up with the ever-changing
options available for accessing information about financial services and for buying
financial products. While making this information available and services accessible
online, using PCs and laptops, has been standard practice for some years, providers
are now being pushed to supply services that can be operated using smartphones
and tablets. The rise in social networking sites and smartphone apps offers new
opportunities for marketing to the innovative financial services provider – and
keeping up to date with this technology is essential if providers are to supply the
financial services that young adults need to keep their finances in order.
3.3.1.4
Grey culture
‘Grey culture’ refers to the older section of the population – ie those in late middle
age and older stages in the financial life cycle – which has been getting bigger year
by year across the world’s industrialised countries in recent decades and will continue
to do so for the foreseeable future.
This group of people has specific financial needs – for pensions, insurance, savings
accounts and income-producing investments – and will often share certain values,
such as respect for tradition, and the need for security and trustworthiness. As the
world’s ageing population continues to grow, it will steadily become increasingly
important as a target market for financial services.
People in the older stages of the financial life cycle are an important and growing market for
providers of financial services.
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3.3.1.5
Consumer culture
In the latter half of the twentieth century, as standards of living rose and people in
the industrialised world found themselves with more disposable income, a consumer
culture emerged. A consumer culture, or consumer society, is ‘[a] society in which
the buying and selling of goods and services is the most important social and
economic activity’ (Lexico, 2021).
As we have already noted, this trend continued apace through the first few years of
the twenty-first century: people were spending more and more money, and even
borrowing to finance what they wanted to buy. The trend was reversed in the
immediate aftermath of the financial crisis of 2007–08. Since 2012 there have been
signs that consumer spending is increasing – not least in terms of the housing market.
However, due to Covid-19, UK consumer spending decreased by 7.1 per cent in 2020
as people saved their money and spent more on essentials (BBC News, 2020).
3.3.2 Demographics
Demographics involve analysing a population in terms of age, sex, ethnicity, culture,
social status and geography – ie its demography. The demographic structure of a
population and changes in that structure play a key role in the way in which providers
design and market their products, because the individuals who can be grouped under
a particular demographic heading may have very different needs, wants and
aspirations from those in another.
Demographics also tell providers a lot about the financial solutions that a target
population is likely to need. Age is an important facet of demographics, for example,
because the financial products that people need at different stages of the life cycle
are very different. Other demographic factors are also important, however, because
people’s needs, wants and aspirations can be influenced by the kind of people by
whom they are surrounded.
Changing and ageing populations
As populations grow in size, financial providers see a rise in demand for their
products. Population growth usually happens because health and life expectancy
have improved, which means that a lot of people are living longer and remaining
economically active for many more years than has been the case in the past.
Many countries therefore now have an ageing population – ie a population of
which an increasing proportion are over retirement age. This has made it less
likely that the state will be able to provide adequate pensions for everybody,
because it is the taxes paid by the working population that fund state pensions.
The impact of this on the individual is that younger people need to plan their
finances wisely (particularly pensions, insurance, long-term savings and
investments) if they are to ensure that they will have sufficient income to live
comfortably through a much longer period of retirement than previous
generations have ever enjoyed.
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Other demographic changes can also alter a population’s demographic mix. The
following are a small sample of such changes:
◆ Changes in birth rates – fertility rates in Europe, including the UK, are falling and
people are having fewer children than they used to. Research from the Office for
National Statistics (ONS) in the UK found that, by 2009, women born in 1964 had
an average of only 1.9 children, while the average among their mothers’
generation (women born in 1937) had been 2.4 children. With 20 per cent of
those women born in 1964 remaining childless (compared with 12 per cent
among those born in 1937), the figure is too low to maintain a stable population
size (Hughes, 2010).
◆ Migration – despite the falling birth rate, however, net migration into the UK (ie
those relocating into the country from elsewhere) may mean that the population
will not actually fall. UK government statistics show that, since the late 1990s,
net international migration into the UK from abroad has been an increasingly
important factor in population growth. During 2007, net migration – ie the
number of foreign people coming to live in the UK less the number of people
leaving the country to live abroad – contributed to just over half of the annual
population increase.
◆ In August 2020, the ONS stated that net UK migration in the year to March 2020
was 313,000. Around 403,000 people emigrated from the UK and the number of
migrants entering the country grew to about 715,000 (ONS, 2020).
Figure 3.6 Migration into and out of the UK, 1985-2014
Emigration
Immigration
Net migration
000s
600
400
200
0
1985
1990
1995
2000
2005
2010
2013
2014
-200
Source: ONS (2014)
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The impact that these factors have on individuals and their implications for
sustainable personal financial planning are complex, and emerge over a long period
of time. The following are, however, some of the likely effects.
◆ Most mothers now go out to work, and this affects the financial products and
services that they need. There are already several independent financial adviser
(IFA) practices that are run and staffed mainly by women, specialising in dealing
with the needs of women in modern society.
◆ Because people have smaller families, they can spend more on each child.
Children and teenagers now consume many goods and services, and have income
from pocket money and part-time jobs. Not only do they need specialised bank
accounts and savings products, designed to meet their needs and requirements,
but also – and most importantly – they need to be offered an effective financial
education, so that they understand how to use personal budgets and cash-flow
forecasts to plan their finances over the short, medium and long terms.
3.4 Technological factors
Technological factors include matters such as increased automation, the rate of
technological change and the influence of technology on outsourcing decisions.
Technological shifts can affect costs and quality of service, and can lead to product
innovation. The financial services industry is directly affected by change in
information and communication technologies (ICT). One feature has been increased
automation – ie a computer doing something automatically that a person would
formerly have done.
The processes that lend themselves to automation are those that are rules-based.
The computer is given a set of rules via a software program and processes
information or carries out tasks in accordance with those rules. Generally, these are
jobs that need no judgement or discretion, although the following points are worth
noting.
◆ A computer that works to a set of rules can make straightforward decisions based
on those rules and it can put borderline cases in a separate list, to be referred to
someone who can exercise judgement and make a decision. Credit scoring is an
example of an automated way of making decisions about whether or not to lend
to someone. A credit scoring system can be set up so that it will refer all
borderline declines and acceptances to senior management. The system
effectively separates out cases that are clear-cut and indicates a decision on them,
while sending complicated cases to a person for a decision.
◆ Some computers can ‘learn’, building up experience that helps them to make
better decisions in the future, based on what has happened in the past. This sort
of technology is of most value where there is a lot of data on which the system
can base its experience; the financial services industry is a good example,
because it has many millions of customers all using essentially similar products.
This type of technology can be of help in developing customer relationship
management (CRM) systems and risk management systems.
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Financial institutions routinely process masses of information about their customers,
including the transactions on their accounts, their balances, etc. This information
can be used to detect any deterioration in an account holder’s behaviour long before
their account actually becomes overdrawn without permission or before a loan
account falls into arrears. Such a system might typically flag up a pattern of declining
balances or a situation in which someone’s overdraft gets bigger and is added to
earlier each month.
Within the finance industry, automation has had the following results.
◆ Increasing speed and efficiency – customers are now accustomed to being able
to access information about their accounts or about the share markets, updated
in real time, 24 hours a day and at very low cost.
◆ Less face-to-face advice and sales – as computers take over jobs that used to be
carried out by people, there are fewer opportunities for people to discuss their
financial needs and plans with an adviser face to face. Your parents may
remember having an interview with their local bank manager, but few people have
ever met or even spoken on the phone to a bank manager. Some have never even
spoken directly to a member of staff.
Technology such as the internet, email and smartphones means that relationships
seem less personal nowadays – and yet, in other ways, relationships are closer than
before. Providers’ huge information-processing capabilities mean that they amass
large amounts of data about existing and potential customers, and form a clear
picture of their needs, wants and habits, which can be to the advantage of consumers
if it means that they will be offered products and services closely matching those
needs and wants.
The digital divide
It is important to remember, however, the problems of social and financial
exclusion (see sections 3.1.4.1 and 3.1.4.2), and to be aware of the ‘digital
divide’ that is widening between those who are computer literate and have full
access to the internet and those who are not and do not. In 2020, the ONS
reported that 96 per cent of UK households had access to the internet (ONS, no
date a). This means that around 4 per cent of the UK population did not have
everyday access to an internet connection.
There is nonetheless no denying that the pace of technological development is
increasing. E-commerce has changed the face of customer–provider relationships in
the last decade, offering an electronic link – as likely now to be via a smartphone or
tablet as it is to be via laptop or desktop PC – between supply (the provider) and
demand (the customer). Technological factors thus directly determine the ways in
which providers sell their products and the ways in which people manage their
finances. The computer revolution has also been the single most fundamental factor
in the rise and spread of globalisation, and the ever-increasing interdependence of
financial providers and markets.
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3.5 Environmental factors
Although there are some scientists and politicians who take a different view, the vast
majority of environmental experts believe that the things we do and use every day –
the products that we make, the raw materials that we dig out of the ground, the
energy that we use in our homes, factories, offices, vehicles, etc – are causing serious
problems for the long-term sustainability of the environment. Waste products from
production processes and from the consumption of goods can cause pollution; waste
heat and ‘greenhouse gas’ emissions contribute to global warming, which causes
damaging climate change including melting ice caps and rising sea levels; rain forests
are being destroyed, and we are using up non-renewable sources of energy and other
natural resources.
These environmental factors must be considered in relation to sustainable personal
finances because, whether or not individual consumers are themselves concerned
about the environment, the financial products and services that they buy will
inevitably have an environmental impact. Financial services providers are being
encouraged by regulators, government and non-government agencies, environmental
campaigners and pressure groups, among others, to make their products more
environmentally friendly. Banks, for example, are under pressure to make loans
available on favourable terms to companies that invest in developing green
technology and not to lend money to those companies whose products or production
processes are non-sustainable. Insurance companies, similarly, can make a difference
by charging lower premiums to people with more fuel-efficient cars and / or cars
with lower carbon emissions. Investment bankers, and pension fund and insurance
fund managers, are also being asked to consider the environmental records of the
companies in which they invest.
Some have argued that it is too easy for
companies
to
adopt
so-called
‘greenwashing’ policies – ie to mask
their
products
with
‘green’
(environmentally friendly) window
dressing, when in truth they are only
paying lip service to environmental
issues. Critics complain that, by
making their products green, providers
face higher costs and will have to pass
those costs on to consumers in the
form of higher prices, and that
investing in green companies will not
necessarily secure the best returns for
investment fund clients.
Changing
perceptions
of
environmental issues have therefore
undoubtedly affected individual
finances in recent years – in both Companies that supply renewable energy could
benefit from favourable lending terms.
positive and negative ways.
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3.6 Legal factors
In addition to all of the legislation that provides the framework for the regulation of
the financial services industry at which we looked earlier (see section 3.1), there are
other legal factors that can have an impact on providers and consumers of financial
products and services. These include laws relating to discrimination, consumer
protection, employment, and health and safety. All of these laws can affect how a
financial company operates, its costs and the prices that it charges for its products.
They can also, both directly and indirectly, affect individual demand for financial
services products.
3.6.1 UK legislation
Financial providers wanting to set up in business need to ensure that they can comply
with all applicable laws before they do so and, in particular, with financial legislation,
such as the Financial Services and Markets Act 2000, the Consumer Credit Acts 1974
and 2006, the Banking Act 2009 and the Financial Services Act 2012.
The Banking Act 2009 established a permanent statutory regime for dealing with
failing banks and makes new provisions for the governance of the Bank of England.
The Financial Services Act 2012 amends the Bank of England Act 1998, the Financial
Services and Markets Act 2000, and the Banking Act 2009. It also includes other
provisions about financial services and markets, which were described earlier in this
topic.
In addition, companies must comply with the following legal requirements.
◆ Company law – this covers many aspects of how companies are set up and run,
and how they report on their affairs. There is also partnership law for those
businesses that operate as partnerships.
◆ Employment legislation – this sets out rules on how employers must treat their
workers and what rights the workers have.
◆ Tax laws – these govern the taxes that individuals and businesses must pay, and
how they are calculated.
◆ Proceeds of crime and anti-terrorism legislation – these laws aim to stop criminals
from laundering money (ie from using financial services to hide the proceeds of
crimes), and to stop terrorists from using financial services to collect and move
their funds around.
◆ Accounting standards – financial services providers must draw up their annual
financial statements in accordance with International Accounting Standards (IASs).
As consumers of financial products and services, individuals are also protected by
more generic consumer protection laws that give them rights, for example, to return
faulty goods to the shop from which they bought them and get a full refund.
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The primary and secondary legislation (Acts and regulations, respectively) that are
relevant in the context of financial services include:
◆ the Courts and Legal Services Act 1990;
◆ the Competition Act 1998;
◆ the Consumer Credit Acts 1974 and 2006;
◆ the Consumer Protection from Unfair Trading Regulations 2008;
◆ the Consumer Protection (Distance Selling) Regulations 2000 (known simply as
the ‘Distance Selling Regulations’);
◆ the Enterprise Act 2002;
◆ the Estate Agents Act 1979;
◆ the Financial Services and Markets Act 2000;
◆ the Sale of Goods Acts 1979 and 2002;
◆ the Transport Acts 2000 and 2001;
◆ the Unfair Terms in Consumer Contracts Regulations 1999 (often abbreviated as
the UTCCR 1999);
◆ the Consumer Rights Act 2015; and
◆ the Finance Act 2016.
While we do not need to go into the details of all of these relevant pieces of
legislation, it is important to understand how their provisions are now enforced in
the context of financial services.
Until April 2014, the Office of Fair Trading (OFT) and the Competition Commission
were the government agencies responsible for enforcing the relevant consumer
protection provisions. On 31 March 2014, both of these bodies closed and their
responsibilities in this regard were divided between the Financial Conduct Authority
(FCA) and a new agency: the Competition and Markets Authority (CMA). This change
was brought about under the Enterprise and Regulatory Reform Act 2013.
[The CMA is] responsible for:
◆ investigating mergers which could restrict competition;
◆ conducting market studies and investigations where there may be
competition and consumer problems;
◆ investigating where there may be breaches of UK or EU [competition
laws];
◆ bringing criminal proceedings against individuals who commit [an
offence];
◆ enforcing consumer protection legislation to tackle practices and market
conditions that make it difficult for consumers to exercise choice;
◆ co-operating with sector regulators and encouraging them to use their
competition powers;
◆ considering regulatory references and appeals.
(GOV.UK, CMA, undated)
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The area of responsibility that most directly affects consumers is the enforcement
of the consumer protection provisions contained in the Consumer Protection from
Unfair Trading Regulations 2008. These address practices and market conditions
that make it difficult for consumers to choose the products that will best suit their
needs and requirements. The work of the CMA includes investigating individual cases
in which consumers have suffered because of a lack of effective competition in the
market for a particular product or service.
If consumers have been sold a financial product or service in breach of the provisions
of the Distance Selling Regulations (which regulate the sale of goods and service via
the internet) or the Consumer Rights Act, they can take advantage of complaints
procedures and ‘cooling-off’ periods during which they are entitled to change their
minds about purchases; their local trading standards office will also take up any
individual cases of bad practice and take steps to resolve the problem. This regime
of consumer protection is, of course, additional to that specifically provided for
consumers of financial services by the Financial Services Compensation Scheme
(FSCS), the Financial Conduct Authority (FCA) and the Financial Ombudsman (FOS).
If all else fails, consumers also have the option of bringing a civil action against a
provider. When a court case between a customer and a financial services provider
goes against the provider, other customers who have similar cases are likely also to
take it to court: the first decision will establish judicial authority, which means that
the court actions of other dissatisfied customers will have a greater chance of success.
The need for legal regulation of financial services was demonstrated by the problems
that occurred as a result of changes in the law in the 1980s, which swept away many
of the regulations that had until then prevented financial services providers from
widening the range of products and services that they could offer. Before this
deregulation, building societies, for example, had been limited to providing only
mortgage lending and savings accounts, while banks supplied shorter-term loans and
current accounts – and the two were not to cross into each other’s marketplace in
that regard. Building societies were also not allowed to borrow money on the money
markets to fund their mortgage loans; the money with which building societies
provided mortgages was the money that savers had deposited with the organisations.
Deregulation freed these two types of firm from many of the legal constraints that
stopped them from competing in similar areas. Most of the big building societies
took the opportunity to convert from mutual organisations to banks (an exception
being Nationwide). In today’s financial services marketplace, there is very little
difference between the ranges of services that banks and building societies offer:
both provide mortgages, loans, savings accounts and current accounts, along with
an increasingly diverse range of other products and services.
Generally speaking, this increased competition is seen to be a good thing, because
it helps to ensure that prices are kept as low as possible. After the global financial
crisis of 2007–08, however, high-profile cases of mis-selling financial products (see
section 3.1.3 above) and fixing interest rates came to light – and were considered to
be the consequences of deregulation. Many economists and politicians now believe
that too many building societies gave up their mutual status to become banks, and
also that it was deregulation that permitted banks to develop certain poor practices
– particularly aggressive sales techniques and expansions in high-risk investment
banking activities – that contributed to the crisis.
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The new legislation and new regulatory system brought in under the Banking Act 2009
and the Financial Services Act 2012 can therefore be seen as an acceptance by
government that deregulation was damaging – that individual consumers will suffer if
banks and other financial services providers are not properly and effectively regulated.
3.6.2 European legislation
Brexit
At the time of writing in early 2021, the UK has left the European Union (known
as ‘Brexit’). The long-term effects on legislation are unknown. The following text
does not reflect any change in legislation that may come into force during the
2021/22 academic year.
Membership of the European Union also has implications for a country’s legislation,
because the institution itself makes laws. These take the form of either regulations
or directives, and they have to be applied in all of the member countries.
◆ Regulations are directly applicable in member countries. This means that they
become law in all EU member countries as soon as they come into force, and that
people and businesses must comply with them immediately. Such regulations
apply to all EU members equally, with no variation of the law from one country to
another.
◆ Directives can be seen as instructions issued by the European Commission to the
governments of the EU member countries. Each member has to enact its own laws
to meet the requirements of the directive within a set period (usually two years).
The exact rules can differ from one member country to another, as long as they
fulfil the requirements of the directive. In other words, the directive sets out what
is to be achieved and the member country can decide for itself how to achieve it.
There can be differences in how quickly each member country brings a directive
into force, but they should result in a set of minimum standards being established
across all EU member states.
Figure 3.7 Implementation of EU legislation in the UK pre-2020
European Union
Regulations
Directive
Domestic legislation
United Kingdom
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A huge number of UK laws have originated in the European Union, eg the Data
Protection Act 1998 and the Consumer Credit Act 2006. In December 2010, the
deposit compensation limit for the UK (payable through the FSCS) was changed; this
too was the result of European intervention – the equivalent in pounds sterling of
the euro deposit compensation limit agreed for all members of the European
Economic Area (EEA), which includes EU member states plus several other European
countries, such as Iceland, Liechtenstein and Norway.
On 25 May 2018, the General Data Protection Regulation took effect. In the UK it
superseded the Data Protection Act 1998 with the creation of the Data Protection
Act 2018, and at least some of its provisions will continue to apply after Brexit to
organisations that collect the data of EU citizens.
European law particularly affects the financial services industry because the EU is
trying to harmonise financial services regulation, with the aim of safeguarding the
rights of individual consumers of financial services. The objective is to create a single
European market for financial services in which people living in one EU member
country can confidently buy financial products and services from a provider in
another EU member country, secure in the knowledge that providers are regulated
and supervised to the same standard across the Union. The European Commission
consequently plans to bring into force a huge number of laws and directives over
the next few years. Despite Brexit, this may affect UK financial services businesses
that deal with customers in the EU.
This planned legislation will naturally mean increased competitive pressure as
European banks, insurance and investment companies enter the UK marketplace –
and this should be to the benefit of UK consumers, who will have more products and
services from which to choose.
3.7 Analysing data sources
Many of the PESTEL factors that we have discussed in this topic are quantifiable – ie
their values can be measured, and differences or changes in those values can be
recorded and analysed. Data on interest rates, levels of inflation or unemployment,
house ownership, budget deficits and debts are just some of the social and economic
variables that can be measured and presented in tables, graphs, histograms, bar
charts and pie charts, etc. In the UK, huge amounts of these statistical facts and
figures are collected and collated every day by the Office for National Statistics (ONS)
and published in a variety of forms online at https://www.ons.gov.uk/.
In this final section, then, we will look at examples of the most common ways of
presenting data, and consider how best to analyse that data and draw appropriate
conclusions.
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3.7.1 Tables
Table 3.4 contains data showing how many houses and flats were sold in England
and Wales in 2015 and 2016. Sales were grouped into different price bands and a
separate column shows the percentage change in number of properties sold in 2016
compared with 2015. Every time a house or flat is sold in England and Wales, the
property has to be registered with the Land Registry, which means that the figures
are very accurate.
Table 3.4 Sales volumes by price range (England and Wales), October 2015–16
Price range (£)
2016
2015
Under 50,000
9,614
11,128
-14%
83,009
92,832
-11%
100,001–150,000
154,565
171,175
-10%
150,001–200,000
151,662
168,661
-10%
200,001–300,000
206,424
214,564
-6%
300,001–400,000
113,881
112,191
2%
400,001–500,000
59,560
57,447
4%
500,001–600,000
31,534
28,475
11%
600,001–800,000
29,524
27,864
6%
800,001–1,000,000
11,934
11,694
2%
1,000,001–1,500,000
8,704
8,502
2%
1,500,001–2,000,000
2,606
3,032
-14%
Over 2,000,000
2,611
2,614
<1%
867,644
917,144
50,001–100,000
Total
Difference (%)
-5.4%
Source: GOV.UK (no date)
By analysing the figures in the table, it is possible to think about the state of the
housing market in England and Wales.
◆ The biggest increase in the number of properties sold was in properties worth
between £500,001 and £600,000.
◆ The increase in the number of properties sold at the ‘top end’ of the housing
market was relatively small.
◆ The decreases in the lower end of the market could be attributed to a shift in the
cost of housing rather than a drop in demand for cheaper housing.
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105
3.7.2 Graphs
Tables of raw data are necessary for detailed analysis of the figures. But to see overall
trends and comparisons of data at a glance, it is better to turn the data into a graph
or chart.
Figure 3.8 shows how the rate of inflation in the UK changed over the ten-year period
from 2011 to 2021. Presenting the data as a graph makes it easy to see, for example,
that inflation dropped sharply in the first half of 2020 due to Covid-19.
Figure 3.8 Percentage change in the Consumer Prices Index (CPI), 2011–21
Source: ONS (2021)
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You should, however, take care with this kind of graph – which plots changes in the
annual rate of increase in average prices, rather than the amount by which average
prices are rising or falling – because it can be misinterpreted. The graph shows, for
example, that the Consumer Prices Index (CPI) fell steadily through 2009, from a peak
of over 5 per cent to a low of just over 1 per cent – but this does not mean that prices
were actually falling during this period. Even at the low point, prices were still rising;
they were simply rising at a slower rate than they had been at the start of the year.
3.7.3 Bar charts
Figure 3.9 shows (at the top of each bar) the number of people in different age
groups employed during November 2016 to January 2017. Note, however, that the
height of each bar represents the percentage of each age group that were in
employment, not the number of people.
Figure 3.9 Employment rates by age group, Nov 2016–Jan 2017, seasonally
adjusted
Source: ONS (no date b)
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3.7.4 Pie charts
With pie charts, the data is presented (as the name suggests) as a ‘pie’ divided into
‘slices’, each of which represents a different variable.
Figure 3.10, for example, shows how much of the government’s total planned
expenditure for 2017 was devoted to education, pensions, health care, etc. Pie charts
are ideally suited for presenting this kind of data.
Figure 3.10 Breakdown of public spending in the UK, 2017
Welfare
1%
Education
1%
Health
18%
Pensions
20%
Remainder
3%
Total spending = £bn
Source: Chantrill (undated)
Key ideas in this topic
◆ Changes in external financial factors – things over which neither consumers
nor providers have control – and their impact on both consumers and
providers of financial services
◆ Analysis of external factors using the PESTEL framework (‘political’,
‘economic’, ‘social’, ‘technological’, ‘environmental’ and ‘legal’)
◆ The effect of international influences – particularly the impact of globalisation
◆ The presentation of the impact of external financial factors in the form of
statistical tables, graphs and charts, to aid easy understanding and accurate
analysis
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