Do you trust financial services companies?

9 February 2009

The credit crunch could shatter consumer confidence in financial services, leading to long-term changes in the way we engage with savings, pensions and protection products.

A new report by the Financial Services Authority (FSA) warns that the economic turmoil has already had an impact on the way people view financial services such as banks, building societies and insurers.

While in the short-term a heightened awareness of economic uncertainty has led more people to review their finances, the FSA is concerned that there is a long-term risk of disengagement and increased distrust of financial products and the companies that sell them.

For example, the FSA notes that fear of redundancy and stretched budgets have caused people to look away from long-term savings towards more liquid alternatives that allow them to access their money easily. While this sort of savings buffer is useful during a recession, there is a concern that such behaviour could become embedded even when favourable economic conditions return.

This means that people opting for safety above returns could miss out financially down the line. With savings, accounts that require you to lock away your money tend to offer better returns compared to those that allow unlimited withdrawals.

While this is not too great a concern over the short-term, the FSA warns that if this becomes a long-term trend savers’ returns will suffer, bearing in mind that rising prices erode value further.

People nearing retirement are particularly at risk, especially if their pensions have suffered from the stockmarket turmoil. While older workers tend to save more as retirement approaches, a lack of trust in the value of pensions (brought on by falling equity prices and low annuity returns) could force people to work for longer or take an income hit.

The FSA’s report, entitled Financial Risk Outlook, also warns that the current lack of credit, such as mortgages and loans, coupled with stretched household budgets is likely to result in larger numbers of people struggling to cope with their debt.

“Consumers are more likely to default on repayments, maximise unsecured credit lines (such as credit cards) or seek out loan shark debt to fill the gap,” the report adds.

There is also a risk from financial fraud, which tends to increase during times of economic hardship. The FSA says people should avoid deals that look “too good to be true”.

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