The UK is still a nation of savers. Outside of property it is more likely for a consumer to hold their money in cash instead of in an investment product.
This is further illustrated by the fact that there is approximately £1.5tn in cash savings held in the UK. For comparison, the FTSE 100 market cap is currently at £2tn.
Given that the government is trying to boost investment in UK companies, utilising this capital is becoming an increasing focus.
So where does this resistance to invest come from and what can the industry do to aid consumers?
The FCA's Response
In 2021, the Financial Conduct Authority published the Consumer Investments Strategy with the objective of creating the right environment for consumers to invest.
As part of this strategy, the FCA identified four key areas where the industry would need to improve to deliver better outcomes for consumers.
- Increase the number of consumers with higher risk tolerances investing in straightforward products like stocks and shares Isas.
- Decrease the number of consumers investing in high-risk investments, ie Crypto.
- Protect consumers from scams and fraud to build confidence in the industry.
- Ensure firms provide redress in a fairer and more sustainable way.
Against each of these areas, the FCA set a target to track progress alongside the objective.
For the first point, the FCA aimed at a 20 per cent reduction in consumers who have higher risk tolerances holding more than £10,000 in cash by 2025. As it stands, these numbers have instead increased to 5.2mn in 2023 from 4.4mn in 2022.
The implementation of consumer duty was the only specific action called out to deliver this outcome.
Although there are many positives from the implementation of consumer duty, its scope only extends to a firm’s current customer base and is not built to encourage new customers to enter the market.
Therefore, the industry must do more to shift the paradigm away from the current way of thinking.
Cash is 'safe'
One common misconception is that cash is the safe option.
Cash has its uses, but there is also a risk when holding cash. This has become evident with high rates of inflation, where cash has seen its real value decrease.
The inflation risk is outlined when comparing investments held in a stocks and shares Isa versus holding that same value as cash.
Between 2021 and 2023, while the nominal value may have increased for investments (as well as cash) – that is, what an individual would see their account valued at – the real value (the value of these products accounting for inflation over these periods) decreased more for a cash Isa than if the same value was held as an investment.
This includes the FTSE UK Private Investor Income Index, which is designed to provide a benchmark for multi-asset indexes with lower-than-average levels of historic volatility.
Comparing between 2013 and 2023, the difference is more apparent. But even if the growth in value of investments is discounted, where results can and will vary, cash has lost approximately £1,600 of purchasing power over the past 10 years.
More importantly, that value is extremely unlikely to ever be recovered. This is the risk industry needs to explain better.
Investments will likely outperform cash in the long run, but to think the benefit of cash is that it carries no risk is false.
