UK financial sector may need to make adjustments as savings grow

David Harvey our consultant managing the role

The UK public appears increasingly keen to save for the future, a new survey has shown.

To say the UK financial sector has undergone significant change in recent years would be to state the obvious in much the same way as suggesting a powerful earthquake will cause a lot of buildings to collapse.

Just as the epicentre of the financial crisis saw Lehmann Brothers and Icesave reduced to rubble and other institutions needing emergency help to avoid collapsing in a heap, so there has been a long and difficult rebuilding process.

As with any emergency, the normal way of doing things has to go out of the window and the financial sector has been heavily geared towards making borrowing cheaper, with interest rates slashed in the UK and elsewhere.

The Bank of England cut the base rate to 0.5 per cent in March 2009 and while commentators have tipped the Monetary Policy Committee to start raising it again on more than one occasion, no more than three of the nine members have voted for such a step.

While this has benefitted borrowers, particularly those with mortgages at a time when incomes have been squeezed, the situation has been bad news for savers.

However, 2015 may just bring a sea change in that respect. Even though the rate situation does not encourage it, a survey by Standard Life has shown an increasing number of Britons want to put more money away.

It showed 46 per cent of the UK public have made a new year resolution to try to improve their finances, with 22 per cent vowing to save more. In addition, 76 per cent said they are prepared to make lifestyle changes to help them save for the future.

While 19 per cent will seek to improve their fortunes by cutting their day-to-day costs, the increased emphasis on saving could be beneficial for the financial services sector.

One of the key problems in 2007 was that many lenders were reliant on sourcing the cash they would lend on the money markets, which of course froze in the credit crunch. However, more saving and savers means more money deposited in accounts, giving banks and building societies a more tangible source of cash. If better saving becomes a longer-term trend, this will help with efforts at greater capitalisation of banks, making them less vulnerable to systemic shocks.

Those developing careers in the financial sector may therefore be pleased with such a trend, although some of the extra saving will be diverted towards pension funds as government initiatives aimed at increasing retirement saving take effect. However, with inflation having now dipped as low as the base rate and deflation a real possibility, savers can now gain even from low levels of interest.

Of course, this does not mean nobody will be borrowing or spending big. Indeed, 65 per cent of those surveyed by Standard Life revealed plans to spend on a big ticket items, with holidays being the most popular (36 per cent). However, home improvements were second on 19 per cent and these may be considered investments in and of themselves.

Either way, it is clear that consumers are keen to ensure their own finances are safer and more secure than in the past, with the need to put more cash away for tough times emphasised by the cataclysmic events of recent years.

11/04/16
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