The anxiety of ageing – What changing demographics mean for financial services

Regulatory and market responses

Regulators have started to consider what steps they should take to address changing demographics. In the UK, for example, the FCA launched an Ageing Population Project in 2016 to look at how older individuals use financial services. The project reported in 2017 that "there are risks that [older persons'] financial services needs are not being fully met, resulting in exclusion, poor customer outcomes and potential harm". Further, it reported that: "While older consumers are not necessarily vulnerable, they are more likely than other groups to experience vulnerability at some point (whether temporarily or permanently)".

Since then, the FCA has developed specific guidance on vulnerability, introduced a new Consumer Duty and commenced a review of financial advice. Enforcement activity has also indicated some focus on vulnerability (eg, by taking action against those who advised on transfers out of defined benefit pension schemes when that was not in the customer's best interests).

An obvious consequence of an ageing population is increased life expectancy, with a resultant increase in longevity risk. Product development has already responded to this to some extent, with large-scale transfers of longevity risk from corporates to the financial sector happening in numerous countries and projected to happen in others. Many issues remain, however, with products related to healthcare costs, long-term care costs and retirement all needing to be looked at in light of the changing shape of society.

Similarly, the Monetary Authority of Singapore (MAS) has become increasingly concerned about older and more vulnerable consumers. For example, in the areas of product development and marketing, MAS has released guidance that financial institutions should adjust their marketing approach to suit the profiles, financial objectives and general financial literacy of their target customer segments. Where vulnerable customers are involved, MAS expects a financial institution to put in place additional safeguards such as conducting callbacks to ensure the customer understands the implications of the purchase or transaction, or requiring trusted individuals to accompany and assist these older customers to ensure that these customers comprehend their purchase or transaction.

In the area of scams, MAS and Infocomm Media Development Authority (IMDA) have also recently promulgated a joint Shared Responsibility Framework which introduces a framework that requires losses from certain types of phishing scams to be shared across scam victims, financial institutions and mobile telephone operators. Indeed, one of the purposes of the Shared Responsibility Framework is to better protect vulnerable and older victims against phishing scams.

In the US, various regulators have focused on the threats to the financial security of older people posed by various types of fraud. For example, the Consumer Financial Protection Bureau (CFPB) has issued consumer advisories on selecting a trusted contact person to assist in protecting one’s money, working with banks to protect older adults from financial exploitation, and planning for diminished capacity and illness.

Prudential issues

There are barriers to markets and regulators being able to react quickly to changing demographics. Building on the issue of longevity risk mentioned above, developing reliable longevity assumptions takes time, particularly when they need to be developed at the kind of scale and detail needed to allow financial services to function effectively. The issue is not just one of product development – both regulators and financial services firms need to understand the assumptions and underlying data well enough to be able to apply a balanced approach to regulatory capital requirements.

Demographic issues feature most obviously in the insurance markets, but a recent IMF working paper also assessed the impact of an ageing population on bank stability. The paper concluded that, while there is a "general enhancement in bank stability correlating with the ageing of populations", in seeking to respond to demographic changes, banks may introduce tail risks. This may lead to the taking of greater risks in the search for yields as traditional business declines over time. The impacts of doing so need to be understood; there have been too many examples of systemically important firms underestimating risks they do not fully understand, with significant consequences for society at large. One would hope that increased regulatory powers since 2008, and particularly those that allow actions against individuals, would function as a deterrent against excessive risk taking, but that thesis has yet to be proved.

Whilst some policy initiatives are emerging, there is clearly much more which needs to be done. This will require a coordinated approach to public policy, with government, industry and regulators all needing to play a part in that. The issues that come with demographic change are significant – but inaction, on the one hand, or poorly informed action, on the other, in response to those changes are perhaps the biggest risks of all.