Suitable Strategies director Neil Bage said research suggested almost a third of the population have “very little confidence in their understanding of even basic financial terms and products” making them vulnerable targets of mis-selling practices.
He said: “Over half the UK population is vulnerable when it comes to fully grasping financial terms, concepts, products and services. This is why the industry must do more to thorough assess consumer understanding, or risk yet more mis-selling scandals.”
The Financial Conduct Authority (FCA) warned in February it had found ‘problems at every stage’ in the way firms deal with vulnerable consumers.
Its definition included those with poor literacy skills, those who have caring responsibilities, people with disabilities, dementia or the elderly but not those with gaps in their knowledge and understanding.
The regulator said it wanted firms to improve the understanding of their customers, else vulnerable consumers risk withdrawing from the mainstream market, which could lead to their “problems to spiral if their needs are not met”.
Bage based his concerns on research carried out by Mintel in 2013 among 1,916 adults, which found 28% of people have very little understanding of financial products and concepts, while 27% have basic knowledge with some gaps.
The research grouped people’s responses in four categories from ‘good understanding’ to ‘I have never heard of this’.
People fared better with simple products such as savings accounts and cash ISAs, where more than half declared having a ‘good understanding’.
But less conventional products such as self invested personal pensions and open-ended investment companies were well understood by a meagre 6% of people and unknown to more than half of the population.
Around a third of people said they’d heard of annuities, equity release mortgages, guaranteed and with-profits bonds, but did not feel they knew how the products worked.
Financial concepts such as inflation, dividend and the Bank of England base rate were generally best understood in contrast to more technical investment terms.
More than a third of people said they have never heard of the terms annual management charge and actively-managed fund. Almost half (48%) had never heard of a bid offer spread and 53% did not know the term total expense ratio.
The Financial Services Compensation Scheme (FSCS) began a push to raise awareness of its service among the public in January 2013, but when the research was carried out in March more than a quarter of people had never heard of it.
A third had heard of it but did not know how it works. A mere 15% felt confident they knew how the FSCS works.