The Financial System is Rigged Against Normal People

25:55I agree. Trust is a key word there, though. And I think you're going to be hard stretched to find mass trust in the government to do anything with people's money because the perception is the government can't even manage their own money or the tax that it raises at the moment. So I don't know how much buy-in you would get from the public. Let me give you some examples, right? So people face, you know, they kind of respond to the incentives that they are being faced with. I think ISAs have been a great success, for example, right? I mean, I think that's, you know, we can argue about what the limit should be, you know, whether cash versus stocks and shares.

26:30I was going to say cash, ISAs, a great success, right? No, stocks and shares, I mean, stocks and shares got more money in them than cash, but by the features of compounding. But yeah, they're a great product, and they're internationally probably, like, the best, right? What other country has something as good as an ISA? Absolutely. And I think the answer is, you know, in the US, they're called Roth IRAs, you know, but here... They're probably not as generous though, are they? They're not in the same way. And I mean, I think this is, you know, really fantastic. It's a fantastic innovation. There are others that you can sort of point to as well.

27:01I think auto-enrollment in this country has actually, you know, has done a lot. It's been a good start. It's been a good start. You could do more, but it's been a good start. SIPs are good as well. I think they've given people power and the freedom to how they invest their pensions. And I think that control has woken people up to them rather than just the whole buy an annuity and be done kind of thing. Absolutely. I mean, now, you know, there are other corners of the market that just haven't actually flourished at all. Corners that I think would do very well to flourish. Reverse mortgages in this country don't really exist, which I suppose we would call home equity release schemes.

27:32I was about to, but it's all the way over there, nicking my buzzer. What is a reverse mortgage, please? they're trying to steal my equipment they pay you to buy the house sounds all right get me get me two of those please um actually that's not a bad definition of a reverse mortgage let me try and tell you what a reverse mortgage is in sort of simple layperson's terms so um when you're getting old and you've got a you've got a house but you don't have a lot of cash one thing that you want to do is sort of trade this heavily liquid asset which is your house for a liquid asset cash. So one thing you can do is you can say, you can go up to a reverse mortgage provider and either get a fixed income stream that comes to you.

28:14Why is it called a reverse mortgage? Because in a mortgage, you're paying that income stream to the person who's lending you the money. In this case, they are paying you the money. You set whatever that monthly transfer is that they're making to you or a lump sum, if you wish. So it's like a loan. Combination, essentially. It's like a loan on your mortgage. Correct. But they get the house when you die. Exactly. They get the house when you die. So the collateral for the loan is the house. Now, the clever feature of this is if they, at the point at which you pass away, you know, or, you know, the, okay.

28:47So then what happens is they take the house, they sell the collateral, okay? And if there's more left over after repaying the debt, then that goes to the estate, right? if it turns out to be less than the value of the debt no problem you just the lender swallows it essentially and it's done and and you get to stay in your home and you get to stay in your home all the way but these are fraught with like to me they've always seemed like dirty products where you know you realize that you're slightly senile mother has signed away the rights to her home for very on very bad terms it kind of got that pushy salesman vibe to it you know now so this is exact This is the classic example of what we think of as financial economists as being an excellent design that kind of, you know, in some ways allows you to trade the buildup of illiquid assets for something that does approach annuitization, which we love as economists as well.

29:44And you're quite right, has been cluttered by sleazy salesmanship tactics. You know, all kinds of problems where, of course, when you're a bit older, you're cognitively, you know, you're suffering, right? Your gran is not necessarily going to have the same kind of acuity as you are. And you're going to come in there and be like, oh my God, what did you do? I mean, of course you are. But now, can we clean that up? Can we turn that into a product that's fit for purpose? I think we should. Absolutely. And that's one of the things we advocate in our work. It's smart because with the care crisis that we have, with the fact that most of the wealth in the nation is in the hands of boomers and houses, it's a great way to kind of solve that problem without people needing to just be put into care homes.

30:28Because there's so much money sat in bricks, right? But there's a lot of people, like you walk around London and you can see these houses that are worth probably millions, but they're falling down. And you know on the other side of the door is probably someone who's really struggling financially, even though they've got this like golden cage that they're living in. Absolutely. I completely agree with that. And I think, you know, one of the issues is that, you know, as a society, we've become obsessed with hanging onto these properties, even at the cost of having a very poor, you know, standard of living.

30:54Ultimately, you know, experiences are the things you should consume rather than, you know, you can't take that thing with you when you're going, right? So you might as well just trade it in for something that, you know, you can have wonderful experience. Tell it to the kids though. Tamein's like, nope, I don't know where Tamein's parents live. He's like, you ain't excited. You'll be fighting off them salesmen. You'll be chitting all those salesmen trying to take advantage. Yeah. You say that this affects the middle class the most. Can you first of all define how you think about middle class? I know this is a heated question in the modern world.

31:29What is the middle class to you? Sure. I mean, you know, it is absolutely a question that's fraught. I mean, especially when in the United Kingdom, using the word class is likely to get you into all kinds of trouble, you know, very quickly. I think the way that we do this in the book is we have a very simple academic definition, which is we've taken household survey data from all around the world, and then we've sort of looked at ranking people by their net worth. And that's sort of a simple way to do it, which is you can kind of go all the way from the people who have the lowest net worth in the administrative household surveys all the way up to the people who have the highest net worth in the administrative household surveys.

32:05So, for example, people who are about a third of the way up the wealth net worth distribution have about, just to use dollars because it was a comparable currency across the USA, the UK, and Germany,$100 ,000 in net worth, which means take the value of your house, subtract off the value of your mortgage, add in the value of any liquid savings. Now you have about$100 ,000. So you have some home equity, you have some savings, and so on. That's a third of the way up, the wealth or the net worth distribution, all the way up to the 80th, which is about$500 ,000, if you think about it that way. So that's kind of one way of thinking about what that group looks like.

32:46So it's anyone, including people who have just started out, who've just bought their first home with a mortgage, all the way out to people or got their first job out of university, all the way up to people who are what we would think of as being quite wealthy. um but it's a big group it's a huge group yeah yeah yeah and it probably flies in the face of what people would think middle class traditionally was in the uk because middle class was relatively affluent whereas you're saying it 100 grand is is often but people could get there in their like 20s and 30s through their pension savings and if they've just got a house they might have that kind of level to get into that group absolutely now of course those numbers i've given you are for developed economies yeah but the book takes a global perspective you know if you were to sort of compare those people who were at the 30th you know kind of percentile for lack of a better word in the uk us german net worth distribution that corresponds to about the 60th percentile of the developing country distribution so you have the kind of purchasing power parity it's the middle 50 percent of people right and you're chopping off the bottom 30 in the top 20 and you're basically saying this middle 50 is the middle that's the way you want to think about it now this is really an important point, and I'm very glad you brought this up, because there's been a lot of great books about alleviating extreme poverty, which is how do you get people from the very lowest point, zero, where they have negative net worth in some cases because they owe more than they have, okay?

34:16They're in hock to moneylenders, unregulated, whatever. It's pretty bad down there, right? So how do you get them out of that kind of trouble from subsistence consumption into entering the formal financial system. And then of course, there's lots of books about, you know, how do I take your million and turn it into a billion? Okay. I mean, you know, many of those books written by fairly unscrupulous people, but okay, we'll, we'll leave that one. Or how do I tax the rich? Or there's a lot of focus on the ends. There's a lot of focus on the ends. Yeah, the extreme ends. Yeah, absolutely. But since the middle class is so big, why is there so much focus on the ends and not on the middle?

34:46I think this is what we're trying to say in this book, which is, imagine the person who's just gone beyond that 30 to 31 or 32, up the scale of 100 in the net worth distribution. Now, you've just got a little bit of money. You've got your first sort of, making your first steps in the formal financial system. You're like a baby adult in the formal financial system. And there are predators all over the place. It's like Jurassic Park. A little velociraptor here, T-Rex over there. And they're coming for you, right? I mean, you're trying to take your mortgage and there are lots of unscrupulous providers ready to do whatever it takes to, separate you from your money.

35:23You're trying to save for retirement. There's probably half a dozen unregulated financial advisors who are turning up and trying to get you to do things that you absolutely should not be doing. And so what this book is intended for is that whole neglected middle of the population. I think your answer to your question is, look, I think all of us justifiably have been very concerned about the plight of the very poorest. We're also very kind of excited about the bezos's if that's the collective if that's the plural bezi

35:53of the world okay that that's also quite appealing to us right but but i think you're right which is it sort of felt a bit boring to kind of you know think about the people who are in the middle but by far the largest group of people struggling um you know the financial system isn't set up very well for them that's what that's what this book is about we like to study the extremes we like to obsess over murderers and stuff don't we like the extremes and the poorest in the in the world have nothing for these people to extract and the richest are so too sophisticated to be have the wool pulled over their eyes or they're paying for good advice on the other side that will act with a fiduciary duty or in their best interests but these like middle 100 i mean i think back to the sort of the very first thing you started with, which is this issue of the kind of regressivity of the way that the financial system is set up.

36:44You know, the way that you operate when you're at rank 30 out of 100 is very different from the way you operate when you're at rank 80 out of 100. If you're very savvy, you know, and savviness is generally correlated with wealth, it's correlated with education, income, then when you see a teaser rate mortgage, you're going to take the best deal you possibly can. You're going to shop like hell for the best one. you'll get it and then like clockwork you'll have a reminder in your calendar and you'll refinance it bang on time and what what's what that's doing is you're essentially benefiting because the teaser rate is kept so low because there's a bunch of other people who are at the 31st rank who are just not doing so well and actually on the standard variable rate because they forgot i can think of a great example in recent years of how it might have got a bit better with car insurance that's so weird i would always get i'd always get done over with that i did it This year for the first time, like on time, they said someone told me - But they don't charge you loads now.

37:38If you try and renew your car insurance with a month in advance, I think it's like 29 days or there's a specific time, you get the best rate. But if you try and renew it like with a week to go, they're going to charge you double or they're going to charge you so much more. And it's like a specific timeframe. And I only found, I've been driving for like 15 years, probably longer. And I just found out this year that if you renew 28 or something days before you expire, you get the best rate. But they've improved it in the sense of, it used to be like the teaser rate where it would fly up. And I'm talking that you would go from like£30 a month to£120, and it'd auto-renew you and you'd be screwed, whereas now it seems a bit more measured.

38:14So this is very interesting. In fact, just yesterday I completed a paper on price walking, okay, and I've just sort of uploaded it. Price walking. That's what it used to be called, where they would auto-renew you as an existing customer and then shove up your rate very high. Okay, now, on the face of it, the fact that they had the price walking regulation seems like a very well-intentioned thing because it's sort of, but the way that the policy was set up, it said you can only have policies that are equivalent, okay? As soon as the policies are a new equivalent business user or auto-insuree, you have to have the prices linked with that person, okay?

38:52So that is to say, they can no longer price walk you if you're a pre-existing consumer because they have to treat you the same as someone who's in the same category as you. and when you study the data you realize that actually insurers respond to this as soon as the regulation has been set the word equivalent essentially means that i can now proliferate products like crazy so actually after the policy was introduced product proliferation went up like crazy now what does that mean it means that no longer as as many people are equivalent which means you can continue to raise prices on people where there isn't an equivalent policy out there or there's only a very few people who have taken that equivalent policy because you're making much more money on the group of people who are old, the back book, relative to the people who are new, the front book.

39:37And product proliferation means that it's even more advantageous to search because you can get a better deal because there's so many different products out there. It's January, mate. Do you want to know an interesting little factoid about this month? Go for it. So not only is it the most depressing month of the year, but this is where legal inquiries and divorce filings spike. Happy days. Get Christmas out of the way. Get him gone. Make sure to see what he bought you for Christmas before you suck him off. Sort out your finances January the 1st. See ya. Yeah, yeah. Talking about, speaking about sorting out finances, it's also tax filing deadlines this month.

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40:44Prices start from£49, and if you use the code MONEY10, you can get a further 10 % off your first tax filing. That code is MONEY10. There's also a QR code on screen for you. So they increase the amount of products so that they can put prices up on certain cohorts. They basically are like, well, we'll just, if we group people, we'll create millions of groups. And then this group over here, well, they're really expensive because they've got a limp or whatever. Like whatever the feature is of them. Is that what you mean? Exactly. Rather than going, oh, he's a male or a female. But it's not even just the person that they can sort of price discriminate on.

41:21We're talking about the product category. I can just introduce another small feature to the product that makes it slightly different from the previous product that I've introduced, and now it's new. It's a different product. So I'm just saying that it's very difficult to kind of regulate these markets when suppliers are responding to the incentives that you're giving them, back to our original point in the conversation. So you're kind of constantly playing this game of whack-a-mole as a regulator. And that's just, I mean, that can be exhausting, right? I mean, it's just, every time you come up with a new thing, these guys, there's a sort of arms race here that ratchets this thing up.

41:54I guess net-net what we're saying is you know well-intentioned policy but at the end there's still big benefits to search what is the change that's happened in insurance then that's made me because I'm probably slightly lazy where I see the bill come through and I'm like oh it was 60 quid last year 65 now I can't be bothered to look around whereas in the past it was so motivating to change because it flew up they've changed something haven't they well of course but actually what's interesting is that the fact that you was so motivated to change because it was better in the past exactly because the incentive to search was so big that it was so eye-watering if you saw it that you just went go immediately to sort of figure out what the policy was so there's also some aspect of this where there's apathy created by it like only being a bit exactly you may be lulled into a false sense of security because you know you're only being ripped off a little bit as opposed to a lot you know what i mean and i think this is the thing where you have so fine because the only reason i changed my insurance this year said okay i'm gonna do it a month in advance however many days in advance is because i bought a new car in the middle of my policy i went from 110 pounds a month insurance to 220 just for like changing cars both mercedes both very similar cars but because they're like well you've got a new car and you need to insure it we're going to double your insurance so i was like no enough is enough i'm going to find another provider insurance is crazy i know 110 is crazy you've been driving for like london man it's you that's nothing to do in london mate i just drive Yeah, how many points have you got?

43:21I'm only three. Three this year. Three this morning. But auto insurance is one of these products which is actually in some ways better as far as insurance is concerned because you have to have insurance in order to drive. So in that sense, it's mandatory to take it. But there are so many other kinds of insurance that households would benefit from, which are just, I mean, that is a market that you could study for a very long, you could make that your lifetime study. And it's another market we discuss. quite intensely. Because imagine the perspective of an insurance salesman who's walking into your house and saying, look, I'd like to sell you some contents insurance or whatever other kind of insurance for your house.

44:00Here's how it works. You keep paying me premiums. And if nothing happens, then I just keep the premium. And you don't get anything. In the best case scenario, you get nothing back. Now, as an economist, you think this is great, because if something does happen, you get insured against those risks. It's precisely there for those kinds of situations. But again, human psychology means that it's very, very hard to do that. What you will end up doing, or what many people end up doing, sadly, is when a crisis actually comes along and they didn't take the insurance earlier, they get into high-cost short-term debt, which is much more expensive than having paid the insurance premiums along the way.

44:36Yeah. If you break down at the side of the road and you haven't got AA cover, they do you. They do you. They're like, oh, we got a hot one here. First you got to pay for us to turn up. Now when we come, you got to pay for the job. Now we got, if you want to be recovered somewhere, you got to pay this. I'm going to put a temporary tire on it. That's 400 pounds. You got to bring it back to us. If you want to be recovered more than three miles away, then it's an extra like 200 quid. I'm like, well, I don't want to be three miles down the motorway. I want to go home. So then - I live there. And then I know, no, we got to take you to the depot in Liverpool and then you've got to pay to release.

45:06Yeah. It's a joke. That is a rinse. It completely is. But I mean, you know, there's so many of these things like that, But then it also goes the other way sometimes. Have you ever, has anyone ever tried to sell you an extended warranty on a stereo system that you've just purchased? Oh, I mean, I think you just program to say no, aren't you? I always say no. Absolutely. That's the right thing to do. But I think the reason that they sell you that is because you're in buy mode at that point. You're like, oh, I just got this wonderful TV. And they're like, what would happen if one of your children just knocked a cricket ball into that thing?

45:33And you're like, okay, I'll give you whatever. Three pound a month or whatever. Exactly. So you say you should always say no. Are they written off? Because it is, absolutely. What about on your laptop or your Mac or something? Well, so I mean, I think one of the things that we say is you should always ensure against large risks, but not against small risks. And you should always take a high deductible as opposed to a low deductible to the extent that you can afford it. I mean, when I say deductible, I mean excess, right? You want to get paid out when it really, really is painful for you. How do you get paid?

46:02How do you ensure that you get paid out when it's really painful for you? you set the excess really high to the extent that you can afford it if the shock comes. So when something really bad hits you, if it's sort of medium bad, you can cover it because your excess is high. If it's really, really bad, you've got the protection because anything above that excess is covered. Now, what's nice about that is you have the assurance that the coverage is there for you at the time when it's a real crisis. and you're paying for that coverage much less up front in the form of a much lower premium because you've taken that high excess.

46:40So in that sense, it also becomes easier for you to get over that trap in your psychology where you feel like you're paying something for nothing, which is kind of the problem that most people have when they're buying insurance. So if you're paying a little something, it might be much more easy for you to take that step and say, okay, I'm happy. It's not that much on a monthly basis. okay fine you have a high excess but you know that the protection is going to be there for you when you really really need it does it not feed into the system that the insurers want though where basically everyone's just paying for it out of pocket uh every time they have a crash unless they they have like a complete write-off it sometimes feels like to me it's like it's annoying that i'm paying for insurance but if someone if i have a dink i basically got to pay for it myself anyway i can't claim on the insurance because i'll whack the price up of the insurance or I've got a massive excess.

47:29Yes. I mean, look, I mean, and I think that's what insurance should be for, which is it should be there for the big risks that you can't tolerate. Now, of course, I'm not advocating that you're setting the excess to a point where it's going to hurt if you repeatedly dink the car. You should figure out exactly what that proportion is. But the thing that you have to recognize is that, you know, insurance has markups associated with it. So that premium is actually going to be high anyway, right? So you really want to scale up the amount of coverage you have so that you're not paying too much in markup and you're just really paying for the coverage you need at the time that the serious crisis hits.

48:06Now, you know, auto insurance may be one example, but there are other examples of this kind of thing, right? I mean, disability insurance, for example, is a good one. Life insurance is another one where, you know, you want to sort of, you want to set it up in such a way that you're paying the premium for the coverage you need. but i mean dead and not is is is a final thing right what i know by that is term life insurance right so you want to take it over a period of time rather than a whole of life policy yeah so that's another sort of example of the same thing where you're absolutely right it's like you know it's like you're not half dead or you know so you're saying you want to do it for like 10 years 20 years exactly and then roll it exactly but then once you get rich enough you turn it off because you've got assets right and we have a little rule of thumb for how much you should insure in the book as well.

48:54But that's essentially the type of calculation you want to be doing. Yeah, it's great that you have those like practical solutions. And it's like personal finance from a how to not get like rinsed by the system. It's quite unique in that sense, because most people are you should have insurance, whereas yours like, well, no, you should only have this amount of insurance and these kind of things, you know. Absolutely. But I mean, I sort of feel like the way that we'd like to think of this book is, you know, there are people like you who are doing great work at bringing these things to public attention day after day, right?

49:22I mean, which is, you know, what is it that you should be doing? What's a good way of proceeding under the current circumstance and so on? I think what we're trying to say as economists is we can use the power of economics to fix the system so that it's not so hard for the ordinary person. Which is why a lot of people don't engage because they just feel, you know, especially if they're first experienced. We talk about the example a lot, but Neil Woodford, the fund promoted by Hargreaves Lansdowne back in the day that then collapsed. And they were shown to be promoted as it was collapsing. And I just think how many people were like, oh, investing is not for me.

49:55And it's really sad that they would have heard about the staff and managers, heard that he only wins, got involved, got burned, and then have just been completely put off by that experience. And I think that probably exists with a lot of things. So many things. I mean, I completely agree with you. And the funny thing about this is that you're essentially just throwing the baby out with the bathwater, aren't you? I mean, which is everyone should participate. Yes, there are going to be risks, but on the other side of risk is return. That's what, you know, finance, that's finance. I agree that you say everyone should participate, but like Damon said, like people hear these horror stories and then you go, oh, let me buy some stocks or let me get this app.

50:31And it says, by the way, you could lose all the value of your assets. And people are like, oh, that sounds very scary. I don't want to do that. Let me go into bricks and mortar because it's more safe. Or let me just keep it in the bank because it's safe or under the mattress. So there are things that kind of barriers to entry and like the fear and the not having the knowledge and it being so complex that put people off. You're completely correct. I mean, and it's one of the things that we advocate in our book. I mean, which is, you know, one of the big solutions that we're advocating at the end of the book is that everyone should be equipped with a starter kit.

51:01Okay. So, I mean, one thing that you could do, which is sort of, you know, which is a form of universal basic wealth, if you like, is when anyone is born, the government could seed their account with, you know,$1 ,000 or 1 ,000 pounds or whatever it is, or, you know, even less, 500 quid, and then just watch that amount compound. So everyone's got an account that's sort of set aside for them, you know. Now, of course, that idea does exist in the United States. They're called Trump accounts. He's just sort of proposed them. but as we've discussed you know there's lots of features there that we wouldn't necessarily think of as being ideal it hasn't been designed the way that we would like it to be designed but the idea of having these kinds of accounts is actually quite helpful it leverage the time the child has which you know our pension systems currently are pay-as-you-go so they don't leverage the time whereas if you did it that way and then auto enrolled them at 18 you might be able to reduce the tax burden whilst also fixing the pension problem.

51:58Absolutely. And in some sense, I mean, of course, this is difficult because governments are always dealing with current financial pressures. But if you were to - It's about 3 billion a year I worked out if it was 5K per child, which is not that much considering state pensions are 150. Exactly. So you're talking about a grand, so slice that down by, it'd be like 500 million a year. There's only 600 ,000 kids a year or something. It's not massive. It is. I also think as well, if you want to get adults interested in finance, show them that their kids get a better return than them. And they'd be like, what the hell is going on here?

52:27Why is Junior's investment account going up like this? And then they suddenly think, well, I've got all this money in cash and he's in global equities. And, you know, because no one can touch it, can they? You know, it's just locked away. No, completely. I mean, and I think one of the solutions that we're proposing is that all of, you know, that the starter kit of financial products is something that should be offered by every financial services provider, which is to say you're allowed to offer as complicated a financial product as you want, as long as you also offer the plain vanilla starter kit alternative.

52:58What would be in this starter kit? And how would it differ from what we already have in the market currently? So a couple of different things. I mean, so there are some of the products in the starter kit that we think are mandatory to choose, which is you must absolutely have one of these things when you go in. So for example, a basic no-frills transactions account. This sounds like a simple thing, but in some countries, there is still not universal coverage of bank accounts in the population. And I bet you could find corners of the United Kingdom where there are people who are unbanked. My nan didn't have one when she died.

53:33So that's certainly one aspect where you should mandatorily have this thing to be able to participate in a modern financial system. And then you should have a savings account linked to that. Now, what does a starter kit bank account look like? It looks like something that has very transparent fees. right now in checking accounts in the, you know, current accounts in the United Kingdom, you don't get interest rate. You just get, you know, or you get sort of incredibly low below market. Negligible, yeah. Right? And that's a form of financial repression, but it's just kind of sitting in the background and nobody really understands that you're actually being deprived of something by keeping your money in there.

54:09If instead they were to charge you a fee and pay you interest, you'd probably be doing better for many people because you're keeping a certain balance in that account all the time. So that's kind of one thing that we recommend the design of those accounts should be changed. We dislike the way that overdraft fees have been set up in many places. In the US until quite recently, and then of course now there's some proposals to roll this back, the way that they would set overdraft fees gave banks discretion within the day of reordering transactions. Now let me try and explain how horrible this is.

54:43Suppose you had a credit coming in and you had three debits coming in on the same day, banks had discretion to push the three debits first, push you into an overdraft, charge you the overdraft fee, and then and only then credit you the money. That is evil. It's evil, right? I mean, it's just basically evil. I mean, I completely agree with you. So these are the sorts of design things that in a starter kit account, you would just never have, and you would never be allowed to do that, okay? Okay, now let's move on to slightly more sophisticated products. Retirement savings, auto enrollment, really important.

55:16We have this in this country, but one of the things that we might do is add something a little bit cleverer, which is roll the money into a transparent, low-cost index fund or even a target date fund, which adjusts your asset allocation as you age. You sort of want to have more equities when you're young and you can take risk, and you want to kind of bring the equity share down as you become a bit older, or you've accumulated substantial amounts of equity wealth. So that's kind of another thing that we would advocate. Simple term life insurance, okay? Not a whole of life insurance policy, but one in which, you know, you just pay the money for a pre-specified period of time.

55:54And if nothing happens, the premiums go away. High access, okay? High deductible, you know, whatever you want to call it, depending on the country in which you're operating. Automatically triggered catastrophe insurance. If you live in a flood prone zone, you should automatically have to have catastrophe insurance. Imagine that that's the biggest risk that we have here. flood risk. And as soon as a flood is declared, you automatically get a transfer into your bank account. If you've been declared someone who has been affected by the catastrophe. So, you know, simple, simple products of this type.

56:28Also, mortgages. I mean, here's a classic one. Let's get rid of the teaser rate mortgages. Let's have ones that are a markup over the variable, whatever the Bank of England based rate is, keep that markup the same over the life of the contract or even just ratchets you into you know refinances you into the right product at each stage so so we have a whole set of these different ideas in the book and we're really hoping that we can have this kind of standardized set of things and then you know innovation can move around and would you make them mandatory as in you have to have these like similar to car insurance mandatory in some cases we think they're so important that they should be mandatory life insurance life insurance catastrophe insurance is another classic one if you live in a flood prone zone i mean it just seems obvious the type of bank account that we're talking about should absolutely you should mandatorily choose one and you should stick with it um and then others mandatory for people to offer you them and then you decide whether you want them so they have to say you don't have this product you maybe you could consider this kind of correct basic version absolutely but they can only offer you the no frills version and then you can compare across all the different providers that offer that no-frills version.

57:37And because it's a no-frills version and it's easy to compare, it's easy to shop for them in the sense that the shopping becomes very standardized and very easy. It's like, okay, here's the way to think about it. We talked about lucky strikes being offered by doctors back in the day. And then we had this system of OTC, over-the-counter medical regulation in the States and in other places in the UK as Well, the Apothecaries Act is what it was called in the UK. What does this mean? You walk into a pharmacy now, and you can get paracetamol. You can get the branded version if you like. You see what the price is.

58:18You can also get the generic version. You see what the price there is. It's usually substantially lower than the branded price. You know what it is. You know if you have a headache, you can take it. You can buy it anytime you like. And it's all very standardized. you can do all the comparisons you want, and then you can pick it up off the shelf and off you go. And we think that certain categories of financial products should absolutely be like that. And that's what we're calling for. We're calling for that medical regulation moment in personal finance. Yeah, like a no-frills kind of, this is the basic version.

58:49Yeah, and I think the standardization of the way that those are sold and marketed would be really useful. Because like I said, I'm a personal finance YouTuber and the mortgage stuff blew my mind. and i don't you know i always question incentives and i know my mortgage advisor is charging me a fee but getting a percentage of the mortgage on the other side and i know that that percentage is bigger than the fees charging me so i'm like who is your client here who is actually your client here because i don't think it's me and when you're saying oh this is the best product i'm not sure that that is the case and i have no way really easily comparing and there's no transparency no and i think that's the thing we're sort of seeing a lot more sunlight a lot more standardization and away we go.

59:26Now, I guess one other thing I should just point out here, which is I think the ways that the regulation works these days is simultaneously too restrictive and too lax. So let me try and explain. We've talked about the too lax, but the too restrictive is also the case, which is there are certain categories of investments that you cannot actually participate in today unless you're a qualified investor. Private markets and things like this, yeah. Absolutely, right? Now, you know, I'm not a wholesale advocate of all of this stuff, but what I'm saying is suppose we had a system where you had starter kit financial products and that you achieved a level of financial sophistication where you were able to understand what these things were you should be able to test into picking up whatever you want at that stage be like you know one thing that i think has really captured the public's attention is the credit score and people really get behind this idea i worked in debt services and i know that the credit score is a load of nonsense it's just you know experiment like oh we can sell this data on the other side as well because they just you know and people like to look i've got a 999 credit score you could almost have like leveling up system through these financial products couldn't you where people move through the levels and go i'm a level five personal finance person absolutely and i mean there's nothing wrong in doing that yeah um i mean i think that's the point which is that you should be allowed to build up expertise through your journey through the system financial education is not always going to get you there because obviously it becomes obsolete you do it in school you're at the age of 18 and then you go out there seven years later for example when you're taking a mortgage how much do you actually recall you've got ai brokers you've got crypto you've got things that weren't there and also you're just a kid right you don't care about mortgages you think i'm just going to get rich by inventing facebook or something you know like that's that's it falls on deaf ears doesn't it at that time it's only when you're in the trenches you really care about it all i think that's right i mean obsolescence is a big issue you're completely right you know having the actual you know it's like it's like reading a manual about things that you have absolutely no idea.

1:01:21They're a rare kid, aren't they, that's like plugged into that kind of stuff at 16, you know. You can't learn how to drive a car by reading a manual. No, exactly. It's hard to do that. Yeah, you only care once you're on the motorway going, oh my God, what do I do now? Exactly. How much, a little bit of balance over, how much do you think that this should be the financial services sector? And how much do you think it should just be on the individual to be accountable for their own financial decisions? So, I mean, I think this is, you know, we've sort of had this debate in lots of different areas.

1:01:49Again, back to medical regulation. I mean, I think, you know, why do we think that this is a serious issue that requires governmental intervention or regulatory intervention so that we can allow the system to operate the way it ought to? It's because it's so systemically important that it does. And when I say systemically important, I don't just mean, oh, financial crisis, building up financial stability. This is not a macro textbook, right? This is a book about how important it is for the average individual when they don't get their financial circumstances right. I mean, it can have very, very serious long-lived consequences for the quality of your life for 20, 30 years if you don't get these decisions correct.

1:02:28And so in that sense, those are precisely the use cases in which there should be some level of governmental intervention that says, you know, we're going to try and create a system that's safe for you to operate in. We have regulation on the roads. You're imposing costs on other people. It's also the case that here you are. If you don't save for your pension, then the system is going to have to bail you out. at some stage. If you undergo a crisis, there's going to be a taxpayer bailout at some stage. So, you know, in that sense, there's lots of reasons why we believe governmental intervention should be there.

1:02:59That having been said, we are not advocating for government provision of financial services at all. Okay. We've seen what can happen in lots of cases. You know, there are good examples, but then, you know, we've seen Verizon. I mean, there's lots of reasons why you would worry about governments getting directly involved in that sense. We feel like the private sector is and the financial sector is best placed to do good financial innovation, as long as they're given the right incentives in which to operate. So we do believe that there's a balance in the sense that we are not advocating taking personal responsibility away from people.

1:03:40We would just like them to operate in a system where the guardrails are clearly set and specified by the government yeah one thing one thing that i think of is uh so i hear the the conversation about generating bigger pension parts and my answer is always well we'll just reduce the fees it's going to generate a certain return but then i look at the uk finance system and the uk economy broadly three trillion sat in pensions in the uk and i'm thinking london survives off skimming one percent off that pot that is our economy broadly like there's lots of other complexity to it but a large part of the money, our GDP is just going, skimming off the top of that.

1:04:14So if the government come in and go, we're going to make it simpler, cheaper, more, are they just going to destroy the economy of the UK in a sense? Does the UK economy need that complexity? Or are we just so in bed with finance that we can't really make it fairer? Well, I mean, one of the things that we realized during the global financial crisis is that the disproportionate size of the UK financial sector was not a domestic issue. That is to say, you know, we were on the hook for losses. The UK taxpayer was on the hook for losses that large banks had been making because of the fact that they were investing in products all around the world.

1:04:51I mean, they were substantially larger than the capability of the current economy could support. That turned into a financial stability risk, and we had all kinds of ring fencing and other rules that came in because of that. Now, what has the UK historically been very good at? It's been very good at having a rules-based legal system in which lots of innovation can flourish. Not only financial innovation, our legal system is very, very good. Our services sector is excellent. You know, the innovation in our universities is terrific. You know, all we're saying is create those guardrails, put it in place, and then now let innovation flourish in that particular dimension.

1:05:33maybe you can then become you know an exemplar for the rest of the world in the way that this this works can we talk about some exemplars in the world then that you think you mentioned i mean you did work didn't you with norway was it uh with the norwegian uh sovereign wealth fund which is a big old fund which is a trillion is it it is it was at the time that i was probably even bigger now yeah these guys don't go backwards do they but but i thought what was what was great is that they took the north sea oil and then they put it into a fund that then accumulated wealth Yeah, we cut taxes, didn't we?

1:06:05Yes. But they have a smaller population than us. They do, absolutely. How big is their population? I think it's a lot smaller. So they had too much money because it was like a, was it a 50-50 split? It was something along those lines. And they were like, we can't spend all this money. Yeah. I mean, but Norway is sort of an isolated case. I mean, I think one of the systems that I've studied extensively is the Danish system, which I think is very, very exciting in a number of different dimensions. For example, their mortgage markets are wonderful. They have long-term fixed-rate mortgages, which they finance using a system that isn't a government-sponsored entity system like the US.

1:06:41It's called a covered bond system. And the way that it works is that banks are essentially responsible for the losses. So anytime there's a default, the banks top up the pool. And the entire pool of bonds is sold to outside investors who price the risks on those bonds. It's a system that works very well. But from the perspective of the household, which is what is relevant in this case, you have long-term fixed rate mortgages without any prepayment penalties, which even when interest rates rise, you can refinance at market value rather than face value. And so what does that mean? It doesn't have lock-in in the way that the U.S.

1:07:17mortgage system does. So I think it's not just the sort of developed economies that are worth looking at. I mean, one of the things that I find super interesting is that when you have worked in countries like India or Brazil or South Africa, all countries that I've sort of studied for various reasons, the nice thing about some of those economies is that they are unencumbered by legacy systems, which means that they can do lots of amazing innovation because none of the systems, you know, were in place. So, for example, there's these amazing payment systems in Brazil and India and so on, where underneath there's a backbone of universal identification.

1:08:00It's biometric. So you can do know your customer with just a fingerprint or an iris print. It automatically does all the KYC in the background. It's super quick. It's very seamless. Payments work extremely well in that system. You know, so there's lots of ways in which you can borrow from those economies and say, put a sort of electronic infrastructural backbone on underpinning some of the financial systems that we have. Is that like PIX in Brazil? So, yeah, for my job, they use it more than they use like Visa and MasterCard. So because it's so, so much more efficient and so much better and cheaper.

1:08:38And you stop them scalping everyone for 3%. Yeah, because my company, we offer different payment channels and PIX is like 0.5%. But if we offer Visa, MasterCard, and Brazil, it's like 3.99%. So it is like the most popular, the most efficient system that they've got. In fact, back to the theme that we were talking about originally, which is these bizarre transfers that are going on. Interchange fees are a classic example of this. The cards that offer you the most rewards charge the highest interchange fees. and the people who capitalize on those rewards are the wealthiest people who have, you know, all these, they get 200 ,000, 500 ,000 air miles, whatever it is.

1:09:15Whereas the people who are, you know, maybe using those cards not as efficiently and not capitalizing on those rewards are still paying the 3 % interchange fee, but they're not getting any of the benefits of those rewards. Or even worse, if you don't have the card, you're paying the fees in higher prices. So the American system, if they got rid of American Express, prices would be a couple of percent lower across the board. You're absolutely correct. So you're just punishing people that don't even have the cards. It's a silly system, isn't it, in a way? Like you say, it just redistributes that up to the people that fly loads.

1:09:46Exactly. Yeah. I was talking to my cousin. He's in Nigeria. Shout out Nira. He's a young entrepreneur. He started like a Kringles crisp company where he sells little plantain chips. And I asked him, like, what's it like in Nigeria? Well, how would we get some of these crisps? Trust me, after this club, you better send us some free ones. I would like some. Yeah, they'd have a little bowl here, wouldn't they? I'm in Nigeria next month. I'll bring some back free of charge. I asked him a little bit about like the middle class in Nigeria, what it's like investment opportunities. But loans, he said it's really hard because people can't really get loans.

1:10:18They tend to borrow from their friends, their families. And then there are loan sharks who take advantage of people. So if you want a visa, which is the most common case, you need to have X amount in your bank account for three months. So if people will go and borrow money for this to put in their bank, the loan sharks will charge them 5 % a month flat. and then they'll just end up having to pay that back. So our system is, I mean, I just kind of want to compare it. Our system has its flaws, but we've got ISAs, we've got great investment things. Yeah, is the UK that bad in comparison? It's not that in comparison.

1:10:47You can get a loan if you want and not pay extortionate amounts. Absolutely. I mean, nobody is saying that one would want to trade one system for the other. In fact, I think the way that we'd like to think about this as academics is you want to sort of think of the best system that you could have, which might have elements from all kinds of different places. For example, you can use the record of digital payments that people have made as collateral, which is to say you can assess creditworthiness by looking at your digital footprint and then try to figure out on the basis of what your repayment history has been on various things or what your spending patterns are, I can predict whether you're likely to be a good credit risk or a bad credit risk.

1:11:27They do that in China, right? They do. But of course, you have to be very careful and regulate the system appropriately, make sure privacy protections are in place and so on. But this could be a way for people who, you know, you always complain that you can't get a loan if you don't have a history and you can't get a history if you don't have a loan. But this may be a way to sort of bootstrap you into a world in which you can get a loan, get on the ladder, the credit ladder, because of your history of being, you know, a good person, right? It's like in the UK, you could pay two, three grand a month for rent for 10 years, but they say you can't afford a mortgage at half the price, you know, because of the affordability checks.

1:12:00Precisely. But if I've noticed your credit history being, I mean, your repayment history being that good, maybe I think you're going to be a good risk. There's certain sectors that do it. When we were in debt management, dude, look, if there's any gambling, be like, sorry, you cannot have any debt relief because you've gambled. Absolutely. There's another classic example of this, which is that if someone walks in and they want to buy a car with racing stripes, you immediately know that the insurance premium on that thing is going to be higher. Yeah, or if you're a butcher, my mum used to work for the AA back in the 80s she said the butchers had the highest life insurance because of the amount of red meat they had and because they would cut their fingers off at work by accident but yeah she said you know like they'd be like oh I'm a butcher and they'd be like oh sorry it's just 10x the bill I don't know if it's still the case but yeah but it's a bit scary though in that system in China where they can I think they facial they can scan you and then if you have like debt or you have bad credit like you can't we won't let you buy this plane ticket we won't let you buy this train ticket because sometimes it feels like even though it's smoother, it can be more invasive.

1:13:01No, completely. And this is why I believe that privacy protections are very important. I mean, I completely agree with you. We talk about this in the book. I mean, that having been said, I mean, you know, it isn't as though when you're surfing online that people aren't, I mean - You've already been tracked. You've been tracked by Google or Facebook, you know, to this kind of level, right? Absolutely. Everything you do. Yeah. And I mean, when's the last time you read a privacy policy in its entirety? Skim through click. You've seen the human center pad on South Park. No, about signing the Apple terms.

1:13:31Some people in the comments will probably get that. But yeah, no one reads those terms. And yeah, so, and the idea that we're not already being tracked. What around London, right? We're all over cameras and all this kind of stuff. Absolutely. Okay, why do you think then that the UK isn't doing this? Why is it taking, why do you need to write this book? Why are we not just going, okay, let's adopt these systems from other places? and so okay so I think sort of two or three things one is I think everybody there's a very large group of people who care about personal finance issues I mean the fact that you're running this show will tell you that there's a big audience for this for this kind of thing so a lot of people understand that the financial system is very complicated and I think many things have people have tried to do different things about it, as I've mentioned.

1:14:23And I think we've, you know, there are lots of self-help books. There are lots of people who are offering great advice. There's financial education pushes and so on and so forth. I think what we're saying in this book is it's time to take the next step. It's time to go one step further here. It's time to use the power of economists and sort of the power of sort of systemic thinking to kind of make structural change in the system. So in that sense, it's more of a recognition of the fact that we've been doing work on these problems, we have enough evidence that these problems are systemic, and now we need to do something to use the power of regulation to change this.

1:14:55Now, I should also make something quite clear, which is vague things like a duty of care are not the thing that we're advocating. So again, like, I mean, in the FCA sort of has this conduct-based regulation, and I think that can also have a chilling effect if you're not careful, which is, you know, if I can always come to you after the fact and say, oh, by the way, you were a bad boy or a bad girl. I mean, that's not good, right? I mean, because then you're discouraging anybody from doing anything up front. So what we are saying is you should spell these things out clearly. You know, there's a very kind of clear manifesto that we have for change in the book about the kinds of things that we would like to see very prescriptively.

1:15:35But other things that we don't think, you should not impose a broad fiduciary obligation. You should not impose a vague general duty of care. You should be very specific about what you're doing in specific areas so as to encourage beneficial financial innovation in those areas. And that's what we're trying to say.