Fixed is a word that can be used in two ways. A market can be said to be fixed when the market design is stacked against a customer in favour of a supplier. Deadweight costs and poor or shrouded equilibrium exist. The chance of a customer getting a good deal is poor. Alternatively, fixed can mean that a market has been repaired and now works as it should.

Campbell and Ramadorai use the word to cover both aspects of personal finance. The authors outline how the structure of personal finance markets work against the best interests of a large section of the population and suggest ways to fix these systemic failures.

Both authors are well qualified to discuss this topic. Both have been pioneers in the relatively new field of Household Finance. This study is now recognised under a specific subset of Financial Economics with a Journal of Economic Literature (JEL) categorisation G5, rather than a subset of Microeconomics in Household Behaviour and Family Economics (JEL code D1). The G5 categorisation has a broader remit covering topics of household saving, borrowing, debt and wealth, insurance and financial literacy.

How is personal finance fixed against consumers?

Making good financial decisions is difficult. There are many studies of the difficulty people have in making decisions. This is especially the case when numbers and computation are involved (number blindness), where there are extended time differences between paying for something and receiving the product (inter temporal allocation), where risk and uncertainty are involved (loss aversion and prospect theory), and where the information available to the supplier differs with that available to the consumer (asymmetric information). Personal finance is beset by each of these. The difficulty of making decisions under these conditions have been known for many decades but has (re)gained attention with the rise in prominence of behavioural economics.

Given these difficulties, suppliers can – either intentionally or inadvertently – design products that may not meet the needs of clients effectively. Campbell and Ramadorai write in chapter three titled The Corruption of Finance that “many financial products are geared to exacerbate and exploit mistakes rather than correct them, with questionable benefits, high costs, and unnecessary complexity. Even worse, some products serve the interests of savvy customers at the expense of less knowledgeable customers.” (page 52)

Four mistakes that consumers make are identified. First is misperceiving the benefit of a financial product (think of the difference between one off sizeable gains [bitcoin?] compared with a steady flow of less spectacular gains [annuities?]). Second is a failure to understand the cost of a financial product. Third is a failure to shop around for financial products. Fourth is a failure to manage a product once it is purchased - for example failing to pay all premiums in a long-term life insurance policy, resulting in a default of a valuable product by the consumer. Suppliers – that is financial institutions –are aware of these mistakes and will do little to prevent them.

The costs involved in these mistakes are large. The book begins by citing examples of individuals who have been adversely affected by financial products that they have bought. A perusal of the money columns in any newspaper, radio or television programme will provide plenty of alternative examples.

It is not simply that some people make unintentionally risky decisions, such as having savings and investments in a highly concentrated portfolio. It is that making decisions when it comes to money is often difficult. This is compounded by the fact that many retail products have high initial, ongoing or default costs. These can be difficult even for the financially savvy to understand. As the authors put it, “The problems of today’s financial system can be summarized as complexity and cost”. (p. 231).

The personal stories are traumatic but the costs of a poorly designed and regulated personal finance industry are more pervasive. They are an important contributor to wealth inequality, especially when it comes to the wealth gap between the middle class and higher income people. Higher income groups are able to earn higher returns from their savings, borrow more cheaply and save more. The effects are large. “The differences in debt costs and investment returns … are large enough to account for almost all the increase in wealth inequality measured in Sweden [ between 2000 and 2007 ] even without any differences in savings as a fraction of wealth” (page 22). Similar results are found for India. A study in the US “estimates that return differences account for 30-40% of the level of wealth inequality in the United States.” (page 22).

What should be done to fix these problems?

Campbell and Ramadorai question the value of both financial education and nudges. They do not suggest that they have no value. However, each risks being oversold. They argue for more active interventions - shove rather than nudge. Many ideas are suggested. A selection is given below.

First, government intervention should be well co-ordinated with one agency having broad responsibility for personal finances. This will help reduce the deleterious aspects of products that cross various financial institutions such as banks, insurance companies and pension providers. They support name and shame approaches “to identify and document marketplaces and financial products when they [the regulators] are confident that abuses are occurring.”. (p. 216) This may sound obvious but there are a number of bureaucratic obstacles to do this. The example of the Financial Conduct Authority’s (FCA) slow response to the sale of risky products to retail investors by London & Capital Finance is cited as an example of the obstacles to a name and shame approach.

Second, “governments should, in addition, actively discourage households and firms from buying and selling financial products that are harmful to households’ financial well-being and actively encourage purchases and sales of better products and services.” (p.216) Such encouragement should involve tax incentives. For example, an employer may receive a tax advantage for having employees join a pension scheme.

Third, governments can “offer providers of financial products a statutory safe harbour protecting them against certain types of lawsuits if their products have approved features that make them suitable for use by less financially knowledgeable consumers.” (p. 217) Associated with this, they propose that governments subsidize or advertise starter-kit products to increase take up of simple and cheap products (see pages 235 and 236).

The recommendations are admirable. The many products proposed are interesting. However, the way they are presented risks losing the focus that there is a structural problem at the heart of the personal finance system. Newly designed, consumer friendly products are useful but don’t address the structural issues. To be fair to the authors, they recognise this and note that regulation must steer a course between “(1) imposing too broad and vague a duty on private financial firms and (2) reducing these firms altogether with public provision of financial services”. (p. 219). The “consumer duty” introduced by the UK FCA is identified as falling into the first category.

The authors are correct to highlight the structural problems associated with personal finance. It is disturbing that these problems are not sufficiently recognised by the general public, government and the financial services industry and that the appetite for more rigorous regulation is lacking.

In the past, groups in the UK and Europe have done extensive and interesting research into personal and household finance. However, many have fallen by the wayside. Enthusiasm for understanding how financial markets affect the lives of individuals seems to have waned as memories of the 2008 global financial crisis recede. After all, that won’t happen again, will it?

Groups such as the abrdn Financial Fairness Trust, the Financial Services Culture Board and the Think Forward Initiative no longer exist. One remaining is Bristol Universities Personal Finance Research Centre. There are numerous initiatives across the UK that promote (and seem to compete with each other on) financial education. However, as Campbell and Ramadorai argue, financial education is insufficient to address the structural issues that amount to market failure in the personal finance industry.

The appetite for appropriate regulation also appears to be lacking. In the US, the Consumer Finance Protection Board (CFPB) faces an existential threat to its funding by the current US government and its investigatory powers are being restricted by a need by staffers to read a “humility pledge” to companies before an examination ( see this Bloomberg article). The situation in the UK appears to be less severe but the FCA has faced significant push back from companies in its policy to name and shame.

I have some disagreements with the book. For my taste, the distinction between household and personal finance could and should be recognised and understood. This is important because finances and the way that decisions are made about saving, spending and pension provision are often organised around a household unit rather than on a personal basis. Hence the importance of the JEL category G5 being for household - not personal - finance. The support expressed by the authors for income contingent loans associated with higher education rings hollow given the current debates in both the UK and Australia. Also, the book understandably and deliberately side steps the discussion of health insurance. This is largely due to the differences between countries in how this is provided. Nevertheless, this is a shortcoming.

Few are writing about household and personal finance from a holistic view. Typically, one topic (e.g. pensions, budgeting, investing) will be taken alone rather than considered as part of a larger market. Few are able to dispassionately dissect the market failures that exist in this space. Campbell and Ramadorai have done an admirable job. They advocate more radical change than many wish to consider.

*Conflict of interest statement: the reviewer was involved with the Think Forward Initiative.