Part 2 in the ‘Restoring trust and integrity in financial services’ series
The post financial crisis response has focused on restructuring regulation, increasing firms’ capital and liquidity requirements, improving their accountability and conduct, and ending “too big to fail”.
Important as these factors may be, however, they do little to address the long-term causes of the crisis, let alone the wider challenges of technology and changing consumer attitudes and expectations.
In addition, the increasing ease of switching financial services’ provider is likely to make customer retention and loyalty a challenge, affecting their bottom-line as much as their reputation.
Grant Thornton’s 2017 Customer Loyalty & Experience Index (CLIX) (see figure 1) reveals the scale of this challenge. Though our findings show that some companies are making progress, there is still a long way to go across the board. Firms will need a fresh approach to tackling long-term causes to the challenge if they are to achieve sustainable improvements.
Figure 1: Relationship between customer loyalty and experience
Source: Customer Loyalty and Experience Index, Grant Thornton 2017
Four key considerations to improve customer trust and loyalty
Align your firm’s interests with those of your customers
Customers no longer assume financial services companies are on their side. The way customers seek redress for Payment Protection Insurance (PPI) mis-selling is an example. Rather than rely on firms’ complaints handling, many consumers opt to use expensive claims’ management companies to take them through the process.
This lack of trust and confidence in firms is largely a result of the long-term divergence of interests from their customers described in the first article of this series. In particular, changing ownership models, remuneration and incentives have all encouraged short-termism.
Simultaneously, customers have shifted towards more long-term financial needs, most notably in pensions, as the state and employers have sought to limit their risk and responsibility, transferring it to individuals. An ageing population means this trend is only going to increase.
It is vital therefore that firms, seek to align their interests with those of their customers.
Recast the concept of caveat emptor
Before the financial crisis, regulation started from the premise that information asymmetry was the main problem, and if customers were given enough information the concept of caveat emptor (buyer beware) could apply and firms’ responsibilities limited.
However, the crisis revealed that mis-selling was much more widespread than assumed, and that, in some cases, firms sold customers interest rate swaps that were against their interests, or PPI for which they were ineligible. This has greatly increased the onus on firms to demonstrate their products are suitable, but recently firms and regulators have begun to argue that “the pendulum has swung too far” towards the consumer, and that the principle of caveat emptor needs to be re-established.
This misunderstands the nature of what has changed. As it unfolded, the crisis exposed not only the degree to which firms’ interests had diverged from their customers’ but also their difficulty in managing the resulting risks and conflicts of interest.
Consequently, simply increasing the information available to consumers is not the answer. Neither are approaches such as robo advice heralded as an accurate, unbiased alternative to human advice - likely to be the whole answer, as they do not provide sufficient assurance of the underlying quality and suitability of the product. Instead, we need a new approach, one that recasts the principle of caveat emptor for financial services in the 21st century.
Revolutionise firms’ risk management
The crisis also highlighted a series of fundamental shortcomings with current risk management approaches. Fixing these will require a major re-think of the scope and operation of risk management across all three traditional lines of defence. Any solution is likely to include:
- A methodology for describing and owning risks that is not constrained by the firm’s structure
- A culture that sees beyond increasingly siloed structures and properly manages risks’ wider implications and dependencies
- Better techniques for capturing, grouping and aggregating risks within the overall risk universe
- The ability to take proper account of high impact risks that have a low probability of occurring (often known as Black Swans), not least those stemming from the increasing reliance on technology and the (often related) use of outsourcing
Increase customer confidence in automation
Several of the causes of the crisis related to the increasing gap between industry and customers, most notably the exponential increase in computing power. This has reduced significantly the human interaction that customers experience and has led to firms holding vast amounts of customer data. Both these trends remain strong, and both have reduced customers’ level of trust.
So far, the industry has largely failed to bridge the resulting gap, even when automation leads to lower costs and greater consistency for the consumer. A major challenge for firms is therefore to persuade consumers they can be trusted with personal data and that automated advice and decision-making will benefit them as well as firms’ profits.
This is the second in a series of ‘Restoring trust and integrity in Financial Services’ articles, for boards and senior management, intended to help support strategic thinking in this area. The first article in the series, Causes – long term trends that have undermined trust, identified eight long-term causes of the loss of trust in financial services. The next four articles, starting in May, will examine each of the necessary shifts in more detail.
Restoring trust and integrity in Financial services
Part 1: Causes – long term trends that have undermined trust
Identified eight long-term causes of the loss of trust in financial services.
Part 2: Routes to improved customer loyalty and experience
Identified four key considerations to improve customer trust and loyalty
Part 3: Aligning firms’ interests with their customers
Aligning firms’ interests with their customers to gain trust and integrity within financial services