Aligning the information available to buyer and seller in financial services is still at the heart of much regulatory thinking, and both the industry and regulators have long believed that consumers need to take greater responsibility for their financial purchases. However, this does not take into account three key factors:
- growing complexity and opacity of financial products now demands a much higher level of knowledge to understand them than it is reasonable to expect
- transfer of financial risk from the state to the individual has greatly increased the consequences for households, and the UK economy, of making poor decisions
- incentives in financial services do not reliably protect consumers, and firms struggle to deal with the resulting conflicts of interest.
These trends became visible in the late 1990s, when the extent of firms’ mis-selling of pensions and mortgage endowments became apparent. Since then, it has been neither fair nor practical to expect consumers to understand how financial products work, the risks involved, or whether they answer their needs.
What firms should do
In terms of consumer responsibility, financial products sit at the complex end of the spectrum, between generic purchases with a high degree of core functionality (eg cars, smartphones) and more bespoke purchases for complex needs (eg medicines). For such products, consumers are not expected to understand how they work.
Following this logic, firms should only offer consumers a choice between products that clearly meet their needs. This would mean taking greater explicit responsibility for consumer outcomes and lessening the need for buyers to beware. It would give real substance to the claim that consumers are “at the heart” of their culture and business model. And it would start to counter the public’s belief - fuelled by two decades of scandal, from PPI to LIBOR – that firms consistently put short-term profit above their customers’ interests.
What regulators should do
When the FSA was created 20 years ago, one of its four statutory objectives was "promoting public awareness". Later, the landmark Financial Capability Survey (2006) showed how far large sections of the British public are from understanding financial products. As a result, improving financial capability became a major policy aim for both regulators and government.
Looking back, however, it is clear that while financial capability has lots of public benefits (eg helping people to budget more effectively), it will not enable consumers to engage knowledgeably and effectively with financial services.
While transparency is usually a positive force, regulators should be wary of seeing it as a solution to specific problems, still less as a universal fix for broader issues. As consumer bodies have pointed out for years, producing more information and more small print to digest rarely improves the quality of choices consumers face and tends to cloud rather than illuminate decision-making.
Where does this leave us?
There is a widespread but misguided belief that we need more ’buyer beware’ in financial markets, and that this, combined with greater transparency, will fix many of the problems. This has become an article of faith for many, but it carries significant dangers for firms and regulators, as well as consumers.
For firms, the danger is of perpetuating the blurring of their responsibility to customers. This can appear attractive but the record shows that the resulting uncertainty too often tempts firms to overstep the line.
For regulators, it lies in the resulting temptation to over-design the buying process. As well as building in significant compliance costs to little positive effect, this risks the regulator taking on a responsibility - for ensuring consumers are well-enough informed to make good decisions - that it cannot possibly discharge consistently.
The way forward should involve firms taking greater explicit responsibility for consumer outcomes – in other words significantly lessening the need for the buyer to beware. In response, the FCA should reduce its policy scope and the level of prescription it requires, recognising that detailed rules distort rather than level the playing field for consumers.
'Buyer beware' is a useful concept only when buyer and seller are in broadly equivalent bargaining positions. In financial services this is far from the case, and no amount of financial capability or increased transparency will change the position. Instead, it is time for the regulator to step back and for firms to take on more responsibility for meeting their customers’ needs.
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