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I recently heard a phrase that I hadn’t heard for more than a decade – long before my time at the ombudsman. I’m not sure many ombudsman news readers will have come across it, but the Herfindahl Index may well form a big part of a wider debate about the future of the financial services sector. In particular, its relationship with its customers.
Orris Herfindahl is credited with inventing the index that bears his name. It’s a formula for measuring the degree of competition in a market – by analysing the market shares of the 50 or so largest players. The higher the index, the less competition in the sector.
Consumers’ ability to choose between distinct providers can deliver much-needed customer-focused innovation. But the financial services marketplace isn’t quite that simple. “Information asymmetries” – suppliers knowing a lot more than consumers – and the long-term nature of many financial products add significant complexity to how competitive pressures are expressed.
It’s apparent that competition has worked in ways that some customers think are unfair. Better rates for new customers are perhaps the prime example. But more insidiously, a focus on the headline rate or price at the expense of a better understanding of value or risk.
From the cases we see at the ombudsman, we know that individual customers can feel that they actually have very little choice. Whether they’re a small business customer or someone relying on a payday lender, people seeking loans often feel at a distinct disadvantage – far from the empowered customers of competition models. And we’ve seen some of the worst examples of bad practice and customer detriment – think PPI and swaps.
Don’t get me wrong. Increasing our ability to move bank – or to easily compare insurance providers – can only be helpful. But no one is suggesting they are a panacea to all the problems between financial services and its customers. What Herfindhal doesn’t measure is what it feels like to be a customer – and how reliant customers are on the advice and guidance businesses give them. As usual, our case studies provide down-to-earth, pragmatic insight into what happens in real life. And readers will be pleased to learn that you won’t need a calculator to get the message.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.