skip tocontent

competition, conduct and complaints in financial services

Tony Boorman, deputy chief ombudsman, speaks at the competition and regulation conference held by the Regulatory Policy Institute

Oxford, September 2013

It is all too clear that over the past decade retail financial markets have not worked well. Not worked well for consumers. And often not worked well for financial businesses themselves.

I hope the Institute will allow me a moment to analyse the problems that I have observed first hand over the past decade. But I want to focus most time on solutions. Critically I want to propose how we can ensure that the voice of the customer is heard loud and clear in the boardrooms of institutions operating in the retail market.

To achieve this, I we need two actions by regulators: a greater focus on competition and a removal of barriers to consumers raising their problems and concerns.

Only in this way will we be able to achieve the mutual respect between providers and consumers that seems so lacking today.

an unhappy decade

The retail financial sector has gained an often well-deserved reputation for poor behaviour and careless customer service over the last decade and more. And its relationships with consumers, regulators and policy makers have been shaped by a series of well publicised crises and large-scale mis-selling - pensions, mortgage endowments, "split" investment trusts, "precipice" bonds, and by far the largest, payment protection insurance (PPI).

To be fair, this poor reputation has been dominated by the actions of a few. Around 80% of the payment protection complaints to the ombudsman come from just five financial groups - in a wider financial sector that officially boasts over 100,000 providers. But almost all of us bank with those major groups - and many of us rely on them for a wider set of financial products, from pet insurance to pensions.

And all this has happened in a sector that by some measures is the most actively regulated of all retail markets.

regulation of conduct

The primary focus of regulation in retail financial services for the last decade has been to improve conduct by service providers. The proponents of conduct regulation note that its achievements are often hidden. Problems avoided through effective supervision are not easily measured.

"Treating Customers Fairly" and similar regulatory initiatives have shifted - or attempted to shift - leadership cultures, to place a central focus on the core principle that businesses should indeed treat their customers fairly.

But the supervisory conduct model has had significant disadvantages. Despite attempts to focus on principles and prune a burgeoning rule book, the "compliance culture" has remained strong. The regulatory dialogue and a search for "permission" in a rule-rich environment has built a compliance framework that is impenetrable to all but an inner cadre of experts.

Whatever its strengths and weaknesses, conduct regulation has not worked as its architects had hoped. Indeed, many of the present problems in the sector stem from those who sought to shape their conduct not by what was in the interests of customers, or in the long term interest of their business, but by their perception of how far they could bend or break the rules undetected by regulators.

It is commonplace post crisis to note that the rewards for such behaviour were very real. In contrast, the chances of being "caught" were limited and the penalties that followed modest.

Certainly, the costs of these failures are very real. Millions of consumers have been encouraged to purchase items which they didn't need or which wouldn't work for them. Some estimates now place the total costs of the PPI mis-selling scandal alone at over £20bn.

Meanwhile, other consumers have been discouraged from buying the products and services they need because they feel they cannot trust the financial business to respect their interests.

other indicators

And there are other less poisonous features of the present market that strongly suggest to most consumers that this is a market that is not working fairly.

Two themes dominate in the complaints that consumers refer to us at the Financial Ombudsman Service:

  • products that are big on promises but fall short on delivery; and
  • product pricing deals that penalise not reward loyalty.

Consumer groups tell us that it is hardly surprising in these circumstances that trust in banks and financial services is so low.

what is missing?

So after all this gloom, is there a prescription for improvement? What is really missing in the DNA of financial services that makes these problems occur?
For me this comes down to one word. Respect.

Where markets work well, providers respect their customers. Businesses that don't, just don't survive for long.

And respect is a two way thing. It's difficult to trust and respect someone who doesn't respect you. Building respect for customers is the only sure way to build consumers' trust in financial services.

so how best can we progress?

Many financial institutions already understand that respect for their customer is key. But as events have shown, not all do.

To ensure that the voice of the consumer is heard loudly and clearly in the boardrooms of financial services businesses, effective competition is key.

The changes already signalled by regulators - in particular, the Financial Conduct Authority (FCA) - are clearly pointing in the right direction here, with a developing emphasis on structural and competition-based solutions.

These build on previous attempts. The FSA's "retail distribution review" marked an important structural reform in the advice market - and has sought to remove "commission bias" from some advice functions.

There have also been some attempts to improve competition by reducing barriers to switching and by improving transparency of charges.

And as we have seen today, with the re-birth of TSB, the European Commission is forcing some divestures following the consolidations of the banking sector during the financial crisis.

My personal view is that even without further structural reform, regulators could and should look again at some of the barriers to choice and diversity in the sector. For example:

  • Surely not all banks and current account providers are the same - as in any market, quality, reliability and price vary? But consumers have stuck with a "they're all much of a muchness"' response to choice. So can more be done to ensure that both the not so good and the better providers are highlighted?
  • Is the heavy marketing of "teaser rates" the best way for this market to develop? A market that promotes unfeasibly high initial savings rates (or low introductory lending costs) to switchers - but relies on consumer inertia to ensure profitability - seems to me not just to be financially unstable but also to do little to build trust and respect among customers. And it's likely to produce a significant barrier to entrants.
  • How should we encourage positive new market options and alternative providers - from credit unions to crowd sourcing? How can they be given room to grow and develop, without undue regulatory burdens being imported from other parts of the sector and without undue risks being placed on consumers?

There are some difficult issues here. Many will understandably be concerned by any implied reduction in consumer protection, given recent history. And some market distortions will take time to unwind. Time will also tell whether the FCA has the legal armoury to tackle the competition agenda effectively.

So competition is not an overnight solution.

making customer problems tell

But in the meantime, there is a further set of actions that are required if regulators are to step back with greater comfort from detailed rule making.

No regulatory regime can avoid all failures from occurring. Nor should it aim to.
But the systems need to be in place to ensure that where things do go wrong, they can be put right quickly and effectively. And the lessons learnt passed back to ensure that similar problems don't occur again.

So making customer problems tell - making complaints work - is key.
Of course, that is where the ombudsman has a particular role. Ombudsmen now hear more cases than the civil courts.

We have a crucial role in many markets in ensuring that where problems and misunderstandings do occur, they can be put right promptly - so that consumers and businesses can move on.

The issues in financial services are particularly problematic. Unlike in most retail markets, the cause for complaint is often far from obvious to the consumer. If my new car breaks down, or if my tin of beans contains bugs, it's easy enough to understand what has gone wrong and who I should expect to put things right.

Contrast that with financial services. Three problems arise for consumers:

  • First, even understanding whether or not there is a problem can often be far from straightforward. If the investment I was advised to purchase fails, is that just the way markets work, or was the advice poor? If the insurance doesn't cover me for the particular misfortune that has occurred, is that just the way things are, or was I badly misled? Or indeed, will I ever find out that the expensive product I was encouraged to buy had no real value, if I don't ever "consume" it by trying to use it.
  • Second, the consumer's realisation that there has been a problem may only occur many years after the critical events. Many financial products are intended, after all, to provide long term benefits.
  • Third, even if a problem is identified, in many cases the nature of the redress is unclear. After all, if I hadn't been encouraged to buy this unsuitable investment, what would I have done?

And this is even before the consumer faces all the behavioural and administrative barriers inherent in raising a "formal complaint".

In fact, there are significant obstacles for many customers of financial services in feeding back their concerns and problems to businesses (and policy makers).

so to make customer problems tell, further action is needed to overcome these barriers

At the moment efforts here are limited. Or in the case of claims managers, insistently calling and texting us to alert us all that we may have a complaint, just plain annoying. Not to mention expensive from the perspective of the consumer.

So there has to be a better way. As an independent and respected part of the regulatory landscape, I hope the ombudsman can play a useful part here.

The FCA has just announced a welcome review of complaints handling by financial businesses. There is much to consider. But ensuring that problems can be identified - and then heard clearly - should be at the top of the agenda.

image: Tony Boorman

useful links