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THE British government expects consumers to be more responsible for their finances, but consumers do not trust or really understand financial services and, as it stands, the industry is not fit to deliver improvements. There is a real opportunity for providers that change; those that do not may not survive.
Everyone knows that an ageing population means more savings, but pensions are not the only area in which consumers are asked to shoulder more responsibility -- healthcare and education are other examples. This should provide a great opportunity for retail financial services to grow and prosper. But instead, government is forced to drag the industry towards change.
There is too long a history of unfair treatment for customers to trust the industry. Mis-selling of pensions and endowment mortgages has affected millions and the industry has not learnt from its mistakes. Only recently the Financial Services Authority (FSA) called time on payment protection insurance. Nor do providers deliver consistent customer value. Banks compete fiercely for new customers but repeatedly fail to give existing ones competitive service -- three days to clear a cheque in these computerised times?
These problems affect the reputation of the entire industry and need to be faced up to. This was recognised by the audience of senior marketing executives I spoke to recently at the Financial Service Forum annual conference. However, each delegate thought it was other providers, not their own company, that caused the problems.
This explains why government and regulators have had to intervene so much. The government has commissioned no fewer than five reports in five years on different market failures, and regulators have implemented a series of initiatives to change industry behaviour. There is a place for public policy and regulatory intervention to reshape markets, but such intervention needs to be used with care -- where industry cannot or will not heal itself.
So what are the causes of the sickness? First, the industry is driven by shareholder demand for short-term profit. This makes it more interested in new than existing customers, more concerned with sales today than advice for life. Yet it is selling some products with very long lives and, as everyone knows, it costs more to find a new customer than it does to keep an existing one.
Second, there is a lack of connection between producers and consumers. Nowhere is this seen more clearly than in product design: overly complex products are still being designed with no reference to consumer need or the target market.
Third, although advisers genuinely think they are in the advice business, they are actually in the sales business. A recent Association of British Insurers report showed that advisers on commission are biased toward some providers of certain types of product.
And the treatment? First, the industry must address its reputation for short-termism. Second, product providers and distributors must start to work as one, sharing objectives, so that whether they are designing products or delivering them they are driven by customer value. This means forcing discussion about consumers on to every board table. Providers need to take an interest in what consumers and advisers make of their products. Delivering customer value is just good business.
Finally, sales must be disentangled from advice since many consumers lack the skills to make informed choices. Part of the solution is education. However, there will always also be a requirement for real advice that helps consumers to identify their financial needs and understand what they can to do to meet them, but which stops short of discussing branded products. Such a service might be delivered in a range of locations by a variety of organisations - in the high street and the workplace by financial firms and Citizens Advice, for example.
If providers embraced this type of service as part of their business plan, the consumers who went on to request branded products would be better informed and the hard-selling employed today would be less necessary. Investment of this sort could also help restore the industry's reputation because if there is one thing consumers want, it is this type of financial advice.
Ultimately, we need less foot-dragging. This is not some other provider's problem, it is industry-wide. Those that recognise this will reap the financial reward of selling better-informed consumers more products that they genuinely need. Those that think otherwise could be looking at an early grave.
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The writer is a former consumer director of the Financial Services Authority.
— FT Syndication Service
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