Social Market Foundation - Rebuilding Public Trust in Financial Services

Social Market Foundation - 25 March 2010

The questions we have been asked to consider this afternoon are:
1. What should the financial services industry be doing now to rebuild trust and engagement with the public?
2. Regardless of regulatory changes, should the financial services sector be taking more visible active steps to revise working practices, such as improving professionalism, and develop fair remuneration policies, and reviewing gender balance at senior management levels?

The first question that comes to mind when asked what we should do to rebuild trust is; why do we want to rebuild trust? I think you would agree that the answer is to encourage savings for old age and the take up of insurance against the impact of unexpected shocks and disasters.

As other speakers have said rebuilding trust alone may not be the entire solution to the problem we face. Claiming not to know who to trust is a good reason to justify not saving if asked the question, but other issues are:

• lack of understanding of the products and their costs
• lack of confidence about what to choose
• a wish to get as big a return as possible and one which is guaranteed – this increases the risk of mis-selling and mis-buying
• uncertainty about where to go for advice and who to trust
• an unwillingness to forgo expenditure now to save for a better future
  

If we assume that the majority of people would like to save and protect their families it is the last item on the list – the unwillingness to forgo expenditure now – which makes people put off the decision to save and insure themselves. Of course, a wish to get as big a return as possible leads people to invest in the most popular choice whether it is housing, endowment mortgages or split caps. A lack of understanding of the products available and lack of confidence means that most people need some encouragement and advice on how to save if they are to overcome their uncertainty about what action to take.

The importance of advice was clearly demonstrated by the AXA Avenue experiment in 2006, where a financial adviser worked with people in Brighton to help them change their behaviour and more recently by the preliminary findings from the Money Guidance pathfinders.

Unfortunately the present model of product development and distribution does not work well for the majority of customers. Trying to deliver advice to people who think they do not have much money to spare is not easy. The AXA adviser could not have justified the time she put in if she had been charging fees to the individual or getting commission from product providers, since much of the advice related to reducing the cost of debt and using tax efficient savings products like ISA’s.

We find ourselves in a world where product providers and intermediaries have tended to focus on selling products which offer them a good return. It is inevitable that this will lead to some mis-selling. However, considerably more detriment is created by some advisers selling people costly products in order to generate more income.

This is why the FSA’s RDR initiative is so welcome. If the FSA continues in the direction to which they have repeatedly said they are committed, a great deal of provider bias introduced by commission payments will be eliminated. More advisers will become focused on representing the best interests of their clients and on building a long term relationship. The transparency of costs will encourage the development of a more professional relationship between the adviser and the client.

The other major aspect of the RDR is the intention to raise minimum standards for advisers to QCA level 4 – the equivalent of first year university and the qualification required for a nurse. In my view this is still too low for the responsibility the adviser is taking on and I welcome the CII’s pressure to raise the aspiration of advisers to achieve chartered status. This can only be good for the industry. And, if enough advisers aim for this level it can only be help to raise their status of advisers and the public’s trust in the industry.

There is a lot of concern in the industry at the moment about the impact of transparent charging reducing the demand for advice, but the demise of DB pension schemes and the move to DC will create a massive need for advice. The problem will be ensuring sufficient good quality advisers are in place when they are needed. There also needs to be enough capital provided to the intermediary sector to make the transition from upfront payment to a more deferred but steadier income stream based on helping to manage a pension portfolio. These problems are serious but I think they will be overcome. And I think we have no alternative – an undercapitalised under trained distribution sector selling expensive products to people who don’t understand what they are buying, is not an industry with a long term future.

A much bigger issue is that advisers with this high level of expertise can only afford to work with people who have significant wealth, or who are likely to have it in the future. This can be no more than 20-25% of the population. So we will have a better service but it will go to fewer people. The coming challenge, is how to help the next 50% odd of the population, in the middle of the market, who have some money to save but for whom any reasonable advice fee will take much of the value of their savings. These people need advice but advice that can be delivered at lower cost, in shorter sessions, and in a way which is better suited to the way people are used to buying other products.

• Money guidance (a key role for the Consumer Financial Education Board which is in the new Financial Services Bill) will be a key element, and ideally one which can go further than the present version in giving advice on types of product and ideally able to produce portable fact finds, to avoid boring repetition – if the car industry can keep details on file for insurance purposes and the credit industry for lending money, why not the savings industry?
• Simpler sales processes where people can dip in and out (see Aegon’s research on delivering financial advice ).
• More straightforward products, which don’t morph into something toxic. This may require some basic design work and product scrutiny - PADA is doing interesting work on the characteristics of pensions for less wealthy people
• People need help to understand how to assemble a portfolio. The other FSA has been quite successful in improving people’s diet by the simple expedient of endlessly repeating five portions of fruit and vegetables a day. I believe we need to do something similar for finance. A simple mantra repeated at every time anyone touches the industry which is more educational than the warning that investments can go down as well as up.
  

So to sum up –

• The world of pensions has changed and the one off rise in house prices driven by low interest rates and low taxes will not be repeated for some time, so people are going to need to borrow less and save more. They will need help to get good value from their savings and they will save more if they see their savings growing and working for them.
• The industry can do a lot to help itself by raising the professional standards of advisers and by creating a true profession that offers a sufficiently rewarding career to attract able young people
  But, on its own, this will not be enough.
• There will need to be a very simple and credible message about saving and protection drummed home at every opportunity
  • There will need to be some kind of independent advisory service in addition to financial capability education at school to encourage people to engage with the industry – advertising alone will not be enough and no one will be able to afford sales forces and still offer a decent return for smaller savers
• So there will also be a requirement for savings products which can provide good returns and which can be sold in ways which are better suited to the pace of modern life – working through for a series of short sessions. Perhaps we could learn something from the way GP’s, pharmacists and practice nurses have divided responsibility in the last 15 years and the increasing role the internet now plays in informing and guiding patients on how to help themselves.

This brings me to my last point. There is a concern that this middle sector of the market will be dominated by a small number of bancassurers who will extract unreasonable levels of profit from their customers. I think this is less of a risk, as long as we ensure the barriers to new entrants are not too high. I am more concerned that nowadays many people expect to buy things themselves without dealing with a sales person or adviser. Undoubtedly many customers will move to the internet where they will assume that the sales promotion they get is advice. I think it is vital that the industry and the regulators start thinking about how to deal with this trend and how limited advice might be given in a way that provides protection for people who choose to use the internet channel.

You will have gathered by now, that I think this industry has to target the population as a whole, not just the wealthiest and that this can be profitable. But it will need to provide a better service to all its customers and move from a situation where there are regular disasters to one where the disasters are infrequent and are located in individual firms whose failings are publicised as an unusual exception – not the kind of disasters we have seen recently where the whole industry has become involved in doubtful practices and ends up in trying to block subsequent redress, because of the cost – a cost which ultimately gets charged back to the customer in any case.

Changing this behaviour will require a broad consensus across the industry and a much more cooperative working relationship with the regulators - a relationship that does not rely on arguing about the meaning of words in rules. There also needs to be a focus on good innovation, to create products which are good value and meet expectations under most normal circumstances - e.g. products that claim they are “guaranteed” only when there is a cast iron guarantee.

In answer to the question posed at the beginning, it can only be good if there is more professionalism, more diversity in the workforce and less incentive to exploit vulnerable customers. This is undoubtedly the primary responsibility of the industry not the regulator. One only has to look at the sorry tale of PPI and the thousands of complaints coming in to the ombudsman while the regulator struggled to get an industry wide agreement on how to settle claims or at the continuing sorry saga of with profits funds to appreciate just how far there still is to travel.

However the responsibilities of the Bank, the FSA, the CPA the OFT and the DWP are chopped up and reshaped next year there will be no significant improvement until the industry agrees that the future has to be different from the past. And without a significant improvement in levels of saving we are going to have a generation of people now in their thirties and forties most of whom will be reduced to poverty and ill health in their old age.