Financial firms may believe they have successfully aligned their strategy, working practices and culture with their customers' interests but, says Mick McAteer, the evidence suggests otherwise
It may well be impossible to make misselling entirely a thing of the past and yet, if the financial services industry could dramatically reduce the scale of the problem, it would surely provide a platform upon which trust could begin to be rebuilt.
The last two decades in financial services have been really quite extraordinary, with a litany of problems emerging and what seems like a never-ending cycle of fines and redress - none of which helps the reputation of this vital sector of the UK economy.
The costs and distress to consumers, who have bought or have been convinced to buy unsuitable and bad-value financial products, is unacceptable. At the same time, firms and their shareholders pay the price in higher regulatory and compensation scheme fees with fines, review costs and untold reputational damage for the worst offenders.
But what if, rather than simply seeing this as the cost of doing business, the industry could instead seize back the initiative?
It is, we believe, possible to do so by aligning a firm's strategy, working practices and culture at all levels of the business with the needs and interests of that business's customers. While many businesses may believe they already do this, however, the evidence does not bear this out.
We analysed misselling over two decades, working through a large number of the warnings and decision notices from the Financial Conduct Authority (FCA) and its predecessor, the Financial Services Authority, and identified the common causes. We then structured a detailed set of questions that go to the heart of why so many organisations fell foul of the regulator in the past.
Using that analysis, we designed the tools to help company directors and non-executives understand their own businesses better - by asking managers, staff and customers the right questions in the first place. This knowledge should empower directors and allow them to identify problems and remedy them in good time, long before the need for regulatory action.
Indeed, we think embracing such a project can actually help directors find more ‘bandwidth' to do their jobs better, because it will give them a clearer understanding of where the business really sits. Given the pressures they face, this could be of huge assistance.
The FCA's annual business plan demonstrates regulators are still demanding significant change across a range of business areas, including platforms and related advice, individual pensions, cash ISAs and execution-only sales of drawdown, while the next phase of the asset management review is going to require a fundamental shift in both model and culture.
Retail banking, in particular, remains a key concern as even a cursory look at the financial headlines will confirm. The FCA is clearly prepared to intervene to change business models when it believes they are not working for customers.
Yet it does not stop there. As well as the FCA, the Prudential Regulatory Authority and the Bank of England are recognising that poor conduct can impact the bottom line and affect the solvency of institutions.
Regulators are not only intervening more - they are placing more responsibility on business leaders and identifying the close relationship between conduct risk and prudential risk.
Senior managers regime
This coincides with the extension of the senior managers regime beyond banking to most significant firms within retail financial service. The FCA is still developing its thinking on where responsibility rests between the business and the business's managers but the upshot is that senior managers will increasingly be held responsible when things go wrong.
We also believe that financial services faces a big economic challenge due to the low interest rate environment and likelihood of a new and lower norm for growth. This will strain balance sheets and reduce returns, with Brexit only likely to exacerbate the situation.
There are temptations in this environment to which companies need to be alive, with a risk that this year's sales achievements - if based on overpromising - become next year's redress bill.
Still, as we say, it does not have to be this way. What if a change in approach in terms of delivering financial products and services could genuinely align company leaders, managers and staff with intermediaries and, most importantly, their end customers and clients?
The role of intermediaries, especially financial advisers and planners, is especially important. We know things have often gone wrong within the advisory sector largely as a result of the wrong incentives operating between providers and fund managers and adviser firms.
Aspects of the operation of adviser firms continue to concern the regulator and our tools are applicable to adviser firms. Yet we also view the adviser sector as potentially one of the most powerful forces for good that can help drive good practice.
In our work with firms that use intermediaries, therefore, we also suggest incorporating adviser views into the process. Yet, once again, it is partly about asking the right set of questions.
We know from past experience that advisers often have well-developed ideas about how a product or a market can go wrong. There is even an argument that, had the better advisers been listened to, policymakers and regulators would have been much better forewarned about the financial crisis. Advisers are gatekeepers and have a big role to play in improving the quality of financial services across the board.
Of course, firms may argue this should be what compliance is for although, at 3RInsights, we are not so convinced. Compliance is an essential part of doing business but is it genuinely transformative?
Certainly in large financial organisations, the executive and non-executive directors are bombarded with compliance information. Yet it does not necessarily give them the answers - not least because they may not be asking the right questions. It certainly will not help businesses understand how their organisation is perceived outside the boardroom.
In addition, we acknowledge that, while consumer survey data is a really important tool for business, it produces lagging indicators based only on current and to a lesser extent past experience. With our framework and questions, we work with the business leaders to understand the data in terms of what it means for the future.
Ordinary consumers cannot say what is going to be the next big scandal about a particular product or practice but there will be warning signals in their answers.
Of course, we do not believe this is all about avoiding negative consequences. In a much broader sense, financial services businesses suffer from a deficit of trust. This has financial consequences.
Effectively, while consumers have to shop or travel or seek medical care, they may not view financial services as an essential public good - more, perhaps, as a ‘nice to have' rather than a ‘need to have'.
It means companies have to expend more time, money and energy bridging the trust gap, before they can convince people to save, invest and insure themselves. A business that is better aligned with their customers has much less work to do in bridging that gap.
While there is a long way to go to change the behaviour of the entire sector, the prize could be extraordinary - much less misselling, much happier consumers and, as a result, more profitable businesses.
Mick McAteer is a founding partner of 3R Insights
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