FCA should rate firms’ behaviour

The UK’s financial system offers a wide choice of products and services to consumers, and appears to be competitive. Yet people cannot make effective choices: they cannot easily differentiate between hundreds of products all doing similar things, nor firms all selling similar products. They are prey to being treated poorly by their providers because they do not know enough to challenge what the provider is telling them.

The list of instances of bad firm conduct is long, and well known. Suffice it to say that fines the Financial Conduct Authority (FCA) levied on firms rocketed from £66 million in 2011 to £1.4 billion in 2014. Despite the negative publicity surrounding these large fines, it seems to have had little impact on what consumers do.

The Consumer Panel wanted to understand why people don’t switch away from firms that visibly behave so badly, and what the regulator could do about it. How could the FCA harness the power of the consumer to help it?

The FCA has said that “most firms need to do more to communicate with consumers in a way that truly empowers them to make effective decisions”, and that it will drive improvements in the information consumers get about financial products and services. We think it needs to go further, and give consumers information about how well firms are likely to treat them post-sale.

People buy financial products on price, product features and a big leap of faith, hoping that once they’ve entered a contract, firms will treat them well (and sometimes end up sorely disappointed).

We know from our research that consumers would like information about firms’ behaviour and service quality, to help them take some of that ‘leap of faith’ out of their decisions. There may not be an obvious link between forex rigging, say, and how long people have to wait to speak to someone in customer services. But both of these say something about the culture of a firm, and how much it cares about its customers.

We would like to see a score for firm behaviour that gives people an insight into firm culture. We have in mind something like the star system the Food Standards Agency introduced for restaurants and cafes. This tells people at a glance the hygiene rating for the eatery they are thinking about using, before they walk in the door.

A rating for firms could be based on, for example, penalties and redress paid out by firms, quality of service indicators, and customer feedback. The FCA already requires firms to publish information about complaints; it could go further and compel firms to disclose some of the   ‘hidden’ information that people say they want. It is not perfect, of course: by its very nature a rating can only ever represent a snapshot. But it would be a lot better than nothing.

Information about the post-sale experience should help drive competition, help firms differentiate themselves and increase trust in the market.  It would be good for everyone. We have called on the FCA to lead the development of this simple rating of financial services providers.

Would consumers use it? We think so, in time, but that may not matter in the short term. The very existence of an authoritative measure like hygiene ratings has been enough for eateries to want to improve their standing vis-a-vis their competitors, and led to improvements in food hygiene[1]. Just implementing the system itself improved conduct irrespective of whether consumers used it or not.

[1] According to a two-year study, published in April 2015 by the Policy Studies Institute at the University of Westminster

Welcome to the blog of the Financial Services Consumer Panel

Welcome to the first Financial Services Consumer Panel blog. You will be able to see our press releases and publications and hear our views on issues of the day here. I hope you will find it a thought-provoking addition to the debate about what matters to financial services consumers.

We are a statutory panel of experts, advising and challenging the UK’s Financial Conduct Authority (FCA) on how financial services can better meet the needs of consumers.

We want to see an open, competitive financial services marketplace, where people can get access to the products and services they need at a fair price, and trust providers to have their interests at heart. It doesn’t sound too much to ask for, but we still have an industry characterised in many cases by the ‘wrong’ sort of competition, lack of transparency, and mis-selling.

Most of our work involves advising the FCA privately, although we also respond to the regulator’s public consultations. We also challenge Government, industry and EU institutions in the interests of consumers. Much of our financial services regulation now comes from the EU (and beyond), and few consumer groups have the resources to counterbalance the weight of industry lobbying in Brussels.

We commission research and develop position papers. Most recently, we’ve put out papers on cross-subsidies in personal current accounts and the hidden costs of asset management. Our aim is to shed some light on issues which have a big impact on consumers, and generate debate. More than that, we want our work to lead to positive change, to enhance regulation where necessary or to improve the way industry does things.

In 2015, we will continue to push for greater transparency of investment costs, and better fund governance. Millions of people are being auto-enrolled into workplace pensions; a small change in costs can mean a big difference to individuals’ standards of living in retirement.

The FCA’s regulation of the consumer credit industry is also high on our agenda, as is the Chancellor’s pension reforms. While the new freedoms will be good for many people, they are not without risk. We are also looking at how people decide which firm to buy products from, and whether firms’ bad behaviour influences their decision.

With a busy schedule for the year, we are pleased to welcome two new members to the Consumer Panel. Mark Chidley will focus on issues affecting small businesses as consumers of financial services, and Kitty Ussher on advice, consumer research and pension reforms.

 

Sue Lewis

Chair, Financial Services Consumer Panel