Developments in the Retail Markets - financial capability, financial promotions and treating customers fairly
Speech by Vernon Everitt
BSA Annual Seminar for Building Society Chairmen
22 February 2006
Good morning and thank you for inviting me to speak to you today on the challenges we face in the retail financial services markets.
I will major on developments designed to raise financial capability among the millions of Britons who, more than ever before, are being asked to make decisions in an area they find daunting and, often, confusing. I will then talk about how we are taking our work forward on financial inclusion, developments in the financial promotions regime and our strategy for treating customers fairly. These subjects are interconnected and getting them right is vital to the financial wellbeing of everyone in this country and the continued health of our financial services firms and markets.
First, a quick word about the strategic framework within which these and our other initiatives sit.
The FSA's three strategic priorities are: to promote efficient, orderly and fair markets, both retail and wholesale; to help retail consumers achieve a fair deal; and to improve our own business capability and effectiveness.
To help achieve this fair deal for consumers, we find it helpful to think in terms of the four pillars essential to delivering a more effective and efficient retail market:
- Capable and confident consumers.
- Clear, simple and understandable information available for, and used by, consumers from the industry and FSA.
- Soundly managed and well capitalised firms who treat their customers fairly and;
- Proportionate, risk-based regulation founded on key principles, including a reliance on the senior management of firms to discharge their obligations.
In terms of overall regulatory approach, I should emphasise that our clear preference is to encourage efficient markets as the best means of providing quality goods and services to consumers. Only after market solutions have been exhausted should regulatory initiatives be contemplated.
So, what are some of the steps we are taking to help consumers achieve a fair deal?
Pillar One – Capable and Confident Consumers
Financial capability
It is crucial to the creation of a successful retail market that consumers are capable and confident in the choices they make.
The number and complexity of those choices has increased dramatically over the last 25 years. Attitudes towards saving and debt (or “credit” as most of us have now been conditioned to call it) have also seen dramatic change, particularly among the young growing up in a more “live today, pay for it later” world.
Many consumers do not have access to face-to-face financial advice – even for very elementary generic advice let alone in relation to products – while at the same time the comforting arm of the State or employers is being steadily withdrawn.
But financial education and information has simply failed to keep pace with these developments. As a result, many people from all backgrounds and all levels of income, lack the ability to manage their finances effectively. Our research shows that 20% of consumers are "often struggling" with their finances, with that financial anxiety far from confined to below average earners1. And we read in our newspapers dreadful stories of some being driven to take their own lives as a result of their financial circumstances often blamed, in full or in part, on the wide availability of “credit”.
So there is no longer a debate on the need for, and benefits of, financial capability. Now the question is how do we get on and make the necessary changes that will lead, over time, to a step change in that capability?
The prize for getting it right is huge. More confident and financially savvy consumers will be able to take better control of their money by planning ahead, getting expert help when they need it, buying products that meet their needs, and being equipped to manage and pay back their debts. They be less likely to suffer from the stress associated with debt and other financial difficulties, limiting the impact on employers and the economy more generally through sickness absence and benefits claims.
Financially capable consumers are also an essential element of a more efficient and effective retail financial services market. More consumers who identify for themselves when they need to seek advice or buy products and who are better able to judge what is good advice should be less likely to become victims of mis-selling or mis-buying. There should also be benefits for the financial services industry, including lower distribution costs if providers need to spend less time and money on selling to consumers who are already willing and well-informed buyers.
Through our leadership of, and active participation in, the National Strategy for Financial Capability, we and our many partners are making a significant contribution to delivering a step change in the level of financial capability in the UK.
Delivering this is a long-term commitment. It will not be accomplished by a single project, or even set of projects. As with most things in life, there are no silver bullets. It needs a range of well co-ordinated steps by many working in partnership to make incremental, and over time significant, progress.
I am very pleased to report that there are now plans for a mutually reinforcing set of initiatives that are laying the foundations of such a step change, which I’d like to describe to you in some detail.
There are seven priority projects, all fully costed with firm plans for implementation. They will see financial capability education, information and advice reaching further into UK schools, higher education institutions, organisations that help young, and often excluded, adults and into the workplace. And we are examining whether there is a commercial case for the delivery of an even more widespread generic financial advice service.
Those solid foundations will be supported by shorter-term measures and a range of resources designed to help consumers make better decisions.
In relation to schools, we have been hugely encouraged by the Government's commitment that from 2008 the curriculum should contain high-quality and comprehensive personal financial education. This is a massive step in the right direction and now needs to be converted into real change in the classroom.
This will be achieved in England by linking personal finance education to planned changes to the functional mathematics units being prepared for classrooms in 2008. Ministers have also asked the Qualifications and Curriculum Authority to consider how elements of personal finance education can be incorporated into the revised GCSE mathematics syllabus from 2010.
Building on existing links to Personal Social Health Education and other subjects of the curriculum these changes provide the opportunities we've been looking for to make a step change in schools working with the grain of the education system. Work has already begun to maximise the effectiveness of these curriculum changes by raising awareness, supporting teachers, and developing first class materials, tools and training. Pfeg, the Personal Finance Education Group, is leading here. We estimate that over the next 5 years the initiative will reach around 4,000 of the 6,000 secondary and special schools in England.
We believe that the benefits from this work will be substantial. Schools will be better able to teach the revised National Curriculum. Teachers will be more confident and competent in teaching personal financial education. And most importantly, children will leave secondary school better equipped to understand and manage their financial affairs.
For young adults, the next stage includes initiatives both for those in higher education institutions (some 2.2 million students) and for those who are not in employment, education, or training (some 1.1 million people).
Our vision is that by 2008, all major organisations providing services to young people communicate at least some basic financial capability messages and pointers to their clients. These organisations will be able to access high quality training materials to help them and they will use creative techniques to overcome the barriers to communicating with young people about their money.
For those in higher education – over 70% of whom are carrying at least some debt – we will be expanding across the UK a very successful pilot scheme undertaken with students at Roehampton University called “Money Doctors”. This involved information distributed on campus, extensive publicity through student unions, education seminars and themed social events, one-to-one surgeries with trained advisers and fellow students acting as peer educators. I am sure that many of you will know of the difficulties in engaging young adults in personal finance - except maybe when they are visiting the Bank of Mum and Dad - but all concerned with this project were encouraged to find that so many students were willing to take part in the Roehampton scheme, even returning early from their holidays to attend advice sessions! We have strong expressions of interest from many more universities for the next phase.
For those not in employment, education or training, we want to maximise the impact of Government policy by providing youth services providers with appropriate materials and training to help their customers. This will involve dedicated outreach workers who are trained, confident and competent in delivering support to this often over-looked section of the UK population.
And on entering the world of work, we want consumers to have access to the information and advice they need to make the most of their money.
The Make the Most of Your Money pilot work has successfully trialled the delivery of financial education to employees in the workplace, through the provision of generic advice seminars, leaflets and access to one-to-one consultations with an adviser.
During 2006/07 this programme will expand to deliver material and invitations to seminars to 200,000 employees, with 15,000 subsequently attending one-hour seminars. These sessions will be delivered by trained personnel and will cover the basics of budgeting, managing debt, planning ahead (including on pensions) and the types of financial products they might need – e.g. insurance. The aim is that by 2010, 4 million employees will have had access to some form of financial information through their workplace, with half a million having attended a seminar.
So this is a highly ambitious set of initiatives designed to lay the long-term foundations for a more capable and confident consumer base. But there is also much going on in the shorter-term.
We have worked with partners such as the BBC and Experian to make available two online tools - the Financial Healthcheck and the Debt Test. Both have been very well received and the Debt Test alone has been accessed by nearly 250,000 people since it was launched in January.
But what really matters here is not the existence of high quality tools themselves but their effective distribution to those most in need of them. So we are investigating ways of taking these and our other materials to a wider set of distribution channels. We are working with a number of financial institutions and other partners to not only link their websites to our own, but to take our materials and integrate them into their own branch or on-line systems. As we have said before, would it not be a good thing if consumers applying for a personal loan or to extend the limit on their credit card were encouraged to complete the Debt Test first? The Debt Test and/or the Financial Healthcheck could easily be incorporated into discussions you have with clients and provide an excellent platform from which to explore your customers' needs.
We are well advanced in developing resources for expectant and new parents - what we term Maternity and Paternity Packs. We have been working with the HR department of a major high street bank to develop a helpful leaflet for maternity/paternity leavers. The bank plans to pilot the leaflet by distributing it in its own maternity/paternity pack. Consultants from Parent Focus are working on pilots that involve midwives, health visitors and Children’s Centres. They will be using the leaflet developed for the high-street bank pilot as part of their work and, if it is successful, it will be distributed more widely during 2006.
In the area of Generic Advice we recognise that many sources are already available.
But I can’t help thinking that there is greater scope to join up the extensive networks which already exist more effectively and we will be exploring this with our partners over the next few months. In particular, it will be interesting to test the extent to which, in addition to dealing with crisis calls, we can begin an incremental shift towards more preventative advice. And as mentioned earlier, work is also going on to assess whether a commercial business case can be made for a significantly more widespread provision of generic advice.
The final element of the seven priorities is a complete revamp of our Consumer Communications Strategy. Our objective is to make our materials and tools much more accessible to consumers and third party partners.
To promote the impartial information and interactive online tools that we offer consumers, we have in place a sustained and co-ordinated programme of campaigns designed to reach and engage consumers. In particular, we're aiming to reach a group known as 'Anxious Aspirants' - they're financially aware enough to know they need to do something about their finances, but they don't know where to start. We are well placed to help them take the first steps.
The first campaign in the series was Mortgages Laid Bare, which ran from October to December last year. It represented a real departure for the FSA - much bolder than anything than we have ever done before. It went down well with consumers, with the campaign website receiving 110,000 visitors, exceeding our target by more than 15%. In addition, daily traffic to our comparative mortgage tables – which enable consumers to shop around more effectively – increased six fold during the campaign, from 170 to nearly 1,000.
Following on from the success of the mortgage campaign, we are currently running two further campaigns: pensions made clear and Money Laid Bare.
On pensions, we're urging consumers to review their arrangements - before the end of the tax year. And in particular, we're encouraging them to consider decisions around the State Second Pension (S2P). We've already exceeded our campaign target of 30,000 visitors to the campaign website and more than 90 external websites linked to the our campaign website.
Our Money Laid Bare campaign has been running for just a couple of weeks now and with this we're encouraging consumers to take control of their finances and providing them with top tips and useful tools to help them take the first steps. The Financial Healthcheck helps consumers work out what their financial priorities are and The Debt Test aims to help people find out whether they have - or are likely to have - problems with borrowing.
In the last year total visits to the resources available to consumers on our website have reached over 1 million. That's more than the entire population of Birmingham or the combined populations of Manchester and Glasgow. So, while there is clearly much more that needs to be done to distribute our material effectively, we are on the way.
So there is an immense amount going on, both within and outside the National Strategy. This really ought to be the beginning of creating the step change we all want to see.
Financial Inclusion is integral to our approach
It is important to recognise that throughout the development of its work, we and our partners have considered financial inclusion as integral to the Financial Capability Strategy.
In 2003, when we published "Building Financial Capability in the UK", we detailed that the Working Groups that were charged with delivering the strategy had to:
"specifically take account of the needs of the financially excluded i.e. those who may not have access to the products and services available to others."
Through the work in schools all children will be reached by the Personal Financial Education elements that are being embedded into the revised National Curriculum, and this will further our aim of helping to prevent children from all backgrounds becoming financially excluded in later life.
Make the Most of Your Money in the workplace, through targeting large employees, will capture many low-paid workers who are unlikely to have been reached in the past.
The Higher Education workstream aims to broaden participation in higher education and enhance completion rates. This should be of particular benefit to less well-off students. The NEET project is specifically targeted at a group of whom many are likely to be financially excluded.
The Financial Healthcheck and the Debt Test are available to all through the FSA and BBC websites, and we are currently exploring plans to broaden distribution further, including via groups who help the more vulnerable in society. This includes targeted content and signposts to organisations that support the financially excluded.
The distribution channels for the Maternity and Paternity Information packs will include those likely to reach the financially excluded. In developing the new Consumer Communications Strategy we will consider the needs of financially excluded, and in the area of generic advice our current focus is on joining up existing resources, including many specifically aimed at, and used by, the financially excluded.
I would also flag the FSA Innovation Fund. We hope that work funded by the Fund and run by Citizens Advice and Mencap will benefit a large and vulnerable group of consumers. The funding will allow these organisations to create special training materials to help Citizens Advice advisers and Mencap staff to guide people with learning difficulties through potential minefields such as budgeting. So this work will benefit many consumers and their families – helping them avoid the isolation and stress often brought on by poor financial capability.
And outside the areas of financial capability, we continue to work in a number of areas to help open up access to financial services for those who may have been excluded in the past. This includes work with the credit union movement, publicising basic bank accounts, arriving at a more proportionate approach to identification requirements and working to introduce Islamic banking and Sharia-compliant products.
Pillar Two – Clear simple and understandable information
I’d now like to turn to what we observe in in the area of Financial Promotions.
Since the creation of a dedicated FSA Financial Promotions team in April 2004, we have been proactively working towards raising industry standards in financial promotions, to help firms produce promotions that are clear, fair and not misleading.
We have reviewed promotions in various media; set up a financial promotions hotline for firms and consumers to complain about promotions that are not clear, fair and not misleading; set up an industry website and published "Taking Stock and Moving Forward" (March 2005) to assist firms in producing their promotions; and we have visited around seventy firms since April 2004, ranging from one-man mortgage brokers to major retail groups.
There is still more work to do, but in many cases promotions, particularly in the press, now tend to display a much more balanced overall picture of a product – not just the benefits, but also providing a more balanced view of the risks and drawbacks.
I am pleased to report that in the area of mortgage lenders, we have seen a significant improvement - our analysis has looked at press and website promotions and found few of the issues that had previously existed, such as including important information in small print and inadequate prominence of risk warnings. So there has been good progress.
However, there is still much to do in the sub-prime arena, and more specifically with sub-prime websites, and we are considering what further steps to take in this area.
Other areas we are looking at include the promotion of ISAs in the run-up to the end of the tax year, particularly the marketing of 'stocks and shares' ISAs bearing in mind the rise in equity markets over the last 18 months. We are also assessing the risks posed by property investments and reminding firms of their obligations when promoting commercial property funds, only recently a permissible ISA investment. This includes, but is not limited to, the important issues of risk, past performance and charges. And we will revisit the promotion of Critical Illness Cover, an area where we found significant non-compliance last year, to assess improvement and the any need for further action.
We are also seeing improvements in firms' attitudes and internal processes towards financial promotions as part of the treating customers fairly initiative. We have said that it is important that firms assess their financial promotion processes against TCF and it has been evident during visits that firms are moving towards embracing and understanding the TCF concept.
Pillar Three - Responsible firms that treat their customers fairly
We believe, as I am sure you all do, that the fair treatment of customers by firms is a key part of the broader picture of helping retail customers receive a fair deal. It is, of course, as I have already said, one of the FSA's principles for business so it is not a new requirement or a one-off initiative.
We also recognise the concerns of the Association and its members about the number of "fairness" initiatives currently on the market – be it our own TCF initiative, the Which? Campaign or other legislative or code requirements. We, like you, recognise that there are differences for different types of firm, hence why our approach has been not to define precisely what constitutes "treating customers fairly", but rather to challenge the senior management of firms to work this out for themselves, taking into account the particular types of business that they undertake. TCF is not about developing lots of new rules, but about encouraging positive behaviours in the market.
We recognise that many of you already have or are in the process of carrying out a "gap analysis" to identify areas of business where more needs to be done. And this is already yielding results. At the BSA conference last year, the chairman of a major society spoke about how they had assumed that a society could do nothing other than treat its customers fairly. But when they took a closer look at how they designed products, they discovered that product approval controls needed significant attention. And as one building society chief executive remarked at the FSA's TCF conference last year, the definition of madness is "believing the fact that being a mutual is sufficient to demonstrate you treat customers fairly".
So TCF needs to be embedded into the culture of a firm at all levels, so that over time it becomes business as usual. This is all very much a responsibility of senior management, not just a compliance issue.
To help, we have produced a number of statements of good practice and case studies to illustrate some of the considerations that senior management should take into account. We have published many of these on our website and further case studies on management information, remuneration, complaint-handling and others were published last year. Inevitably, the issues raised are not exhaustive and the practices observed are not prescriptive – treating customers fairly is not something that lends itself to box-ticking. We have also suggested that a useful starting point is to think of treating customers fairly in terms of the product life cycle.
Specific areas for building societies to think about include:
Product design and information – for example, checking that the terms and conditions are not too complex and that key features are clearly reflected in the marketing material. Not all building society products are as simple and straightforward as instant access share accounts – structured deposits or fixed rate mortgages with overhanging redemption fees are more complex.
Sales and advice – for example, is it clear what information a customer needs to provide when applying for, say, a mortgage? And if a society offers non-prime mortgages, do its controls effectively manage the risk that some consumers may be offered such products when they would in fact be eligible for cheaper conventional products?
Producer/distributor interface – does your society, as manufacturer, make sure that distributors of your products are provided with a fair and balanced picture of the terms, nature and risks of your more complex products?
So societies must avoid falling prey to the definition of madness I reported earlier. All societies – whatever size – need to engage proactively with TCF.
We will be publishing in Q3 of this year a further TCF update, indicating the progress the industry has made (including some analysis by size and type of firm), how much there is for the industry still to do and what further work we will be doing at the FSA to make the TCF a reality in all firms, at all stages of the product life-cycle.
Conclusion
In conclusion I come back to where it all started. All of this activity is about helping real people with their real lives and the, often daunting, financial decisions that they are required to make throughout those lives.
The four "pillars" I have outlined today will help us meet that aim. But I would leave you with two particular thoughts.
First, we would very much welcome the support of building societies in carrying forward the work I have described on financial capability. For example, I'd be delighted to talk to any of you interested in using the various tools we have developed or indeed if you are simply prepared to link your own website to the FSA website.
Second, I encourage all societies to continue to think about what TCF means for you in your day-to-day business operations.
Thank you again for the chance to discuss these issues with you today.