Retail banking: Challenges and opportunities
Speech by Clive Briault, Managing Director, Retail Markets, Financial Services Authority
IEA Conference on the Future of Retail Banking
5 June 2006
It is clear from the number of current and saving accounts, of mortgages and other loans, and of investment products provided by retail banks to their customers, that retail banking is important for many millions of consumers and has a vitally important role to play in UK financial services.
And it is clear from the wide range of subjects under discussion during the two full days of this conference that the retail banking sector is looking to move forward on many fronts, from your branches to the internet; from your brands to business strategies; and from your products to the needs of your customers.
So I am pleased to have the opportunity this afternoon to set out three challenges for the retail banking sector from the regulatory perspective.
- First, what more could you be doing, and how can we work together most effectively, to raise the level of financial capability in the UK?
- Second, although the senior management of most retail banks have introduced various initiatives in response to our emphasis on Treating Customers Fairly, how will they be able to ensure that these are delivered throughout their businesses, not least in the interactions between branch and call centre staff and their customers?
- Third, as we the FSA move to a more principles-based approach to regulation, how will you use the flexibility this will offer you to benefit you and your customers, while meeting our higher level regulatory objectives?
Context
To begin with some context: the FSA retail agenda focuses on delivering an effective and efficient retail market for financial services and products, and through this a fair deal for consumers. This requires:
- capable and confident consumers;
- clear, simple and understandable information provided for, and used by, consumers;
- soundly-managed and well-capitalised firms who treat their customers fairly; and
- regulation that is proportionate and risk-based.
These four pillars are closely interrelated. Our work on financial capability is complemented by our requirements that firms provide clear information so that consumers can engage with your market, make informed decisions and shop around; by the need for you to treat your customers fairly; and by our risk-based supervision of individual firms, and our thematic work on particular risks and product types.
Financial capability
Financial capability is hugely important for society more generally. Consumers are increasingly being required to take responsibility for important personal financial decisions. These include how to make provision for their retirement and healthcare, how to budget for day-to-day living, how to save for the future, and what to do if they end up with high levels of debt. These decisions and money management are made more challenging in a world of sophisticated marketing, and by the "credit culture" driven by relatively easy access to credit – both secured and unsecured - and the acceptability of high levels of personal debt from a young age. Gone are the days when you had to make an appointment with your bank manager to obtain a credit card.
Everyone will benefit from a more financially capable population. A society of more confident and financially savvy consumers will be able to take better control of their money: by planning ahead, getting general or more specific expert advice when they need it, buying products that meet their needs, and being equipped to manage and pay back their debts.
Financially capable consumers are also a necessary element of a more efficient and effective retail financial services market. Retail banks should benefit from lower costs as you will need to spend less time and money selling to consumers who have become willing and well-informed buyers.
We at the FSA want to be the catalyst for delivering significant change in these areas, by providing leadership, direction and momentum, and by coordinating the contributions from the wide range of partners we rely on.
The major baseline survey we published earlier this year revealed in particular that people from all sections of society are poor at planning ahead, be it for retirement or for an unexpected event; that in addition to the half a million people already experiencing severe problems with debt, another four million either have started to fall behind or are only just coping and could easily tip into debt repayment problems; that many people are poor at choosing products; and that younger people, by which I mean 18-40 year olds, are less financially capable than their elders but face some of the greatest demands on their financial capability.
Against this background, we have developed a seven-point plan to focus our efforts for delivering change. This plan majors on improving financial capability among children and young adults to lay strong foundations for the future; on providing employees with ready access to information in their place of work; on targeting resources to people at critical life stages; and on the provision more generally of relevant, user-friendly and accessible information and generic financial advice.
In schools, we want to build now on the Government's decision to give personal financial education a prominent role in the revised National Curriculum that is to be implemented in 2008, not least by including personal finance in the new functional maths part of GCSE Mathematics.
We want to increase the capacity of existing organisations – including pfeg (the Personal Finance Education Group), an independent charity that works with schools in England, and similar partners elsewhere in the UK – to provide teachers with help, support and advice, ahead of the curriculum changes.
We believe that the benefits from this work will be substantial. Schools will be better able to introduce a planned programme of personal finance education as they prepare for the revised curriculum. Teachers will be more confident and competent in teaching personal finance education. And, most importantly, children will leave school better equipped to manage their financial affairs. Our target is to reach 1.8 million children in 4,000 schools over the next five years.
For young adults, the next stage of our work includes initiatives both for those in higher and further education and for those who are not in employment, education, or training.
For those in higher education we want to roll out across the UK a very successful pilot scheme undertaken with students at Roehampton University. We all know of the difficulties in engaging young adults in personal finance - but all concerned with this project were encouraged to find that so many students were willing to take part in the Roehampton 'Money Doctors' scheme, even returning early from their holidays to attend advice sessions.
For young adults not in employment, education or training, we want to ensure that youth services providers have appropriate materials and training to help their customers on financial matters. Working with trusted and credible partners in government agencies and voluntary organisations, we will provide the tools and training to deliver targeted and appropriate information to this hard to reach group of more than one million young adults.
In the workplace, our Making the Most of Your Money programme delivers financial education through financial information packs and seminars on issues that concern everyone, including budgeting, borrowing, savings and planning for retirement.
Our workplace pilot work has already trialled this approach successfully. The next step is to roll out that model to substantially more employers and their employees across the UK, beginning with large employers in both the private and public sectors. This programme will expand during 2006/07 to deliver materials to 200,000 employees, with 15,000 subsequently attending one-hour seminars presented by trained personnel, mainly from financial services firms. The pilot work indicates that this will generate considerable benefits. 90% of attendees in the pilots found the seminars useful, while employers saw benefits in terms of increased employee satisfaction.
Over the next five years we want to deliver information packs to four million employees, and for half a million of them to attend a seminar. Several leading banks are already active and committed members of this programme – including Lloyds TSB, HBOS and Bank of America/MBNA. They have provided secondees to deliver the workplace initiative as well as tireless work and enthusiasm to help drive the project forward. So many thanks to them and our other partners in these projects.
Moving on to communications, the FSA is already a major source of impartial information on financial products and services, through our fact sheets and guides, our comparative tables, our calculators, and a host of other web-based materials. And we have increased substantially our campaigning to promote these materials.
Two of the most important on-line tools developed recently to assist consumers in managing their finances are the Financial Healthcheck and the Debt Test. The Healthcheck helps consumers understand and sort out their financial needs, while the Debt Test allows them to consider whether they have or are likely to have any problems with their borrowing. Both tools provide useful tips for a healthier financial lifestyle. Since their launch, the Financial Healthcheck has been used by over half a million consumers, and the Debt Test by over a quarter of a million.
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 extending these tests into many more distribution channels. For example, although outside our remit, and not an area where we will be making rules, 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?
I am pleased that HSBC and RBS already feature links to the Healthcheck and Debt Test on their websites. The RBS Face 2 Face with Finance website has been recently launched and has made a good start – this site has driven over 2,000 extra visitors a week to our on-line tools within the first few weeks of its launch. We are also talking to several other banks, insurance providers and other organisations about linking to our healthcheck and debt test tools from their websites.
Helping people to understand in general terms what financial issues they need to tackle is a crucial part of the seven point plan. We call this generic financial advice, to distinguish it from regulated or basic advice. There is already a wide range of information and advice available, some of which, in particular the Money Advice Trust, is heavily funded by the major retail banks. However, much of this focuses only on those in debt. The issue here is therefore about providing more "preventative", as well as "crisis" advice, and about encouraging people to make greater use of what is already available.
We need your expertise and support to drive forward the work on financial capability. Part of this will be through secondees and financial support for the various initiatives that are underway. But I want to emphasise today what you can contribute directly, through the assistance you offer your actual and potential customers through your branches and through your websites and other consumer-facing materials. How effectively can you deliver initiatives to promote financial capability and even to offer generic financial advice, separately from the selling of specific products?
Treating Customers Fairly
The requirement for firms to treat their customers fairly is rooted in the FSA's Principles for Businesses. Principle 6 states that “a firm must pay due regard to the interests of its customers and treat them fairly”. This is not a new obligation - but we are giving it renewed emphasis to encourage firms to consider for themselves how they deliver fair treatment to their customers. Ultimately, we want to measure the success of our Treating Customers Fairly initiative by looking at the difference it makes to your customers.
We are working towards achieving a number of outcomes for consumers. These outcomes will mean that they:
- can be confident that they are dealing with firms where the fair treatment of customers is a key part of the corporate culture;
- are sold financial services and products that have been designed to be likely to meet their needs;
- are provided with clear information and are kept appropriately informed before, during and after the point of sale;
- are provided with advice which takes account of their circumstances and attitude to risk;
- are provided with the product performance and associated service which they have been led to expect by the firms with which they deal; and
- do not face unreasonable post-sale barriers imposed by firms when they want to change product, switch provider, submit a claim or make a complaint.
Since the launch of our Treating Customers Fairly initiative and through our supervision of firms in the financial services sector, including retail banks, we have seen many encouraging and positive examples of real progress towards firms implementing a Treating Customers Fairly programme.
Most importantly, and at the highest level, the senior management of firms tell us that they recognise the need to embed Treating Customers Fairly as a behavioural and cultural change throughout their business, and that this is very much a senior management responsibility, not simply something to be passed across to their compliance departments.
In many firms we have seen the establishment of clear senior management responsibilities – and project processes more generally – to drive forward a decisive move towards Treating Customers Fairly. For example, one banking group we spoke to recently has set up a Treating Customers Fairly forum to oversee all of its Treating Customers Fairly activity. To ensure that key messages are received at all levels of the organisation, employees are invited to sign a "Treating Customers Fairly pledge" focused on the principles required by the firm.
In product design, we have seen a number of firms involving customer representatives and making good use of consumer research to design simpler and better understood products. And we have seen a general improvement in financial promotions over the last few years. Some firms have also made good use of the results of our thematic work in areas such as equity release and payment protection insurance to design products that can more easily be sold and advised upon in line with our requirements. And we heard from one firm that its improved product design procedures had resulted in three unsatisfactory new products being dropped, that would otherwise have reached the market.
We have seen more firms carrying out mystery shopping of their sales and advice processes, and using other techniques, to assess the fair treatment of their customers and to identify areas of customer concern.
On staff remuneration we have seen an increasing number of firms reducing the emphasis on commissions and sales targets. They now favour including a larger element of remuneration based on core salary, on measures of customer satisfaction, and on internal reviews of the quality of the service provided to customers.
Staff training and internal communications also contain an increasing element of Treating Customers Fairly. Some time ago now, I was pleased to see, while waiting for a meeting with a major banking and insurance group, a copy of that group’s in-house magazine with “Treating Customers Fairly” emblazoned across the front cover. Of course, as a cynical regulator, I wondered whether that was the only copy, placed there especially for me, and I did not have time to read what was inside. But to be fair, I have to say that I found the front cover immensely gratifying, proving as it did not only that the group was trying to embed the Treating Customers Fairly culture into its people, but also that it was possible to do this using the same words that we have been using.
In the context of mortgage endowments we have seen improvements in complaints handling procedures. We have also seen more firms analysing complaints to identify and to correct the “root causes”, and thus to change procedures so as to reduce the number of complaints received in the first place.
So there are many examples of good practice, but there is still a long way to go. We recognise the scale of the challenge firms face in trying to embed the principle of Treating Customers Fairly within all that they do. But in some firms there is still no clear articulation from senior management of what Treating Customers Fairly means for the business; no allocation of responsibility within the firm for implementing any initiatives to meet the Treating Customers Fairly requirement; and little or no staff understanding of what the principle means in practice.
It is not just in the smaller and medium-sized firms that there is further to go. We recently visited a major banking group and found a general air of complacency and defensiveness around the firm on Treating Customers Fairly - even though it had no discernible Management Information to justify this complacency. Our view of the customer experience at this firm was that it was not at all customer-friendly and less than half of client files reviewed showed clear evidence of product suitability for the customer. Customer communications were also of a generally low standard.
Some firms have not addressed their product design procedures either, and clearly need further encouragement before they think about either the information they provide to their distribution channels, be they in-house or third party, or about customer testing their consumer-facing product literature. We have found firms where staff remuneration continues to be dominated by commissions and other volume-related incentives; and where no attempt is being made to collect any management information on whether customers are being treated fairly or not. And there is still a long way to go before firms develop convincing management information to show whether they are indeed treating their customers fairly.
There can also be a disconnect between the good intentions of senior management and the behaviour of their customer-facing staff. We continue to find a worrying number of practical examples where customers are not treated fairly. For example, in the course of our thematic work over the last year or so we have found: financial advisers giving poor quality advice to consumers on equity release products; a range of issues with both the content and provision of disclosure documentation, for both mortgage products and for the initial disclosure and menu documents following depolarisation; and poor selling practices and a lack of proper compliance controls among a sample of firms selling payment protection insurance, where we found firms selling policies to customers who were not eligible to claim on them and firms that did not clearly explain the price of the policy or the main exclusions and limitations of the policy to their customers.
Much of our thematic work – and some firms have told us that our findings match the results of their own compliance and mystery shopping reviews – therefore suggests that in many firms the Treating Customers Fairly initiatives begun by senior management have yet to deliver improvements further down the organisation, and are therefore yet to deliver benefits to customers.
Even those firms who have made substantial progress in implementing Treating Customers Fairly within their business would be among the first to agree that it will take time to move from the implementation stage to the embedding of Treating Customers Fairly throughout all levels of the firm. It takes a long time to change the culture of a firm. So we and you should be cautious before being tempted to declare victory too early.
A final thought here. A number of retail banks have announced that they want to simplify and reduce their product range. That is a challenge in itself! And some have told us that they are keen to explore the possibility of introducing a more straightforward advice regime linked to simple products that will be rolled out both in branches and on the internet. It is not for us to determine market structure, but we are keen to facilitate innovation. And when we consulted on the basic advice regime for stakeholder products we mentioned the possibility of extending a basic advice type of approach to a wider range of simpler products. So if you are thinking along these lines please let us know.
More principles-based regulation
Treating Customers Fairly is just one of our eleven high level principles. Our Principles set overarching requirements for all financial services firms, articulating the actions and behaviours we expect of them. They focus on what we are trying to achieve and so are expressed in terms of outcomes rather than processes or procedures. Indeed, the increasing emphasis we have placed on Treating Customers Fairly over the last few years has made it one of the forerunners of our move to a more principles-based approach to regulation.
Equally, the questions asked of our emphasis on the Treating Customers Fairly principle over recent years reflect the questions asked of our move to a more principles-based approach more generally.
Let me address some of these questions this afternoon.
First, why do we want to be more principles-based? It is because we see real benefits for firms, markets and consumers in shifting the balance towards a more principles-based approach. We want to provide firms with more flexibility to decide for themselves how best to run their businesses, while remaining compliant with our regulatory objectives. Firms who seriously commit to a set of outcome based principles should be well placed to judge the detail of how best to deliver those outcomes in the marketplace. We want to align good regulation more closely with good business practice. For example, firms can deliver fair treatment to their customers in a way which is aligned to their commercial objectives in terms of customer service and retention. And we want to provide greater clarity about the outcomes that really matter to us and to engender a shared appreciation of the regulatory outcomes we are seeking to achieve. So the focus shifts from the means to the end.
This in turn should benefit consumers, if firms focus more on outcomes that are consistent with our regulatory objectives, and if they use greater flexibility to deliver these good outcomes for consumers more effectively.
Second, in a more principles-based approach, how do we provide clarity about the minimum standards to be met? How should firms interpret the Principles? How can we provide sufficient predictability? In part the answer to this is that detailed rules will not disappear entirely. Some will be necessary to address the imbalance in the retail market between a firm and a customer, and in particular to ensure that consumers receive clear, simple and understandable information about financial products and services. And many detailed rules will remain because we have to implement EU Directives.
Another source of predictability is to supplement the Principles through various forms of guidance to firms – what we call “small g” guidance sitting outside our Handbook of Rules and (“big G”) Guidance. In our work on Treating Customers Fairly, firms have welcomed the statements of good practice and the case studies we have published to illustrate our interpretation of what the Treating Customers Fairly Principle means in practice.
We are also looking to make even greater use of industry codes and guidelines, and are revisiting how far we can accept that a firm following such codes and guidelines meets our minimum standards in that area. There are significant challenges to making greater use of industry solutions, and we do not intend simply to replace FSA rules with codes and guidance issued by trade bodies, or to proceed without input from consumers and other interested parties. However, we do see appropriately formulated industry codes and guidance as a means to help firms understand how to comply with our high level rules, and we want to make progress here.
We also accept that as all of this material proliferates we need to do more to bring it together in a consistent and coherent manner so that our interpretation of the minimum standards implied by our Principles is clear to all. This material needs to be readily accessible, so that the flexibility we want to achieve with a more principles-based approach is not at the expense of confusion or a lack of clarity.
Third, what does being more principles-based mean for the relationship between us and those we supervise? In large part the answer to this is that we all need to exercise more judgement. For us, this means making informed judgements based on a good understanding of firms, their customers, and of the markets in which they operate. And in forming judgements about outcomes, it means seeking a broad degree of consistency in terms of the outcomes that firms deliver – in particular with respect to how they treat their customers – rather than consistency in detailed requirements about processes. As I have already mentioned, in a more principles-based approach firms will be able to adopt different approaches to an issue but with a reasonably common outcome. We recognise the demands that making these judgements will place on our people and we fully intend to recruit and develop the people we require to meet these demands.
For firms, a more principles-based approach requires them to make judgements as well. It means a greater focus on senior management responsibility to deliver outcomes in line with our Principles, rather than a compliance department led emphasis on meeting detailed requirements. And it means a firm being able to demonstrate that these outcomes are being delivered. I have already welcomed the significant shift in this direction over the last year or two as firms have addressed the Treating Customers Fairly Principle.
Fourth, what does a more principles-based approach mean for enforcement? Let me say immediately that we are not looking to take more enforcement actions for their own sake, and we are absolutely not looking to catch firms out by finding some aspect of their behaviour that falls short of meeting 100% of every Principle at all times. And I should note that we can and do already take enforcement action on the basis of our Principles alone. For a firm to be judged as having breached a Principle then, as with any of our rules, it must be possible to predict, at the time of the action concerned, whether or not it would be a breach. Where the requirement of predictability is met it is legitimate for consequences to follow a breach even though the Principle is expressed in general terms.
For example, in the context of Treating Customers Fairly I have stated before that where we find that a firm is failing to treat its customers fairly, we consider the most suitable course of action. In many cases, we will agree with the firm a means of addressing shortfalls including, where necessary, providing redress to consumers. In some cases, failure to treat customers fairly may lead to enforcement action; in particular where a firm has not responded to indications of a problem, has failed to identify shortcomings and to develop a strategy to remedy them, and has committed a serious breach of the Principle. But we do not expect to take enforcement action if we see that firms are making a genuine attempt to deliver on what Treating Customers Fairly means for them and there has not been significant risk or actual detriment to consumers.
Time does not allow me to cover all aspects of moving to a more principles-based approach. But let me assure you that we understand and appreciate your concerns about what a more principles-based approach means. We recognise that we need to establish an environment that firms find reliable and predictable; where communications from us are relevant, clear and timely; and where our people have the experience, expertise and skills to make sensible, informed and proportionate judgements. We are also clear about the opportunities and challenges for you under a more principles-based approach.
Conclusion
To conclude, I outlined at the outset three challenges to your from a regulatory perspective, covering financial capability, Treating Customers Fairly, and more principles-based regulation. I very much hope that if I am addressing retail banks in five years' time then I will be able to report on a real shift in financial capability, having worked with you and our other partners; on real progress in the customer-facing delivery of Treating Customers Fairly; and on a successful transition to a more principles-based approach to regulation, under which you are meeting our higher level requirements by operating more flexibly to the benefit of both you and your customers.