This talk was given on 7 November 2006
The text here may not be identical to the spoken text

The Moneyfacts Conference 2006

Marketing Financial Services: from Reputation to Retention

What Does the Consumer think of You?


Hi. I’m Paul Lewis I’m a freelance financial journalist and as some of you may know I present Money Box on Radio 4.

But I do lots of other things including writing most of the financial pages in Saga Magazine and the views I express here are mine not Saga’s, not Money Box’s and certainly not the BBC’s.

What Does the Consumer think of You?

I was chairing a meeting recently and a representative of a youth organisation asked anyone in the audience to stand up – if they had ever been young. They all did. She was making the point that young people weren’t an alien species. They were just us, a while ago.

And if I asked everyone to stand up who had ever been in a shop or bought stuff on the internet – no-one would stay sitting down. So you know what customers want. They want to be treated as you want to be treated. Honestly. Politely. Efficiently. Fairly.

But they’re not.

Let’s start with our own baseline survey of where we are now on the two themes for today Reputation and Retention.

Reputation first.


A new MORI poll out this month shows that nine out of ten of us trust doctors to tell the truth (92%). With the police six out of ten of us trust them (61%). Civil servants nearly one in two (48%), Business leaders three out of ten (31%). Then we come to the bottom feeders. With politicians just one in five of us trust them to be honest (20%). And slightly below them, worst of all, buried in the slime at 19%, are yes, journalists (MORI 2006).

I couldn’t find a similar survey that included financial advisers. But here’s the strange thing.

When the MORI asked people where they got information and advice about investing in a range of products – from ISAs to unit trusts – typically they answered – internet 5%, friends and family 7%, tied agents 12%, building society 13%, bank 17%, - mmmm so that’s 42% tied or multi-tied – and then IFAs 19%. But out in front of all of them at 31% was Newspapers. So nearly a third of people turned first to newspapers, to journalists, for their financial information and advice. Although 4 out of 5 people don’t trust journalists to tell the truth – they obviously trust us more than you lot!

Actually I find having been a financial journalist for nearly 20 years that our bit of the profession is trusted. We are expected to get things right. This is from a reader of Saga Magazine.

‘Dear sir, Your pension issue did not say the truth and you pussy-footed around. People will not save because of Governments that cannot tell the truth, Prime Minister lies and spins, pension companies cheat, bosses swindle and we are taxed again on what we’ve worked for and saved. Hope you get it right next time. Tell the truth.’

So that’s what I’ve come here to say really.

So at the moment there is a problem with trust, reputation. How about retention?

Industry figures for how long people keep long term products show that there is certainly a problem of retention.

In October the FSA published the latest persistency figures – how many people keep their long-term financial product long-term. And grim reading they made.

Regular premium long-term products

Endowments – one in three sold by company reps and more than one in four sold by IFAs given up within four years.

Whole of Life policies – one in three sold by company reps and about one in five sold by IFAs given up within four years.

Personal pensions – half sold by company reps and more than half - 54% - sold by IFAs given up within four years.


And it’s getting worse. from 1993 to 2001 there’s been a slow decline in persistency for regular premium personal pensions sold by company representatives. But for IFAs it has declined from about three out of ten in 1993 to more than half now given up within four years – 54% of personal pensions sold by IFAs in 2001 were given up by 2005.

So you’re not retaining customers and people prefer to trust journalists – journalists – than you lot for financial information .

These persistency figures enable us to compare persistency across what you would probably call ‘sales channel’ – or even better ‘distribution channel’ because nothing quite so grubby as a sale is involved is it? These products are just distributed, in an altruistic sort of way. These are aggregate figures for all long-term regular premium products sold in 2001. At the end of four years, how many had been kept?

Step forward company representatives – in force 55%, abandoned 45%.

Now IFAs – same thing in force 54.8%, abandoned 45.2%.

So that’s all the stuff that’s sold. What about the stuff that’s bought? Where foolish individuals, without taking advice, think they know better than someone with FPC1 and buy it themselves off the page or more likely the internet.

Here we see a different picture. After four years about a quarter has been abandoned and more than three quarters is still being kept. So if you want persistence let people buy it, don’t sell it.

Or as the FSA says

"If investors buy policies on the basis of good advice, they would not

normally be expected to give them up"


"in the case of direct offer contracts, investors have chosen the terms of the

contract for themselves (as opposed to being sold it)."

If there is one maxim that you hear in financial services it is that financial products are sold not bought. It’s one of those things that are said with a kind of conspiratorial whisper, as if the speaker was imparting a profound truth. Like ‘toast always lands butter side down’. Or ‘There’s no I in team.’ Though there is ‘me’ thank you very much.

And they use this phrase to justify that fact that droves of commission driven sales staff have to go out and sell us stuff whether we want it or not. Even worse, whether we need it or not.

When I was boy I lived in Maidstone. There’s been a market there on Tuesdays for more than 700 years. I love markets and when I was a boy my Dad used to take me there. One day there was a man selling bed linen literally out of the back of a lorry.

"Pair of sheets, put your hand up I’m gonna treat you, pair of Egyptian cotton sheets, in the High Street or department store, sheets like that will be a fiver, ten pound the pair. I’m not even gonna charge you a fiver for the both of them. Not four not three not two - the first hands held up with a pound note will get them. And wait a minute wait a minute. I’ll tell you what. The first five hands that go up get a pair of matching piller cases. Treat the man over there, treat the lady over there, sir are you buying? You are. Take a quid off that man and give him the bedding."

Now in those days a pound note was worth £15 or £20 in today’s money – but still cheap for sheets, especially with matching pillow cases. Dad was very pleased.

Back home Mum took a different view. The hems were poor, the stitching was uneven, the colour was patchy and worst of all the cotton was so thin they’d wear through in a few months. She wasn’t even sure she would allow them on the beds at all. Bad buy. Or rather bad sale. Because the one thing you have to understand about badly made sheets is — they have to be sold not bought.

Those sheets were such bad quality, no-one would buy them. They had to be sold to unsuspecting people who thought they’d got a bargain. They had to be sold not bought because, as Gerald Ratner would say, they were total crap.

If people have to be forced, bullied, cajoled, deceived, harangued into buying stuff perhaps they don’t need it. And perhaps you shouldn’t be selling it.

Now of course this phrase about being sold not bought was originally used as far as I can tell for insurance, specifically for life insurance.

It’s an interesting product life insurance. Invented in the 18th century probably around this time of day in a City coffee shop. Someone came up with a new money-making wheeze.

"I say, you give me ten pounds every quarter. And I’ll give you £1000."

"Splendid plan. When?"

"After you die."

OK, they needed to work on the marketing. So it was sold as a generous product. Because of course life insurance isn’t about you, it’s not a selfish product like saving – it’s an altruistic product. You spend money and someone else benefits. That’s why the first two years’ premiums go straight to the person who sold it you.

The industry started as it meant to carry on. The very first life insurance claim in 1766 was disallowed. The customer went to court and the judges made the insurer pay up – with costs. But the industry survived and grew into the financial services industry we all know and love.

Then a few years ago, after more than two centuries, some marketing whiz decided that insurance needed a re-brand.

So now no-one sells dull boring old insurance – no, they sell ‘a range of protection solutions’. Marvellous products that protect us from all sorts of horrible things.

Except they don’t do they? Home contents protection? Does it prevent me getting burgled? No. Critical illness protection. Does it stop me getting cancer? No. Building protection. Does it earth a lightning strike? No. It’s not protection. It’s insurance.

Protection prevents something nasty from happening.

Insurance pays up if it does happen.

We all understand what insurance is. After 200 years why call it something else? It’s all part of a trend to make things misleading. To inhibit understanding.

What do customers want? Words that help understanding not hinder it.

Now at this point I would normally continue the insurance theme and talk about Payment Protection Insurance and go on at length about the iniquities of it. But now I just refer you to the Financial Services Authority which found – eighteen months after it first looked into it and a year after Chief Executives were written to about the problems – it still found

Some are not making it clear that PPI is optional

Customers are not receiving full information about costs.

Customers are not being made fully aware that there may be parts of the policy under which they cannot claim.

Where customers are sold single premium policies, this is not always done with the best interests of the customer in mind – like always

And Debbie Samosa who did the research for the Office of Fair Trading fou8nd similar things and told Money Box

in a truly competitive market, you could probably make about £1 billion of consumer savings and that’s probably quite a conservative estimate.

And that’s a billion pounds out of about £5 billion, about 20%. And as she said that’s a conservative estimate.

What do customers want? Fair pricing not profiteering.

So the whole market is probably going to be referred to the Competition Commission. But these things take time so don’t worry you can safely go on selling this product inappropriately and making excess profits for probably another couple of years. And that’s another 14 million policies worth £11 billion.

All of them sold not bought. I wonder why.

The idea that financial products have to be sold not bought has now been extended to investments – particularly to pensions. Everyone is expected to put money into a pension. But most people are a bit reluctant. They want to know what pension they will get for the money they choose not to spend now on much nicer things like houses, food, or going out. And some want to be sure that charges won’t eat away at their investments.

I wrote about public sector pensions a while ago. And in the list of people who had good pensions guaranteed by the state I included police officers. A serving policeman sent me a vituperative letter pointing out that he paid for his pension, thank you very much. 8% out of his pay.

He had no idea that to get the pension police officers can look forward to would cost more like 25% of pay. And because police pensions are paid for out of the public grant towards police costs, some forces were cutting back on policing to pay pensions.

And this is the problem with pensions. To have even a modest pension costs a hell of a lot of money. My policeman’s 8% of pay would buy him a very modest pension. 3% or 4% of your pay probably isn’t worth buying at all.

And yet a lot of effort in financial services, and a lot of the cost, is devoted to selling pensions to people who probably should not buy them. The median earnings in the UK is just under £23,000. Suppose you wanted a pension of half that at 65. To have a good chance of a pension like that starting at 30 you would have to save £5111 a year, £426 a month, almost a quarter of your pay. Would any of you honestly go up to a person on £23,000 a year and expect to get them to save not £20 a month, not £100 a month, not £250 a month but £426 a month? It’s not going to happen.

In case you’re wondering those figures come from a spreadsheet I worked out with Tom Ross – the doyen of actuaries if I can put that way – Chairman of the Pensions Policy Institute and past President of the Faculty of Actuaries. His simplifying assumption is that investment growth after charges is just about equal to inflation. You can try out the calculator on the website of AC Black through the link to my book Live Long and Prosper.

So is it worth selling a pension to a person on median earnings of £100 a month? Or £50 a month or even what you would no doubt see as a good start £20 a month. Probably not.

I am often told that pensions, like life insurance, have to be sold not bought. And for people on median incomes that is probably true. But not among richer folk. The people who are piling into pensions are the ones with plenty of spare cash, who get £67 paid in by the taxpayer for every £100 they pay in themselves. That’s why the richest one in nine taxpayers gets more than half the tax relief subsidy to their retirement savings. They don’t need to be sold pensions. They know they are a good deal. And the other 89% get the remaining 45% of the tax relief. Or rather half of them get it and the other half get nothing because they don’t even pay into a pension. They just subsidise the richer folk who do. To the tune of £15 billion

So just as with thin sheets or payment protection insurance we have to ask – you have to ask – why does this person need to be sold a pension? Why aren’t they queuing up to buy a pension? Perhaps because the pension they are being offered is made of thin material, is losing fabric at the seams, and is generally stitched together really poorly. What customers want is a bit of honesty about what their contributions will buy.

Honesty. And that of course means behaving legally. Earlier this year the OFT decided that credit card providers were breaking the law. Acting illegally. By charging excess penalties when we went over our credit limit or our monthly payment was late. Typically they were around £25 a go. But the law says that a company cannot make a customer who breaks the terms of a contract "pay a disproportionately high sum in compensation." In other words the charge made for breaking the contract can only reflect the cost of the breach of the rules and cannot have a penalty added on as well.

The OFT did not say what a fair charge would be. Not least because the banks wouldn’t tell them what it cost for their computers to churn out a letter saying your payment’s late and the charge is £25. The banks just said ‘we are acting lawfully. And when pressed added ‘we are acting lawfully.’

So the OFT plucked a figure out of the air and warned that if any credit card provider charged a customer more than £12 then it might launch an investigation into that bank’s costs and make a formal ruling on what it should charge.

The last thing the banks wanted was the OFT using its powers to burrow away in their books and discover the real cost of their computers generating a letter which is printed, enveloped, addressed, pre-sorted and posted, automatically. All of them decided to reduce credit card penalties to a level at which the OFT would not investigate.

Here’s the current list of credit card penalty charges.

Out of 42 credit cards 38 have cut their penalties to the level which they believe will prevent OFT investigation. Just four have reduced them to £11. And just two – both American Express branded cards – to £8.

Of course, this is very embarrassing for the OFT which is supposed to promote competition. Can’t quite see where the competitive pressure is there. Of course, it was a danger the OFT foresaw. In its ruling it said "we are not inviting the banks to align their charges at such a threshold figure". But that is just what they did. The OFT certainly didn’t say that £12 would be legal.

Now of course the OFT is doing a similar exercise on overdraft penalties. And again we do not know whether these penalties are legal or not. We do know they are a high. Take Lloyds TSB – I’m not picking on Lloyds – it’s going to sound like that for five minutes but you’ll see why Lloyds later.

From the first of this month if a customer of its Classic account – and there are several million – goes a penny overdrawn without permission, the bank now charges £30. And if the bank decides to bounce a direct debit or cheque it charges £35 a time with a maximum of £105 a day.

So a payment is late coming in. A standing order is paid, the account goes one penny into overdraft — £30. Another payment is due. It is bounced. £35. Another £35, ditto £35. At the end of day one £135 in charges for being a penny overdrawn.

Day two dawns. Still overdrawn. Another payment is due. Another £35. Ditto. Ditto. A total of £240 pounds in charges. Next day, another three payments due another £105 added on, total of £345 in charges. So the cost of being a penny overdrawn on Tuesday is £345 by the end of Thursday. It’s worse than parking in Camden.

Now this person has been careless, perhaps foolish. Three days late with money going into her account just at the time when her standing orders and direct debits are due.

Three days. By coincidence the same time it takes you lot to move money around the banking system. It is perfectly possible that she tried to move the money into her account but it has taken three days for the banks to achieve that simple objective. (NB Lloyds TSB does give instant credit on certain kinds of payment into some current accounts).

I can leave here this morning, go into a jewellers in Acton, and pay in £100 and by tomorrow morning their time – six hours ahead – a man on a bike will deliver 13,300 Taka to a family in a village in Bangladesh. But you lot still take three days – excluding Saturday and Sunday and Bank Holidays when money likes a bit of a lie in like the rest of us.

So if the bank is three days late with a payment, it’s a shrug and that’s how the system works. If we are three days late with a payment it’s £345 in fines.

I tell you. Customers don’t want this. It doesn’t seem fair. It does seem greedy.

And does £35 a bounced payment and £30 for being overdrawn reflect the actual cost to the bank?

When I asked Ian Mullen, chief executive of the British Banker’s Association about banks’ penalty charges he replied

"the banks believe that they have a fair, lawful and transparent system"

And when I asked specifically about the £39 Halifax charges for bouncing an item, and whether it was more than the cost to the bank he replied

"Well I can’t go into specific banks and their charges because you see each bank has its own system of charging."

And of course on this topic the banks won’t be interviewed. They always put up the BBA or APACS who cannot answer questions about individual policies. These Lloyds charges began last Wednesday. But they were announced in October. Yes, Lloyds TSB announced it was raising its penalty charges on its Classic current account shortly after the OFT announced it was looking at whether such charges were legal. Lloyds decided that was the moment to put up two charges to several million customers – or perhaps it was two fingers to the OFT. And the bank was prepared to be interviewed.

As I said, there is one condition these charges have to avoid – Schedule 2(1e) of the Unfair Terms in Consumer Contracts Regulations 1999 here it is in full as one of the examples of an unfair term under Regulation 5(5)

"requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation"

So are the charges imposed ‘disproportionately high’ which lawyers tell us means they can recover the cost but no more. In other words are the charges more than the cost to the bank of a customer going overdrawn? Does someone who goes a penny overdrawn on their Lloyds TSB classic current account for one day cost the bank £30? And does bouncing a payment cost the bank £35 each time? It’s a simple question and goes to the heart of whether these charges are legal.

Strangely that key point it has never been tested in the courts. Because when a customer asks for their money back, the banks pay up – well they try not to and put all sorts of barriers and hurdles in the way – including now threatening to close customers’ accounts – but if customers persist then just before any case has been due in court to have this key point decided, the bank has settled.

So when Lloyds’ head of current accounts Gerard Schmid agreed to come on Money Box to explain these new charges it was the question I had to ask. Here is how it went.

LEWIS: And let me ask you about the charges - £30 if you’re a penny overdrawn; £35 to bounce a payment. Does it actually cost you that much because if it doesn’t the OFT could tell you those charges have to come down?

SCHMID: Well as the earlier discussion alluded to, the OFT has not had a view in terms of whether these charges are …

LEWIS: No, but I’m asking you does it cost you £35 to bounce a payment?

SCHMID: There are a number of decisions that the bank has to undertake in terms of choosing whether to decide to extend credit when a customer doesn’t have an overdraft facility with us or whether to choose to bounce the cheque, so there are a number of complicating cost factors that are embedded in this decision that we do have to make.

LEWIS: So yes or no, does it cost you £35?

SCHMID: I think the way to think about it is a lot of these charges are completely avoidable for customers.

LEWIS: Is it yes or no?

And then a very strange thing happened. The head of current accounts at Lloyds TSB just sat there in silence. As the transcript indicates


So I tried again

LEWIS: You’re not saying?

Once more, silence.

I thanked him and he left, in silence.

So on this one central question of legality – when a payment is bounced, does it actually cost the £35 you charge your customers – the Head of Current Accounts at Lloyds TSB sat in silence.

Of course if you are interviewed on live radio "You do not have to say anything, but it may harm your defence if you do not mention when questioned something which you later rely on in court."

Incidentally if you want to hear a Lloyds TSB executive lost for words it is preserved for posterity at, look for 7 October.

I’m not picking on Lloyds TSB. Its charges are not exceptional and I am sure MoneyFacts can find worse. And I’m certainly not picking on poor Mr Schmid. Because the truth is the banks dare not answer that key question. Their only response on whether their charges reflect the cost – in other words are legal – is to remain silent.

What do customers want? They want banks and building societies to behave legally, not to break the law.

If the banks cannot even tell us if they are behaving within the law, how are we expected to trust them? And I can tell you that one of the things that fills our email postbag at the moment are complaints about excessive and unfair bank charges. Customers may not know exactly what the law says. But they know what is fair.

What do customers of any retail business want? What do you want when you into a shop or onto a retail website? You want to trust the seller. And you know whenever I talk to people in the financial services industry the one thing that everyone says to me is. We need to restore trust. So you and your customers have one common interest. Restoring trust. So how do you do it?

That brings me finally to commission. Just as the OFT stole parts of my speech when it comes to Payment Protection Insurance so the FSA has now stolen other talks I give about commission. Callum McCarthy had a first go at this in September, at Gleneagles appropriately, when he recognised the albatross that was round the necks of your industry. Under the title ‘Is the present business model bust?’ he said

"we have a system which serves neither the producer of the services nor the consumer of the services. It is doubtful whether it serves the intermediary either."

he then set out why it failed producers, customers, and intermediaries.


persistency is low

not clear how much is motivated by the customer's best interests

conspicuous examples of either mis-buying, or mis-selling, or some combination of the two

incompatible with developing either a reputation for the industry as a whole, or a brand reputation for individual companies.


providers managing demand – up or down – by adjusting commissions which can lead to less suitable or even unsuitable sales.

significant consumer detriment from paying unnecessary commissions, charges or fees when induced to switch from one product to another

when the commission model applies [managers] fail to mitigate these high risks of inappropriate advisory and transactional activities


built encouragement to churn

[a system] not naturally robust to claims for mis-selling, and the associated compensation liabilities.

at May 2006, the top 21 IFAs had turnover of £640 million, but operating losses of £22 million – twice that of a year earlier.

Now Sir Callum didn’t say commission was wrong. And he didn’t offer any alternative. And nor did Clive Briault last week when enlarging on these thoughts. Commission he said does cause bias and does have detrimental incentives, but he stressed

"we have not already concluded that commission is bad, or that we should ban commission altogether. But we are open to suggestions about alternative structures."

The FSA’s view that commission biases sales should be enough. But it is a persistent argument that it doesn’t. People will even misquote research to me to show that it doesn’t.

But I just ask you to consider this

Look at the major financial scandals of the last twenty years – from pensions mis-selling to precipice bonds to splits. And go the FSA website and look at the disciplinary action taken against firms. And ask yourself if those industry wide or company specific mis-sales would have happened without commission. Of course they wouldn’t.

I know the argument for commission – how do you motivate people without commission? Well it may come as a surprise but most people who work don’t get paid commission. What motivates teachers, plumbers, the people who run this theatre, police officers, cooks, journalists, bricklayers do their job?

I’ll tell you. If they do it well, they are valued, promoted, and yes maybe given a bonus at the end of the year. A fair wage for a worthwhile job. That’s what motivates most of us. And if people don’t do their job well, then they are offered advice, perhaps some training, and if that doesn’t work they are disciplined, warned. And ultimately sacked. That’s what controls most of us at work.

It’s called management.

Are people who work in financial services so different from the rest of us that they can only be motivated to get out of bed by the thought of earning £2000 for selling a product that isn’t wanted, isn’t needed and may not even achieve the limited objectives it actually has? I don’t think so. Treat them like people, not like greedy bastards, they might behave that way.

Commission is literally and precisely a conflict of interest between the financial adviser and the customer.

I know at least two IFAs who don’t pay commission. They manage their staff as any other business does.

And outside financial services, PC World scrapped commission across its 150 stores in March this year because the company realised that

"The previous commission-based selling scheme encouraged behaviour that was not necessarily in the customer’s interests"

So they piloted no commission. And stores where it was tried out – called One Team – showed a 5% better performance in converting visits to sales than the stores which still paid commission.

It can be done. And your industry is full enough of bright people to sit down and work out how it can be done.

Only when you do that will you be able to restore the trust between buyer and seller. That will help you retain customers not lose them. And that is when your business will grow.

Because that is what customers want.


7 November 2006

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