This talk was given at the Consumer Congress 10 December 2009
The text here may not be identical to the spoken text
Transforming financial services
I
am here as a freelance financial journalist. Not to represent any of my clients.
Specifically I am not here representing Money Box or still less the BBC.
In
my fifteen minutes I want to introduce you to three radical ideas. Ideas that
would transform financial services from an industry which is largely a money
making machine for the financial services industry into one which serves and
helps consumers to keep more of their own money and use it wisely.
I
bought a car the other day. And I was faced with a choice. What colour would I
like – maybe metallic paint? Did I want a sporty number with two seats or a
family vehicle that could fit a table and a dog in the back. How about built in
sat nav? And was I worried about the fuel efficiency of the car? If so I could
reduce my road tax – and save the planet. These are all valid consumer choices.
But
if this had been sold by a financial adviser I would have been asked what
tensile strength glass did I want in the windscreen? It all depended on my risk
reward ratio. Plain window glass was clear, you could see through it probably
better than normal windscreen glass. And it would cost me a lot less. But there
was an outside chance that a stone might hit it and then it would break and
shower me with razorlike shards? What was my risk profile?
Luckily it was a car. I didn’t have to search the internet for information about
the brake linings you needed for a 1.8 litre engine. I didn’t have to understand
torsion bars or tensile strength. I didn’t have to decide how many and where I
wanted air bags. Or check the mounting of the seat belts. All those things are
laid down. In the law. The car I bought will be safe. It is illegal to sell one
that isn’t. So I didn’t have to have to take a vehicle literacy course so that I
could make rational choice about the car I bought. I was allowed to make the
choices that a customer can make –
colour, fuel consumption, upholstery. That’s about as active a consumer as I had
to be.
But
imagine if the sale of cars was regulated by the Forecourt Sales Association –
FSA for short. it would be perfectly happy if I
was sold a car with a windscreen
made of window glass. As long as the risk was explained to me in paragraph 94
(b) (ii) blobby point five. ‘In some circumstances window glass can shatter.’
You were warned.
Because the FSA regulates not products but process. As long as an item is sold
correctly and the risks explained then it does not have to fulfil any other
standards.
Now
I made up the Forecourt Sales Agency. But there is another FSA – no, not the
Footballers Supporters Association. And it does regulate products. And it does
tell us who is doing what.
17
August 2009 Shutki Raja Chutney Powder. The FSA has issued a Food Alert. Local
authority food law enforcement officers must make sure the chutney is withdrawn
from sale and destroyed.
No
problem was found with Shutki Raja Chutney Powder. Except that it had been
produced on unregistered, or possibly unapproved, premises. So the product was
named and withdrawn and destroyed.
17
March 2009 Active brand peanut butter has been found to be contaminated with
excess levels of aflatoxins. The Agency has issued a Food Alert. If any of these
products are found, enforcement officers should ensure they are withdrawn from
sale and detained.
Compare that with its namesake that regulates financial products. Aflatoxin in
peanut butter. It would immediately swing into action and order a thematic
study. And a spot of mystery shopping. After some months it would publish the
results calling on the industry to take action to explain clearly to customers
what aflatoxins were. After giving the industry several months it would order a
second round of thematic work and a bit more mystery shopping. The next year it
would publish a review and ask for comment. A few months later a Consultation
Paper would appear on how these ingredients should be described and discuss
whether they were ever completely inappropriate. A few months after that it
would publish the results of the consultation paper setting out what it planned
to do. Food manufacturers could object. It would then issue a feedback statement
with a draft a timetable to make changes in the rules. And six months later
decide that more time was needed as otherwise there was a real danger than
peanut butter would not be available for everyone’s sandwiches and that changes
would not be ordered until 2012.
Meanwhile the businesses that had been found to be selling food contaminated
with aflatoxins would not be named. Their identity would be kept secret from
consumers. So the FSA would know who was selling dangerous food and under what
brand names. But it wouldn’t tell customers. That would take another long
process of enforcement and eventually some retailers would be fined. But the
amount would be reduced by 30% because they had co-operated with the
investigation and taken the products off their shelves promptly – four years
after they started selling them. And only at that point after they had stopped
selling these dangerous products would the public finally know who they were.
This FSA is of course is not the Food Standards Agency it is the other FSA – the
Fundamentally Secretive Association. Which began investigating Payment
Protection Insurance in 2005, found problems and two years later referred it to
the OFT which passed it onto the Competition Commission which did more research,
published draft proposals then a draft order and still has not imposed a two
week period between the sale of the food and the sale of the aflatoxin. Sorry,
the sale of the loan and the sale of the insurance.
Much better to be like the Food Standards Agency – ban them. Issue a notice and
destroy them. ‘My goodness’ I am told ‘we can’t work like in the finace
business! If we went round banning things it might destroy confidence in the
industry. Then no-one would buy pensions or investments. And that would be a bad
thing – wouldn’t it?’
Among that list of products reported by the Food Standards Agency recently there
was this
20
November 2009 Tesco has withdrawn two batches of its own-brand wholegrain brown
rice because they might be contaminated with insects. The Agency has issued a
Food Alert for Information.
12
November 2009 Coca Cola Hellenic Bottling Company has withdraw certain batches
of Dr Pepper in Nothern Ireland, because of high levels of benzoic acid.
Big
brands. Does it stop people shopping at Tesco? No evidence of that from their
recent sales results. Does it make Dr Pepper less popular as a drink? No
evidence that it does.
Indeed we buy food with confidence because we know that the Food Standards
Agency is there, naming products, withdrawing products, and ultimately banning
and destroying products.
And
to its credit on one form of PPI the FSA has stepped in and banned it – even
though it doesn’t regulate products. Single Premium PPI was banned on 29 May.
And from some time in 2010 the Competition Commission will ban the sale of PPI
with the loan. Five years after the FSA became concerned and seven years after
journalists began to point out the dangers.
So
radical idea number one: regulate products not process. And while you're at it
end the secrecy that surrounds the current process of investigation. Give
customers the information so they can make rational choices for themselves.
And
that brings me on to my second radical idea. Choice is a bad thing. At least
when there is too much of it. Try this experiment at home. Throw a handful of
Smarties or coins on to a table. Without counting them how many are there? I can
tell you if there are three or four or five or six you can tell me that without
counting. If there are seven you probably can. But 8 or more and the brain gives
up. A dozen and we are completely lost.
And
similar numbers applies to choices. Take your washing machine – how many
programmes does it have? Probably 20 or more. How many do you use? Nevermore
than seven. Probably 2 or 3. You go to your favourite restaurant. How many items
on the menu? Again 20 or 30. How many do you really choose between – a handful.
But
when it comes to financial services you are faced with what is normally called –
what I think I first called – a bewildering array of choice.
Mortgages. I used to do a slide of the rise and rise of choice in mortgages.
According to MoneyFacts in July 2007 there were 11,951 different retail
residential mortgage products. Today the number is far lower. But there are
still 1,629. No-one can choose between 1,629 mortgage products.
Standard Life sells personal pensions through what it is called a SIPP a
self-invested personal pension. And there is a choice of funds you can invest
your money in. 1,666 funds. The human brain cannot choose between 1,666 things.
It’s a process I call complexification. Giving customers so much choice that
they cannot make a rational decision between the products available. And making
products so complicated that no-one can really understand the choices they are
being offered.
You
might think at that point – I’ll get advice, go to an advisor. They will use
their computer programmes and find the best product for me. And to help you
choose they will ask impossible questions. What is your attitude to risk? Do you
want to be exposed to emerging markets? What proportion do you want in commodity
funds? And if you ask for a recommendation and it goes wrong then the advisor
takes no responsibility for the advice at all.
Because the advisor is actually a sales person. So although you may think you
are getting advice, all you are
getting is guided sales – choices between one commission paying product and
another. Because in fact they make their money by selling you stuff. And that
creates a conflict of interest between the advisor and their client. The
customer never knows why the advisor has recommended a particular course of
action. And within that course of action why he or she recommends a particular
product to fulfil it. That is not to say that there aren.t good honest financial
advisers most of them are. But they are in a system that fails its customers.
Would we have had any of the mis-selling scandals of the last twenty years if
there ad not been commission? No. Of course we wouldn’t.
And
the answer is to take commission out of the process. I have often called
commission the cancer at the heart of the financial services industry. An
unfortunate metaphor because the heart is one of the few organs in the body that
is almost immune to cancer but you know what I mean.
There are moves to do that – at least for independent advice. But whether the
retail distribution review will ever happen, or be extended to mortgage and
insurance sales, or indeed to the staff at High Street banks – all of whom are
allowed to call themselves financial advisers – remains unclear.
So
that’s the second radical idea. Reduce choice. Make products simpler. And get
rid of commission. Completely.
Of
course the retail Distribution Review is supposed to ban for independent
financial advisors. Fees will be the only way they can charge.
But many of them are now asking ‘what about those who can’t afford £100
an hour for an advisor? How will they get pensions and investments?’ My answer
is very simple. If you cannot afford an advisor you probably shouldn’t invest.
There is no point in putting £20 a month into a pension. The minimum is about
£100 a month and if you can afford that each month you can afford to pay an
advisor. And if you can’t write a check pay for it on your credit card and pay
it off over a few months.
Now
people say to me ‘but commission exists throughout the sales process. What about
the car salesperson who sold that car? They were on commission.’ That’s true.
But they didn’t persuade me to do anything dangerous. They could praise my
choice of red as the colour. They could commend the luxury of the leather seats.
They might encourage me to buy the more expensive model. That is consumer
choice, they are guiding it, and I know what they are doing. But suppose they
got more commission for recommending a car without seat belts. Or enhanced pay
for encouraging me to have the cheaper but clearer cheaper window glass in the
windscreen? Or the model that saved a bit of money on manufacture by having two
wheel nuts instead of four? Would that be acceptable? I don’t think so. But we
accept in financial products.
The
answer that the industry has come up and has persuaded consumer groups and
politicians alike is that customers should all know more. Financial education or
as it is often called financial literacy. This is a cunning move. Because an
educated knowledgeably consumer can be expected to make rational choices. And so
what was mis-selling to the ignorant becomes misbuying by the wise.
But
that is like saying that we should scrap the Food Standards Agency and make sure
that every child studies food toxicology at school. Was warned about the effects
of aflotoxins on the human body. So they would know that it was sensible to
avoid them.
And
we are now encouraged to believe that the end to financial mis-selling will be a
national network of ‘money guidance’.
You
know I get hundreds of emails every week at home and at Saga Magazine and at the
BBC. I don’t think a single one has ever begun ‘Dear Paul, I’d like some money
guidance.’ People have asked for help, for advice, for information, but never as
far as I can recall for guidance. Advice is what they want. But that term is not
allowed because it has been hijacked by the financial sales industry. So if
sales are called advice then advice has to be called something else. Guidance.
Now
there is a need for some forms of financial education. All the things financial
advisors won’t or can’t tell you. Question one from any advisor face with
someone wanting to invest is – do you have debt? If yes, then tell them to go
away and pay it off then come back and see them. There is no point in saving or
investing if you have debt. Debt will always cost more than investment or saving
will always guarantee to bring in.
Very few advisors will tell you that. Nor will they give advice about tax, about
benefits, about credit cards, about current accounts, about tax credits, about
personal loans, about budgeting, about grants, or in most cases about cash
savings. Because none of those pays commission.
So
someone has to do it. Or do they? Why pick on financial services as the one area
that we all have to be taught about in school, and guided on in adulthood? Do we
go on vehicle literacy courses before we buy a car? Do we take an evening course
in apparel education before we buy clothes? No. The answer to financial literacy
is to make the products that are sold safe, simple and clear. And then anyone
with a general education can buy them without being conned.
So
my third radical idea is that financial education is a diversion from the
changes needed in the financial services industry. And in any case it is not
concentrating on the right skills. Many children leave our schools unable to
read. Even well educated people are proud of the fact that they don’t do
numbers. Improve literacy and numeracy and people could see for themselves that
the financial services industry is a vast money making machine – not for its
customers but for itself.