Although the direct costs to retail consumers of the crisis were limited, the GFC has had two effects which will have far-reaching implications. The first is that perceptions of risk, and the consequent desire for protection and assurance, have been substantially heightened. The second is that trust has been severely damaged, causing far greater scrutiny to be applied to aspects of financial services activity, beyond the scope of the immediate causes of the crisis.
Many components of the emerging consumer protection agenda were already in place before the crisis — it is over a decade, for example, since the Australian banks suffered significant legal and reputational fallout from misselling Swiss franc loans, and overseas, the UK's Financial Services Authority (FSA) launched its initiative on Treating Customers Fairly.
But what we have seen both locally (for example the National Consumer Credit Protection Act, Credit Code and FOFA) and overseas in the past 2 or 3 years is a major political focus on consumer protection in financial services, articulated and given weight through the framework of the G20, and progressively being translated into regulatory practice in many different jurisdictions.
There are two main drivers. Firstly, the political imperative to be seen responding, in the face of consumer anger (whether justified or not) and distrust of the financial services industry. Secondly, with increasing evidence emerging in the fall-out from the crisis that some financial institutions have indeed proved to have been unmindful of consumers' best interests, in the increasingly challenging search to maintain their own margins and returns.
Some of this was a contributory cause of the crisis — such as fraudulent mortgage loan selling in the US housing market; other examples — such as the continuing series of misselling scandals in the UK and the collapse of high risk investments being promoted to unsophisticated investors in Australia — were the result of lax controls, inappropriate sales and incentive schemes and a culture of profit maximisation.
The upshot is the growing attention and focus on more intensive consumer protection frameworks. Banks must now explicitly ask — is this the right outcome for my customers? Customers should be placed at the heart of business strategy with a focus on quality products and service.
A way to get this right is by looking at incentive schemes, and by completing detailed root cause analysis of customer complaints to identify any risk of misselling. Getting this focus on what is best for the customer represents good, sustainable business practice and will help anticipate changes required to comply with Australian regulators' future expectations.
As such, banks must develop appropriate compliance strategies, conduct appropriate levels of governance and control reviews and action must be taken to deal with any weaknesses and flaws identified.