In the wake of the global financial crisis, policymakers and regulators across the world have intensified their efforts to strengthen consumer protection policies and supervision. One of the consequences of the crisis has been severe damage to consumer confidence in financial services, with detrimental impacts both for the industry and the wider economy. A continuing series of mis-selling scandals in a number of countries and the mortgage crisis in the US has convinced policymakers of the inadequacy of existing regimes to protect individual consumers. It is now recognized that measures to rebuild customer confidence and ensure effective consumer protection are essential in promoting global financial stability.
The consumer protection agenda is perhaps more advanced in Europe and the US than elsewhere, but the rest of the world is catching up quickly:
- In the US, the core consumer protection functions are being concentrated into one agency, the Consumer Finance Protection Bureau (CFPB); this has the responsibility for consistently implementing and enforcing federal consumer financial laws to ensure that all consumers have access to markets for consumer financial products and services which are fair, transparent, and competitive. Prudential regulators and supervisory agencies are increasingly vigilant, coming down heavily on financial institutions. The period 2011-12 witnessed a number of consumer protection enforcements and settlements in the areas of mortgage foreclosures, overcharging of overdraft fees, payment protection programs, treatment of service members’ accounts, force-placed insurance, and credit card claims.
- In Europe, similarly, there have been a number of enforcements and monetary settlements in the financial services industry. Most of these have been related to fines and compensations with respect to mis-selling of financial products, particularly of payment protection insurance (PPI) by UK retail banks. To strengthen the focus on consumer protection, the UK government is restructuring the regulatory regime, creating a Financial Conduct Authority (FCA) as a specialist regulatory agency. This agency will take on responsibility for restructuring the retail financial services market, which was started by the FSA under its Retail Distribution Review. This will see commission for sales of investment products banned from 1 January 2013, in an attempt to remove the inherent conflict of interest between providing suitable advice to consumers and sales force remuneration and incentives.
- In Australia, the credit regulator has forced a major card company to stop charging ‘punitive’ rates of interest to customers who fail to pay on time. The Australian Securities and Investments Commission said it was concerned that the charges breached the national credit code, with extra interest being charged on the entire card balance rather than the outstanding amount.
The G20 Principles on consumer protection make the point that: “Additional and/or strengthened dedicated and proportionate policy action to enhance financial consumer protection is …considered necessary to address recent and more structural developments.” The current Chief Executive of the FSA has said that the new consumer protection regime reflects the judgment that “The degree of consumer detriment seen over the last decade has been at an unacceptable level to society.”
Recovering from this position will be a major challenge for the financial services industry.
Far more than compliance
No segment of the financial services industry will escape the greatly increased regulatory focus on consumer protection, conduct and customer treatment. Retail banks, commercial and wholesale banks, investment banks, insurers and fund managers will all feel the impact. Consumer protection has far-reaching implications for most business activities, from product development through to customer interactions across the whole sales and product life cycle. Consumer protection concerns could also affect the markets in which an organization operates: geographical distribution arrangements, customer base, products offered, etc. The impact of new regulation may drive companies to exit certain markets or fundamentally restructure their activities or their organizations.
It is clear, then, that consumer protection is far more than a regulatory and compliance issue. Of course, compliance is necessary and will need to be monitored, but to delegate (and relegate) consumer protection solely to a compliance or risk function without business involvement and ownership would be a major mistake. Regulation may be the principal driver at present, but consumer protection should now be seen as one of a company’s top strategic and cultural issues. It is a business issue that should be at the board level and across all operations and functions if businesses are to ‘future-proof’ themselves from the cycle of mis-sales, complaints and repayment that have characterized so many of the recent scandals.
We have seen some recent cases, such as the PPI mis-selling scandal in the UK, wipe out an entire year’s worth of profits at one of the biggest banks. The creation of programs to redress that situation that will run for many years and, in effect, become sizeable business units in their own right. So, an institution’s future success may well depend on how effectively it meets the challenge of enhancing consumer protection.
The experience of the Treating Customers Fairly (TCF) initiative launched by the UK Financial Services Authority (FSA) in 2004-05 is instructive. This focused on the importance of delivering appropriate outcomes for consumers and sought to prevent substantial failures from occurring. However, it is widely seen to have failed in improving consumer confidence and the customer experience. The reason? Financial services companies treated it largely as a compliance and management information issue. The customer impact was largely limited to experiencing more bureaucracy and paperwork rather than improved service. The new FCA will build on the foundation laid by TCF but now focus on the outcomes achieved for customers and on challenging the operating models of all financial institutions, from product development through the whole product life cycle, with powers to intervene to amend or ban products if it see fit.
The central mission of the Consumer Financial Protection Bureau (CFPB) is to ensure that “Consumers get the information they need to make the financial decisions they believe are best for themselves and their families – that prices are clear up front, that risks are visible, and that nothing is buried in fine print. In a market that works, consumers should be able to make direct comparisons among products and no provider should be able to build, or feel pressure to build, a business model around unfair, deceptive, or abusive practices.” From their mission statement to their examination practices, the CFPB is focusing on business issues and strategies in addition to compliance requirements.
Just good business
The key point is that a company which engages actively with its customers, treats them fairly and provides them with products and services which meet their needs is simply pursuing competitive advantage by doing business well. The best companies will do the right thing automatically, not because of consumer protection regulation but because it is good business.
What regulators may regard as consumer protection is, from the perspective of the financial services provider, rather a matter of delivering value to consumers: understanding their needs; designing products which meet those needs appropriately and are consistent with customers’ risk profile and risk appetite; and providing those products at a reasonable and transparent price.
So maximizing consumer value is business – not just a mandate, but an opportunity. It must move to the boardroom and to the executive management agenda. And it has implications across the enterprise, from product development and pricing, to channels and markets, to compensation structures, and customer interactions all along the way. In future, consumer value will be a leading contributor to a company’s success. The need, then, is to reset corporate culture around compliance and conduct, to find new ways to innovate – rethinking business models, packaging new products, marketing them through the right channels, at the right price, to the right person – all while turning a profit.
Embracing consumer value as a cultural and operational foundation is the way to rebuild trust, improve customer experience and satisfaction, and gain market share. The fundamental requirement is to rebuild relationships with customers so that confidence can return. The consumer protection agenda, though currently being driven by regulation, should result in business models and practices which improve consumer service and the customer experience:
- the provision of timely and understandable information
- protection from unfair, deceptive, or abusive practices
- elimination of outdated, unnecessary, or unduly burdensome regulations on consumer financial products and services
- consistent enforcement to promote fair competition
- transparent and efficient markets for consumer financial products and services.
Regulators will continue to supervise financial institutions and some of their service providers to ensure they are treating customers fairly. They may also make specific interventions to eliminate harmful products or practices and ensure appropriate redress in the event of failure. But if companies act rationally, with their own and their customers’ long-term interests in mind, the necessary changes will emerge without a heavy additional regulatory burden.