Emran Mian is Director of the Social Market Foundation
Complex financial products bamboozle consumers and erode already fragile trust in financial services. Rather than ethics codes, action is needed to put consumers in the driving seat, says Nida Broughton.
Back in 2011, the SMF’s Confidence Crisis report found that the general public’s trust in financial services was at a low. Since then, even more has happened to shake the public’s confidence. In 2012, Barclays was fined £290m for Libor fixing, with the FSA expected to announce further penalties, this time for RBS. More specifically in the retail market, the amount paid out in compensation for mis-selling of payment protection insurance (PPI) has continued to mount to a total of £8bn, with the eventual total expected to be even higher.
Small wonder, then, that last week Barclays told its staff to buy into its ethics code, or leave. Re-aligning staff incentives so that they focus less on the singular pursuit of new sales can no doubt play a role in reducing high pressure sales tactics and re-building trust with consumers.
But for the retail financial service market to really work, consumers need to be in the driving seat. Banks should be competing for customers by providing great products at good prices. At the moment, consumers just aren’t in a position to drive competition in this way.
As we found in our research, in consumer finance, competition tends to drive greater complexity. Instead of competing on value for money, it too often makes more sense for providers to bamboozle customers increasing additional and hidden charges, and making products hard to compare.. Ethics codes aren’t going to help cut through this complexity.
We recommended the development of a set of trusted financial products that have transparent and standardised charging structures and small print. The Treasury’s Sergeant Review has since come up with similar recommendations for Simple Products. This can only be a good thing. But their effectiveness will crucially depend on how they are implemented. Simplicity is a start: but being able to easily compare different products will be the factor that can really drive trust and competition in this market.