13 July 2011
Voracious competition over headline prices in financial services comes at the expense of product quality, undermining consumer trust and compounding inertia, a new report published today (Wednesday 13 July) by the think tank the Social Market Foundation finds. Instead of focusing solely on boosting the competitiveness of the financial services market, the Government should also create a 'trusted product' kite-mark scheme to improve the quality of financial products.
The SMF analysis finds that financial services markets are highly competitive for new customers, but loyal ones get a raw deal as a result. Financial providers compete avidly for new customers, who are usually young people, through offering them cash, 'teaser' interest rates and cheap insurance premiums.
But these are often cross-subsidised by unfair practices like hidden charges, interest rates that fall over time, and reduced insurance coverage, eroding consumer trust in providers. New polling reveals that inert and confused consumers are ripe for the picking. Strengthening competition without tackling provider reliance on customer inertia will make these problems worse.
According to the SMF research, entitled A Confidence Crisis? Restoring Trust in Financial Services:
The market for financial products is skewed by intense competition for first-time buyers of products: less than half of people aged 18-24 questioned hold common financial products (current accounts, savings accounts, general insurance and credit cards) as compared to 70% of 35 to 44 year olds and 73% of the 55+ age bracket.
65% of current account holders do not switch providers even after experiencing unfair treatment from their current bank.
Over a quarter (28%) of people treated unfairly did not switch because they thought that banks were 'all the same'.
Further, the research shows that the financial crisis has had remarkably little persistent impact on perceptions of the banks that failed. New figures show that consumers continued to favour long-established banks, even those that had been bailed out, over new entrants like Santander and supermarkets.
John Springford, the report's author said: "From the Independent Commission on Banking's interim report, to George Osborne's Mansion House speech, policymakers are pinning their hopes on greater competitiveness in financial services to make the market work for consumers.
"Competition can be a great thing for consumers. But our research has found that in the financial services market, where complexity makes it hard for people to assess value, price competition leads to hidden charges, poor coverage and acres of small print. No wonder they are confused and mistrustful. The Government needs to step in and lead the market towards healthy competition on quality rather than damaging price competition."
To safeguard quality, the SMF suggests that the Government should create a branded kite-mark for 'trusted products' that reach certain standards, encouraging firms to compete on the quality of their products. The kite-mark would be awarded to any product – from ISAs to pensions – that does not take advantage of consumer inertia through teaser rates, hidden charges or complicated smallprint. Products that did not meet the 'trusted product' criteria would carry a health warning, and all products would be displayed on the Money Advice Service website, which would then become the comparison site for all products, 'trusted' or not.
The SMF report dismisses financial education as a potential solution: "Financial education is a red herring in this debate," continued John Springford. "Millions of pounds have been squandered on this agenda to no clear benefit. Even if financial education did work, the onus shouldn't be on consumers to navigate the minefield of unfair practices that exist in the industry. The only solution is to make firms compete on quality rather than price".
An electronic copy of the full report is available to download here.
The Social Market Foundation (SMF) is a leading UK think tank, developing innovative ideas across a broad range of economic and social policy. It champions policy ideas which marry markets with social justice and takes a pro-market rather than free-market approach. www.smf.co.uk
The SMF report draws on two sets of YouGov data: